Turns out too much money can be a bad thing.

Speaking at the Blockchain Connect conference in San Francisco last week, investors struck a surprisingly nervous note on the recent wave of initial coin offerings (ICOs) and the eye-popping funding rounds they’ve secured.

In fact, while ICOs and token-based blockchains have been touted as a way to circumvent the often tricky venture capital process, speakers like Linda Xie, managing director of crypto hedge fund Scalar Capital, went so far as to advocate for the industry and its decades-old approach to best practices.

Xie told the audience:

“It’s great that these ICOs allow thousands of people to invest in the project … but thousands of people aren’t going to give you the best advice on how to run this protocol or company.”

Speaking to more than 1,000 crypto enthusiasts and entrepreneurs, Xie argued traditional VCs aren’t interested in just giving startups money to build their platforms. Rather, she argued they’re just as focused on helping the entrepreneurs build a successful business from start to finish.

And with that, Xie and others worry about the entrepreneurs that raise exorbitant amounts of money in token sales – more money than they may ever need.

Echoing that skepticism was Rodolfo Gonzalez, a partner at Foundation Capital, who said, “It’s pretty obvious why folks are skeptical – 140 lines of code for $140 million raised; that wouldn’t happen in the traditional venture world.”

There’s no doubt that kind of raise will lead to failures, failures that Gonzalez said would make investors, both institutional and retail, demand better management of the crypto projects they put money towards.

And while that hasn’t shaken out just yet, the investors on the panel had some ideas of what that transparency in management might look like in the future.

Is this legit?

Others chimed in with words of warning as well. Take Huobi Capital, which thought everything was on the up with one of the startups it invested in through a token sale not long ago.

The venture arm of the cryptocurrency exchange Huobi is focused on a buy-and-hold strategy for projects that it thinks might become the next “it” blockchain, and the team believed this startup had potential.

Yet, shortly after closing the ICO, the founders of the company resigned, taking a good chunk of change with them and leaving the project in limbo.

“We had to liquidate,” Li Huo, head of Huobi Capital, said.

And that’s why the company now looks to invest primarily in token projects that instate some sort of lockup process for the tokens they raise.

“We get a better deal because [the token] doesn’t go onto the secondary market for speculators … and it shows that [the founders] are interested in working on the project longer term,” Huo said.

Xie agreed, explaining that Scalar also looks for longer-term lockups because the company is interested in investing in companies over three to five years.

She said:

“Even if there’s a liquidity event, we’ll hold.”

Continuing, Xie said she is interested in seeing more token projects develop a method for raising money in installments, like the traditional venture rounds, instead of raising a ton of money all at once. Plus, vesting periods for making tokens available to employees of the startup would also make institutional investors feel more secure.

A ‘beautiful’ business model

Having discussed all that, though, Huo admitted that liquidating the company’s position in the failed token it backed had its advantages.

In the traditional venture capital space it’s much harder because the positions aren’t that liquid, he said, but in crypto, investors can easily sell tokens on the secondary market.

Gonzalez echoed that, calling the current business model for VCs investing in token sales “beautiful.”

“You get in with discounts, then when it goes on the secondary market you’ve already made money,” he said. “If you can get into the presale of many of these things, you will get rewarded well.”

And while Gonzalez seemed very much the capitalist on the panel in this regard, he wondered what another crypto “winter,” where the hype dies down and the industry stagnates, will bring in terms of exit strategies for both the token issuers themselves and the hedge funds investing in them.

Overall, Gonzalez said, the real strategy was getting in at the earliest position possible and going along for the ride.

Changing agreements

But Gonzalez admitted investors could get mixed up in crooked deals with this approach.

And from that, Kavita Gupta, founding managing partner at ConsenSys Capital, said she believes token issuers shouldn’t be offering discounted periods with only very small lockups.

Not only that, but she and her team at ConsenSys are “completely against SAFT” now, a comment that refers to the Simple Agreement for Future Tokens framework.

Created by startup Protocol Labs and U.S. law firm Cooley, the living document was an effort to keep token issuers and their tokens away from the purview of the securities regulators, who are increasingly taking an interest in how these products resemble securities.

But instead, Gupta believes the Brooklyn Project, an initiative led by blockchain startup ConsenSys, will create a new framework for token issuers that is based on set deliverables, yet keeps with the ethos of ICOs that anyone and everyone can invest.

ConsenSys Capital has invested in three token projects.

And while Gupta said those investments were made based on stringent due diligence of the core concept and the founding team, she said there’s no standard to making the correct crypto token investment currently.

“I don’t have a very optimistic answer,” she said.

Hot topics

Yet, many of the investors on the panel did give some insight into what kinds of things they’re looking for before investing in a token project and what are concepts they’re researching heavily.

Xie said she asks three questions before moving forward with an investment – “Is this something that anyone would want to use? Does this actually need to be decentralized? Does this token actually make sense or can you replace the token with a more liquid coin like bitcoin or ether?”

She continued, saying that all the more traditional mechanisms are vetted too, such as the supply of tokens, the inflation rate, the community interested in the project, what percentage of tokens is being held by the founders and the governance structure. Plus, Xie’s co-founder is a developer who analyzes the codebases.

And in doing their research on the nascent crypto token space, what several investors have found most intriguing are protocol tokens, privacy tokens and decentralized exchange projects.

Both Xie and Huo mentioned decentralized exchange projects, which many in the industry believe are the way forward in stopping large repositories of customer information from catching the eye of hackers.

Aligning with this interest in securing people using crypto, Xie also mentioned privacy-oriented cryptocurrencies (projects like zcash and monero), which are getting quite a bit of attention of late as the technology used in those projects attracts developers from the top two cryptocurrency projects – bitcoin and ethereum.

In a separate fireside chat, Todd Chaffee, a general partner at IVP, which just recently invested in Coinbase, said the venture fund is looking for the core protocols that all other crypto applications will ride on in the future – similar to the underlying infrastructure of the internet itself.

All in all, though, Xie said she expects there to be some amount of “ICO burnout” in 2018.

The rampant pace of ICOs “is going to continue, but these projects are going to have to differentiate. They’re going to maybe have a platform or product already,” she said, adding:

“Many of these [entrepreneurs] this year will realize they don’t need a token and go the more traditional equity route.”

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Coinbase and Protocol Labs.

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