As promised we are cranking up our “Token Candy” – coverage of crypto currencies in general and the “ICO” phenomenon. Mainly because of the potential for real disruption in traditional equity capital markets and a new way for companies to access capital.

The Event

I attended a small event in NYC last night hosted by The Information with a mix of presenters from crypto startups and traditional banking and capital markets types. The very same day Jamie Dimon of JP Morgan decided to unleash a tirade on how bitcoin is “worse than the tulip craze” and would end in disaster.

Dimon is kind of right and wrong at the same time. For example, during the internet stock bubble 20 years ago and Webvan were both “disasters” but online commerce and grocery deliveries are real and Amazon is doing quite well.

The same will true with crypto currencies and their myriad applications. But the idea of crypto assets and technologies like the blockchain are here to stay just like the internet and its open protocols. There is a “gold rush” mentality in the market now along with some crazy claims but they will be sorted out as the market sorts itself out.

Getting back to the conference my full notes are below but I’ll start with what I thought were the highlights and my own conclusions from the evening:

  1. The innovators (like Circle and AngelList) are working on some large and potentially disruptive applications of crypto technology. Yet they are cautious about some of the recent hype and sudden surge of ICO deal volumes. We will see some contraction as we separate the wheat from the chaff.
  2. Investment banks are not eager to innovate with respect to the IPO market and appear prepared to cede the small IPO market to alternatives. This may seem a glib statement but there is much to support it. The banks represented at the event (RBC, BofA and Goldman Sachs) talked about the usual suspects like “a broad spectrum of financing options” and “big M&A deals” which is where they really make their money. A small IPO only moves the needle if it’s for a company that becomes a big success, like a Google or a Facebook. (more on this below…)
  3. Crypto currency growth is being driven by low and declining faith in institutions. This is true not just for governments but for large companies like Equifax, JP Morgan, Wells Fargo, thanks to their calcified culture and lousy recent track records.
  4. We are beginning to get some structure and the ability to intelligently value crypto currencies and assets as the market has become large. This will define the “next stage” of growth and create opportunities to for differentiated and branded service providers.

The Numbers Don’t Lie

2017 is the year that crypto currencies hit institutional size. Bitcoin which has a market cap of $64B and a daily trading volume of over $2B. There are *a dozen* with market caps of $1B and another 40 with caps over $100M. Based on daily trading volume there are 24 that do over $10M.

Compare that to small cap stocks trading on exchanges like OTCMKTS. You can track these markets in a few places. For the numbers above we used this one:

Bitcoin (BTC) dominates with 47% of the market.  The total crypto market cap is $134B with daily trading volume of over $5B.

NIH at Investment Banks and VC Firms

By NIH I mean “No Innovation Here” because the core process of initial public offerings and VC finance are the same as they were 20 years ago.

In the IPO case, the whole “book building process” that banks use consists of flying a management team around the country to meet with scores of investors and go through a deck of PowerPoint slides. This adds up to heavy travel coordination, lots of management time, hundreds of phone calls, and tedious meeting arrangements and follow ups.

It’s a dirty secret but pricing and allocation an IPO is still done with a pencil and a yellow legal pad. The banks will cry “no, no we use a software platform” which is true but it doesn’t work. There are two providers, they are incompatible and “joint-bookrunners” always have a mix of systems. So, in the end, here come the yellow legal pads…

Behind the scenes the investment banks are spending on blockchain R&D. Goldman Sachs, Credit Suisse and even JP Morgan have been very active. These investments will position them to “embrace and extend” crypto-based approaches to capital markets when they feel the timing is right. But how will the banks address their current high cost model and feel levels?

Venture capital is worse by comparison. At least the banks have systems, even if they mostly serve their own internal processes. A company trying to raise VC makes calls, sets up and travels to meetings where they do their pitch. Most of that time the result is a succession of refusals or even worse a “maybe.”

If a VC firm does invest their “due diligence” process creates (you guessed it!) yet another book. This one is four to six inches thick and will be the tome that the VC general partners will use in making their final decision to invest.

A decade ago at Le Web in Paris there was an “innovation panel” with a group of top-tier VC partners. During the audience Q&A I stood up and asked what types of innovation they were working on to change their own business processes and make it easier for companies to secure venture capital? Crickets…

Of course, there are some more innovative VCs out there – Fred Wilson at Union Square Ventures in NY and Marc Andreesen at a16z in CA come to mind, but they are rare exceptions.

During the event last night, it was pointed out that many VC firms add value through personal effort and resources. They are better differentiated than those who have taken a “portfolio approach” to their investment strategy. Those VCs are the most likely ones to get replaced by more efficient capital raising options if they get more viable.

My Notes

Jessica Lessin @Jessicalessin started with an introduction pointing out that the ability for technology to shift capital markets and change access to capital would be a Big Deal.

Sean Neville, Co-Founder and President of Circle, talked about their mission to make payments easier and less encumbered by fees. (I’ve always been amazed that banks have managed to collect fees on anything you do with your own money – including withdrawals by ATM and transfers.)

Sean was joined on-stage by Andy Bromberg, MD of Token Sales at AngelList. There was a good discussion of how we are getting more clarity on the types of tokens and which are more suitable for investment. For example:

  1. Protocol tokens – these are the major building blocks of innovation, like Filecoin. These are huge opportunities and one could argue that the deserve to get as much capital as it takes for them to be successful.
  2. Application (ERC20) tokens – these support specific use cases like ticketing or escrow on existing protocols. This level is most like where classic VC investments have been made.
  3. Securities tokens – like equity or shares of stock these are regulated. Blockchain Capital is one example in this space.

Overall both felt it was “early days” for the technology and we might see some consolidation in the short term after the big recent surge. Bitcoin may or may not be the ultimate crypto currency but today it is the only one with enough liquidity for many applications.

The next panel was banking-focused and included Michal Katz from RBC, AJ Murphy from BofA and David Ludwig from Goldman. The panel was moderated by Serena Saitto @serenasaitto.

Exits and the markets were the focus. It was noted that institutions still “appreciate the IPO market as a source for new ideas and incremental returns” despite it being a bit slower of late.

On the topic of the potential Spotify direct listing and the Social Capital IPO the view was that right now “there is lots of liquidity for sellers.”

Rather than focus on the IPO or ICO market specifically it was highlighted that the banks offer a “broad spectrum” of options including preferred shares and debt. M&A should be integral to the capital raising process as a “dual path” to an end. Softbank is so big it’s an asset class of itself. Corporate buyers have $4T in cash to deploy on M&A and they are looking for good strategic fits.

Finally, Bradley Tusk wrapped up with a discussion of innovation, investing and politics which is even more interesting with our current administration in the US.

Politics and regulations are often not taken seriously enough. For example, AirBnB messed up in the key market of NYC and now AirBnB faces at least a year and expenses in the tens of millions to fix the damage and get back in favor with NY legislators.

When it comes to favorite investment areas he likes insurance (cites Lemonade) and agrees that areas like crypto, cannabis, and drones are promising but still in the early stages.

Tusk noted that there is lots of uncertainty around how these new businesses will mature and even regulatory approval for acquisitions is hard to predict. Even if federal regulation is reduced the slack is often picked up by state and local agencies.

His ending note and that of the whole conference was to the tune of “excitement & uncertainty.”


This event was a great start. Crypto currencies and assets have exploded despite the uncertainties around how they will mature and develop. The vacuum created by declining institutional trust is being filled and it feels like this genie will not be going back in the bottle.

IPO Candy will focus mostly on how this will impact capital markets in general and for companies and investors.

This post will be archived and joined by our follow-up work under “Token Candy.”

Leave a Reply