Startups raise cash with cryptocurrency

Storj Labs is selling digital coins at 50 cents apiece to raise $30 million in an early-stage financing round. In just five days, hundreds of contributors signed up for a piece of what they hope will be the next Silicon Valley unicorn. less Storj Labs is selling digital coins at 50 cents apiece to raise $30 million in an early-stage financing round. In just five days, hundreds of contributors signed up for a piece of what they hope will be the ... more Photo: Marcio Jose Sanchez, Associated Press Photo: Marcio Jose Sanchez, Associated Press Image 1 of / 28 Caption Close Startups raise cash with cryptocurrency 1 / 28 Back to Gallery

It’s too late to invest in Airbnb but a company that bills itself as the Airbnb of cloud computer storage is raising cash — and anyone with an Internet connection can get in on the action.

Storj Labs is selling digital coins at 50 cents apiece to raise $30 million in an early-stage financing round. In just five days, hundreds of contributors signed up for a piece of what they hope will be the next Silicon Valley unicorn. But there’s a catch — unlike traditional venture capital investments, the tokens don’t confer a claim on Storj’s equity or future profits.

Instead, the tokens’ value derives from their utility in the firm’s app, by providing access to data storage on a distributed network. They are the latest entry in the growing ledger of cryptocurrencies, digital coins that unlock myriad apps across the computing world. The coins can be traded on dozens of online exchanges, and demand for all sorts of them has exploded as people speculate on the next big tech startup.

“The average investor is missing out on the Ubers and Airbnbs of the world,” said Bart Stephens, a managing partner at Blockchain Capital, a venture capital firm that has invested in blockchain-related startups since 2012. “If the next Uber decides to issue tokens, that would be an opportunity for more investors to get access to the most exciting technologies out there.”

The Storj sale is known as an initial coin offering, a model of finance spreading across the tech sector. Investors spent $332 million on tokens in the past year, more than double what venture investors handed over in seed rounds, according to data compiled by coin-focused blog the Control. The haul is slated to hit $600 million in 2017, it says, adding to a market for tokens that’s nearly tripled in a year.

Such offerings are possible thanks to blockchain, the catchall term for a digital ledger that promises incorruptible storage of financial transactions. Banks and stock exchanges have spent millions on it, looking for ways to cut the costs for transferring money or recording equity sales. One of the latest to back the technology was the chief executive officer of Fidelity Investments, Abigail Johnson. Most famously, it’s the technology that underpins bitcoin — just as it does for every token offered in a coin offering.

Their huge increase in popularity has more than a few detractors warning of a bubble, worried that the allure of finding the next tech lottery ticket is fueling rampant speculation. The concern is particularly acute at a time when investors are fretting about stretched valuations for tech startups, with the likes of Uber commanding multibillion-dollar price tags even as they burn through cash.

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Take Gnosis, a prediction market application based on the Ethereum blockchain that raised $12.5 million in 12 minutes on April 24, resulting in a market capitalization of almost $300 million. It generates no revenue and has little more than a white paper describing what it intends to do. Yet its tokens, which would allow users to bet on things such as election outcomes, soared eightfold in the three weeks since May 2, giving it a valuation of over $2 billion — more than the average Russell 2000 Index stock.

Gnosis’ growth is just part of the craze that’s gripped the cryptocurrency market in the last month, with the price of bitcoin gaining more than 30 percent last week, to more than $2,500. That has pushed the market capitalization of digital currencies more than 50 percent higher to more than $90 billion.

Even after that, the market is still relatively small, though it’s taking steps toward maturity as the boom in coin offerings spreads. There are places to track historical prices and volume, and reports on individual offerings to help prospective buyers assess a firm’s prospects.

The offerings happen outside the purview of regulators — quite by design — because technically, the coins are part of the app and not securities. Initial coin offerings don’t have disclosure requirements, and the issuer can accept an unlimited number of investors, instead of the limit of 99 vetted investors in traditional venture funding rounds.

But the marketplace has also been a breeding ground for scams, and some coins have turned out to be vulnerable to attacks. Hackers were able to steal $50 million from a fund called Decentralized Autonomous Organization after it raised $150 million in the biggest offering ever in April 2016.

For entrepreneurs, the appeal is obvious. A white paper published online replaces weeks of pitches to venture capital firms, followed by an online auction that can take minutes. The technology can be poked and prodded by geeks around the world, providing a depth of expertise often missing at even the best tech firms.

“You don’t have to limit yourself,” said Jae Kwon, who raised $16.8 million in a coin sale for Cosmos, which provides custodian-like service for transactions in different blockchains. “There are just not that many VCs and they’re not experts. People who contributed to our fundraiser are the experts.”