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I don't agree at all. The rise of ICOs and crowd funding provide a strong counterexample. Ideally the best startups would be funded by revenue and bank loans.

The idea of value-added investors is pretty silly IMO. On one side, you add value to your team not by investing but by hiring. On the other side, you never want to have to rely on investment and with interest rates as low as they are, loans would almost always be preferable over equity dilution.

Usually the most significant value an investor can add is by making a raise as fast and painless as possible so the founders can get back to building their business. "Smart money" and "value-added" seem like concepts invented by investors to get equity at a better price. Founders should desire to spend as little time possible networking with investors and the maximum time focused on building products, engaging with customers and networking within the industry.

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> I don't agree at all. The rise of ICOs and crowd funding provide a strong counterexample. Ideally the best startups would be funded by revenue and bank loans.

ICOs provided the single best example of why regulation is necessary in decades — a world of fly by night scammers doing whatever it takes to separate people from their money, and a few well inventions but utterly unsuccessful projects. Zero ICOs turned into real successful business. Zero. You can count them on no hands. In exchange for what must be hundreds of billions of dollars worth of investments from the common person. What an utter write off.

Thing is, if you can raise from value added investors with experience and connections, you do. If you can’t you go after people who don’t know better. This leads to massive adverse selection risk - present in JOBS act investing too fwiw.

There’s a long and storied tradition here.

A lot of ICOs aren't trying to turn into businesses, or at least not primarily. They're trying to make an open protocol with a valuable token. Successful examples so far include Filecoin, Ethereum, and several major Ethereum competitors. One built on top of Ethereum is Maker, the leading decentralized stablecoin. Another is Chainlink, which does oracles.

Two actual businesses I can name that started with ICOs and appear to be doing well are Funfair, which does legal regulated gambling over Ethereum state channels, and Monolith, which puts tokens on VISA cards for spending.

ICOs are mostly scams. If the company's product isn't the coin, clear scam. If the product is the coin, is the coin unique in some way? If not, scam. Most ICOs fall into one of those categories. I'm sure there are a handful of counterexamples amongst the myriads of scams

Brave Browser is doing all right AFAIK.

You know what, I'll give you that.

The following ICOs became successful projects:

Ethereum Tezos Monero ( I think ) BAT (Brave Browser's Token)

There are plenty of others, but these are the ones that came up off the top of my head.

> The rise of ICOs and crowd funding provide a strong counterexample.

The crowdfunding provisions of the JOBS act are nearly a decade old now, which is the horizon of a typical VC fund. Has there been a single company that has returned well to investors? (Honest question, I haven't looked -- but I've seen some pretty suspicious looking pitches enabled by the act)

> Ideally the best startups would be funded by revenue and bank loans.

This is basically what happened before venture capital. If it were a more efficient way of funding startups, VC would not have emerged as an industry.

Certainly, absent the VC model (or some other wealthy investor model), it would be much harder to scale businesses that are capital-intensive and/or aren't profitable in the short-term. So presumably absent VCs, you'd have a lot fewer crappy tech startups but you might also not have the success stories--or at least it would have taken them a lot longer to get there.

Oculus started on Kickstarter. I believe GlowForge is a unicorn and started on Pebble.

Although the naming is confusing, crowdfunding in the JOBS Act sense enables small-time investors to invest for equity. It’s different from crowdfunding in the traditional, product sense which is essentially just a preorder and was legal before the JOBS act.

> The rise of ICOs

The rise of this scam ecosystem is proof that regulation is useful. Maybe there are rare cases of ICOs that were not scams. And maybe some of few remaining and were not utter, complete and predictable failure.

But it was a good demonstration how gullible people are and how evil people will readily exploit it.

> how gullible people are and how evil people will readily exploit it

This really shouldn't be a surprise to anyone at this point. At least this one didn't create a war or recession. ICOs are innovative the same way other crowd funding initiatives are. It's a way for poorly networked but high quality people to get funding. There will be less scams over time as the people get smarter. It's no different than when radiation was discovered in the early 20th century, irradiated products became all the fad (1). Innovation always brings this risk.

(1) https://www.washingtonpost.com/health/the-lethal-legacy-of-e...

ICOs seems to have vastly higher rate of fraud than say Kickstarter

Yes, but you don't get equity or securities equivalents from Kickstarter. Here's an article about how $115B was scammed from crowdfunding investors in China (1). The biggest individual scam was a simple $8B Ponzi scheme.

(1) https://www.crowdfundinsider.com/2020/08/165315-115-billion-...

Value-added investors effectively act as "free" management consultants, and also make introductions to potential customers and partners. Those services are valuable, at least to founders who lack experience and industry connections. Small investors can't provide those services.

Most ICOs are simply scams and in no way comparable to legitimate investments.

Wouldn't you prefer an advisor then? Same exact benefit but with better alignment. Usually advisors are actually currently in the industry and can give meaningful introductions outside their portfolio.

I also don't think it's fair to call all ICOs scams. It's certainly in its wild west phase but provides an alternative funding mechanism.

Advisors can certainly play that role, though they’re often low commitment roles with a small degree of aligned interests. Advisors are on their side and investors are on yours ideally.

Consider also that bank loans require that you make frequent structured payments with interest. That simply doesn’t apply to venture backed investments. Nobody ever got anywhere at a bank by taking risk. The role of the VCs is to provide the right level of risk tolerance on their capital.

> I also don't think it's fair to call all ICOs scams. It's certainly in its wild west phase but provides an alternative funding mechanism.

Usually switching out of the wild west phase is marked by regulation.

VCs certainly have a role for high risk high reward investments. Equity is very expensive and if you can avoid giving it up, you should. Bank loans aren't an option for everyone but if both VCs and loans are on the table, you should pretty much always take the loan (unless it's personally collateralized).

I don't have any issue with the idea of VCs and generally I think they're better aligned than private equity. The big point is not to value smart vs dumb money. Just take the best deal and use the money you saved to hire someone. No amount of "smart" is worth even an extra 0.5% on the cap table. When comparing VCs, I'd like to safe vs dangerous instead. Does a VC have a reputation of creating problems for founders or giving them space even if things aren't going well? That's way more of a consideration than if a VC has better intros or a smarter team.

> No amount of "smart" is worth even an extra 0.5% on the cap table.

I respectfully disagree. Your equity is worthless until it’s worth something. That 0.5% could be the difference between a unicorn and a bankruptcy. I would counter with: don’t over value your equity. Don’t make stupid decisions of course but don’t let 0.5% be the reason you fail.

Name three ICO successes.

Let's look at topcoinlist.com. Not the current version, but the one of three years ago.[1] See how the top 5 from early 2018 came out.

- Tripbit - Down to near zero.[2]

- Developeo - No longer listed. "Website not active" as of 2020.[3]

- Proof of Toss - "Coin is inactive"[4]

- BitRewards - Still traded, sort of.[5] Issued at US$0.003, now at US$0.0002, with a daily trading volume of about US$1.

- CoolCousin - "Coin is inactive" [6]

FAIL.

[1] https://web.archive.org/web/20180403121628/https://topicolis...

[2] https://ih.advfn.com/crypto/TripBit-TBT

[3] https://icomarks.com/ico/developeo

[4] https://www.coingecko.com/en/coins/proof-of-toss

[5] https://coinmarketcap.com/currencies/bitrewards/

[6] https://www.coingecko.com/en/coins/cool-cousin

I'll name nine: Ethereum, Cardano, Chainlink, Filecoin, Maker/DAI, Augur, the Brave browser, Funfair, and Monolith/Tokencard.

- Monolith/Tokencard: down 90% from peak.[1]

- Funfair: down about 95% from peak.[2]

- Brave basic attention token - actually went up.

- Augur - down about 70% from peak.

- Maker/DAI is a sort-of-stable coin. [4] DAI is supposed to be stable with respect to dollars, but is backed by Etherium and the right to dilute Maker coins. So Maker holders are subordinate creditors. Unclear how that will hold up in a downturn. Interesting, though.

- Filecoin has been going way up lately, with institutional backing. That's interesting and needs further attention. It's a scheme for trading disk storage capacity.

- Chainlink has gone way up. Although the system for actually storing files is only in beta, and hasn't been priced yet.

- Cardano - way up at the ICO, then way down for three years, now back up to slightly above the ICO peak. This is a proof of stake system.

- Etherium - big peak in 2017, crashed to about 15% of peak, now back up.

[1] https://coinmarketcap.com/currencies/monolith/

[2] https://icomarks.com/ico/funfair

[3] https://www.coinbase.com/price/basic-attention-token

[4] https://coinmarketcap.com/currencies/augur/

[5] https://coinmarketcap.com/currencies/multi-collateral-dai/

[6] https://www.msn.com/en-us/news/technology/what-is-filecoin-a...

[7] https://www.coinbase.com/price/chainlink

[8] https://coinmarketcap.com/currencies/cardano/

All true but what matters to ICO investors is their buying price. For Ethereum for example, the ICO price was between 30 cents and 60 cents, depending on when they bought. At the bottom of the post-2017 bear market it was $82, and at this moment it's $2098.

The only way Ethereum ICO investors could have lost money is if they bought over 43 cents, and sold when it dipped down to that point several months after launch.

Why would an advisor be better aligned than an investor?

An investor has other constraints that prevent them from acting in the best interest of the company. Especially VCs have a timeline they need to hit for their fund so they'll push founders to make -EV decisions to speedup the timeframe. Investors also only care about the value of their portfolio, not the value of an individual company. Portfolio infighting, for example lawsuits, is highly discouraged even if it's for the benefit of one company. An advisor is usually an industry professional with fewer constraints and fewer possible sources of conflict.

> The idea of value-added investors is pretty silly IMO.

The company I work at is VC funded. It would have folded if it was run by the original founders. At ~200m valuation it started stagnating. A member of the board that was on a VC seat found a consultant who came in as a strategy officer at first. He was able to turn the company around, made it possible for original founders to step away and became the new CEO in about 1 year. The company became a unicorn +-1.5 years ago.

After seeing this I prefer smart money very strongly.

For every example of a VC saving a company (other than the actual investment), there are a dozen about a VC destroying one.

Let's also actually analyze the economics of this success case to show how it's still silly. Let's say the VC got a 15% discount for being smart(1). Let's say the VC owns 20% of the company. At a $200M valuation, the founders paid $6M to get smart investors as opposed to dumb money. For this $6M, they got an introduction at a pivotal point in the company. The salary of the COO of Yelp is $3.3M year (2) and most of that was stock compensation. For $6M, you could have your choice of COOs from top tech companies. IMO, that $6M could've been spent much more efficiently.

(1) This is a big assumption and you can play around with the numbers but if "smart" money doesn't get a better valuation than dumb money, there's no value to being a smart investor and the extra effort wouldn't make it worth it. 15% is also pretty conservative as you can feel free to look at the difference in VC valued companies vs how Sovereign Wealth Funds valued them.

(2) https://www1.salary.com/Jed-Nachman-Salary-Bonus-Stock-Optio...

Well, you made a lot of assumptions here. For example that a COO from a good tech company in the US would come to a small EU country to save a failing startup. Also, we needed some pretty specific knowledge to succeed and we did not even know we were missing it.

Our company checks with people working in the org to see if we want to take money from particular investors. We have rejected investors in the past because the values of the investors were different from ours. We take money from investors that we can align on the mission. I mean, there are so many more criteria than money - values, mission, control of the company (are we free to run the company as we like?), preference treatment (how much preference you give VC's on their stock? How much are you willing to reduce the risk of the investor by taking their terms?). We used to value such things and we continue to do so. I'm happy we paid a premium and would do so again.

I look at it the other way round - if you compromise on values / mission / control / other things that are important to you and people in the organisation - you can get more money.

I mean, but how did we get into a hole if we took all this smart VC money? We followed some of their advice (as well as our own misguided ideas). If we failed back then, we would have been just another company "destroyed by smart VC's".

I think I'm much more cynical about investors than you. Employees are very different from investors. Employees dedicate most of their waking hours to make your company better while using that money to provide for their families. Investors spend maybe a couple hours every quarter making sure their investment is successful. The vast majority of investors do not depend on a single bet or really care that much if a single bet loses. As a founder, how you treat investors and employees should be very different. For me in particular, I see investors as a necessary evil. I see employees contentment and fulfillment as a chief responsibility.

I have client who has developed industry-changing medical technology but they do not want to sell any equity.

We are looking at a bank loan to fund the factory and growth. They sell products that cost $5 per metre and sells at $500 per metre.

Bank loans are under used in startups but every company is different.

There’s also a lot of debt finance available outside the Western world of finance if you know where to look (and how to negotiate with...interesting types).

I was expecting to see Brave browser in your list.

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