Start-up funding is broken — the founder perspective

Start-up founders often have ambitious dreams of building their start-up into major league company, perhaps even reaching a unicorn level and eventually selling the company for a big pile of money. The founders establish the company, build the business plan and kick-start the long journey, often sacrificing their corporate career and sometimes even family relations in the hopes of reaching the top and becoming the Elon Musks of their respective industries.

The reality is very different. According to a recent study, only 25% of Silicon Valley start-ups made an exit during the six-year study period. Given that Silicon Valley is considered to be the mecca for start-ups, it would be fair to assume that the start-up success rate may be as low as 10% in the other parts of the world. The numerous and restricting investment terms VCs set on the founders also further limit the founders’ possibility to successfully sell even a part of their shares. When the reality hits the fan, a founder might look back and think — was the journey worth the sacrifices?

The start-up funnel. Source: CB Insights.

Investor perspective

The start-up funding journey is difficult for early stage investors, too. They invest into a start-up trusting the bold promises given by the founders, without knowing if the founders are able to walk the talk and execute the plan. An early stage investor might invest into 5–10 start-ups and have to wait five to seven years without an opportunity for an exit. Even worse, in those startups which succeed in raising funding in several rounds, the early investors are often being pushed into a corner, having no say in the shareholder meetings nor provided access to board meetings.

It seems that even venture capital funds are struggling to succeed as only 5% of VCs reach 3X return. Something must be wrong with the model as the series A, B, C, D, E machine does not seem to bring enough success stories.



Recently, many early stage start-ups have raised significant amounts of funding through token sales or ICOs (Initial Coin Offerings), which have significant advantage compared to traditional equity funding: the liquidity of the token. Investors can at any moment sell their tokens at the market, whereas equity investments are much more difficult to sell. However, ICOs provide almost no security for the investors, and most of the projects which have so far raised significant amount of funding through selling their own token, have not yet proven that they can bring a viable product to the market which serves a certain customer need. Could ICO funding become a mainstream mechanism for funding start-ups and disrupt the venture capital industry, if more security would be provided to the investors?

The ICO boom and its shortcomings

ICO boom started when The DAO launched its ICO last spring and raised 150 MUSD within few weeks. We were amazed by how a distributed autonomous organization, without any management, just voting investors, could raise such a funding. More than a year later, tens of projects have raised ICO funding, and total ICO funding is projected to exceed billion USD this year.

Many are talking about a bubble, and the craziness of the ICO boom, and refer to the dot.com boom and bust in 2000. However, many of today’s leading internet companies were created during the dot.com boom, while most of them failed. The same will probably happen with ICOs. Most of them will fail, but some will grow into future leading ventures. I believe that ICOs are here to stay, and the volume behind them will grow more than 10-fold from today’s volume, though in the meanwhile we might experience a bumpy road.

At the same time, the ICO market will learn that most of the projects will not walk the talk, as execution capability is something else than capability to run an ICO campaign and write a whitepaper. Taking a product to the market successfully is a rare skill and requires experience.

Current ICO market situation has also several other shortcomings. Here is a list of few of them:

ICOs are done by projects without even a minimum viable product & run by a small team without proven execution capability

Tokens lie in the balance sheet of the project, unused as the start-up is nowhere near to scale its operations

Not all start-ups can have their own token and realistically scale that into a currency. There are currently close to 900 tokens, while only 10 of them are having significant volume

Legality of ICOs: Many tokens will most probably be concluded as financial products by regulatory authorities. That means that authorities will expect that ICOs are done according to financial regulations: proper KYC (Know Your Customer) and public offering regulations will expected to be applied in ICOs.

It is very clear that in order for projects to continue raising funding through ICOs, the shortcomings above need to be addressed.

How Jolla could have utilized ICO funding?

Exactly six years ago, we established Jolla, a Finnish start-up, to continue the development of Nokia’s MeeGo mobile operating system, which Nokia had invested close to one billion USD so far and then decided to ditch it due to strategic collaboration with Microsoft. The announcement got a huge positive response from the MeeGo community, mobile tech fans and media. The David vs. Goliath story brought Jolla huge attention and helped the company to kick-start the impossible journey.

My task as the Jolla Chairman was to raise the funding with Sami, one of my co-founder colleagues. I was told by industry professionals that you need at least 100 MUSD to have even a slightest chance to succeed. The venture capital investors were not interested in us at all, as our plan sounded too ambitious and crazy. How could a small start-up succeed in developing a mobile operating system and bringing it to the market?

Eventually, Jolla managed to raise close to 10 MUSD seed funding from angel investors in its first funding round. Although this was probably a European record size for both seed funding and angel funding round, we already knew back then that it wouldn’t be enough.

The weekend cover of leading Finnish newspaper Helsingin Sanomat illustrating the David vs (several) Goliath setup (“Jolla” means dinghy in finnish).

What followed was an amazing story of an incredibly gifted team fighting to succeed with their dream to bring an alternative mobile operating system to the market. As the executive chairman of the company I should have been able to focus on growing the company, but instead my time went to constant fundraising and jumping through hoops to get new investors on board. During six years, we raised close to 60 MUSD funding, had three death valleys on a brink of bankruptcy and somehow managed to survive from all of them. After six years of fighting, Jolla’s operating system Sailfish OS seems to be gradually taking off with solid customers in some big countries. Still, I can’t avoid thinking that what if our funding would have been done in a different way, would we have been able to succeed better and faster?

One key learning for me from Jolla was that for ambitious projects like Jolla, the project should be funded big time from the very beginning to give management a possibility to focus on execution and leadership. The company does not need to get the funding immediately but it could receive it in milestones.

My second learning is that start-ups can rarely succeed on their own in beating the industry giants. However, if they join forces with their community and key ecosystem stakeholders, this could be possible. If Jolla would have had a way to incentivize our developer and fan communities, we would have had, instead of 100 people, 10 000 or 20 000 people wanting to bring the OS to the market successfully.

Could an ICO have helped Jolla to succeed and could we have used our own tokens to incentivize our community to develop new apps and more vocally marketing Sailfish OS around the world?

Let’s play around with this idea a bit. In 2012, when Jolla’s plan was published, it could have created its own ecosystem token “SF token” and announced that it will aim to raise 100 MUSD in token sales and leave 2/3 of the tokens into reserve for future token sales. Jolla could have then agreed that this 100 MUSD will be paid to Jolla in six milestones, making the investment safer to investors. The 100 MUSD would have been locked into an Ethereum smart contract, and when each milestone would have been met, a payment batch would have been released.

Financing milestones for Jolla (example).

With the “SF token” in reserve, Jolla could have given 1/3 of the tokens to its developer and fan community to develop and promote the Sailfish OS ecosystem. For the ultimate target to get1 million users for Sailfish OS, 10 000 community members could have received total of 100 MUSD worth of SF tokens. That would have been 10 KUSD for each community member. If each community member would have managed to get 30 new users for Jolla each year, that would have meant reaching a million users in three years.

Although Jolla is not a blockchain company, I think it is clear that it could have benefited from an ICO. ICO would have provided Jolla a possibility to raise large amount of funding at once and Jolla could have used the tokens to incentivize its community to grow the user base more aggressively. I am eager to see how messaging app Kik will do after their soon to be launched Kin ICO. Kik could be a future winner in messaging game with its new power to incentivize its users to grow their community.

A way forward for ICOs

In order to ICOs to become mainstream financing instruments for start-ups, the serious shortcomings of ICOs need to be addressed. Here are few suggestions:

To make the start-up’s fundraising legal, investors should identify themselves before making an investment into a project ICOs should be divided into public offerings (crowdfunding) and private offerings which are targeted to professional investors. There are different financial regulations for these two funding categories. Start-ups should get their funding in milestones: only when they reach the next milestone, the next batch of funding will be released. Start-ups should not issue their own token until they have a minimum viable product ready. Until then, they should get bridge funding from pre-ICO investors. Ecosystem tokens: the idea of every start-up having an own cryptocurrency does not sound feasible. In order for currencies to be viable, they need scale and rarely one company reaches big enough scale. Start-ups from same technology areas could issue joint ecosystem tokens, which could be used to fund and incentivize several companies and their networks. For example, Artificial intelligence technology companies could have their own AI token.

The future development of ICOs will be one of the most interesting phenomenon to follow. ICOs have big potential due to liquidity of the tokens and especially because of the network impact the tokens can have, but at the same time the ICO projects have to bring value to the real economy. To make ICO funding a true disruptor to current startup funding, ICOs need to be aligned with existing regulations and provide only carefully screened and mature enough projects to the ICO market.

We are excited to contribute into this development through our own start-up Zipper, which is an investment platform for start-ups and token investors. Check it out at zipperglobal.com and please let us know your thoughts.

Antti Saarnio,

A Business mountaineer and a fund raiser

Founder of Zipper

Chairman of Jolla