I got this question on Twitter yesterday:

Are there any parallels you can draw between ICOs and private investment rounds? — Daniel Olshansky (@olshansky) June 13, 2017

And I responded with this:

Yes, buyer beware. Do your homework. Don’t be greedy. — Fred Wilson (@fredwilson) June 14, 2017

I could say a lot more and so I will.

Whether you are buying in a private placement of securities as a venture capitalist or buying in an ICO as a crypto enthusiast, there are certain things that you need to be careful about. And right now, with all of the enthusiasm for crypto assets out there, I am very concerned that nobody is being careful about anything.

So here are some things to think about before placing your order on that next ICO:

The amount raised matters, a lot. More money is not generally a good thing. I wrote a blog post about this a while back. In my experience, the startups that are careful and raise modest amounts of capital outperform the startups that raise crazy amounts of capital and are overly aggressive. I would look for capped ICOs and modest amounts of capital. Teams should raise enough money to do what they want to do but you can do a lot with $10mm and a tremendous amount with $50mm. Ethereum raised $18.5mm USD (in BTC) in their token offering and lost some of that due to a decline in BTC value. And look at what they have been able to accomplish with that funding. You should understand what the token that is being offered does and have some feel for how large of an opportunity that is. I remember friends buying hot Internet IPOs in the late 90s and I’d ask them why they were investing and they would say to me “I heard its a hot deal” and I would say “But what does the company do?” and they would say to me “I don’t know, but I know I’m going to make a lot of money.” That kind of investing is dumb. Be smart and understand what you are buying and why. And if you can’t hold the investment through to the point at which the token will have real utility and real value, you might want to think twice about buying it in the first place. Valuation matters. I know that many in startup land don’t really agree with this. There are VCs who want to be in the best deals and don’t really care what they have to pay to get into them. That might work as an investment strategy but it requires a lot of luck and market timing. If, instead, you focus on valuation when you make your investments and buy into investments at prices that make sense to you and have a model for why and how the investment will be worth 10x your entry price in 5+ years, you stand a much better chance at making solid returns. There are people in the crypto space who are building valuation models. You should follow them and understand their work. And you should try to apply that kind of thinking to your crypto investing. Avoid scams and things that feel like scams. Scams are not limited to the crypto sector. They exist in all forms of investing (and many other sectors too). As VCs we often get pitched an opportunity that has red flags all over it. You learn quickly to delete those emails and not return those calls. But an emerging sector, like crypto, where there is less regulation, scrutiny, due diligence, and knowledge, scams are going to be more common. There have already been a bunch of well publicized scams in the crypto sector and I would bet that one or more successfully funded ICOs that have already been done will turn out to have been a scam in some measure. There is a difference between a intentional scam and an accidental scam, but if you are the investor, you were scammed in both instances. Be on the lookout for scams and avoid them. The best red flag for a scam is lack of detail on the technology, how it will work, and a lack of credibility of the people behind the project. Do you homework on these investments and make sure the technology and the people are credible before you part with your money. Look for projects where the technology is well specified and is working in the wild. It is much easier as a VC to invest in companies where the product has been shipped and you can use it. I would venture to guess that more than 80% of USV’s investments over the years have been into companies where that was the case. You can use Bitcoin, you can use Ethereum, you can use Steem, you can use Zcash. These are fully functioning crypto assets that have been “shipped” and are widely used. That does not mean they will be successful, but it sure gives you more confidence that they might be successful. Investing on a white paper is way more risky than investing in a working technology that you can use yourself. Don’t be greedy. This goes for both buyers and sellers in the market. You might be able to make a killing right now. But I would suggest you resist that urge. Those who play this market right over the long term will do extremely well. But trying to make a killing overnight is always a bad idea. So for sellers that means raising reasonable amounts, not all you can get. And selling more into the market over time, as Vitalik suggests in this blog post:

If we want to strike at the heart of this problem, how would we solve it? I would say the answer is simple: start moving to mechanisms other than single round sales. For the buyers, this means not putting all of your assets to work in one ICO, or even all of your assets into crypto. Markets can crash. You need diversification to manage risk, particularly in highly volatile markets.

I have been a big booster of Bitcoin, blockchain, crypto tokens, and the like on this blog for the past six years. I am a big long term believer in this sector. USV is investing in this sector. We are investors in token funds and I believe we will start directly buying tokens soon. So we are bullish on crypto.

However, there are many things going on in the sector right now that are head shakers to us. We have been investing in startups and emerging tech sectors for over thirty years. We have seen this movie before . We know how it plays out and we know that all is not up and to the right forever.

When people are afraid, be greedy. And when people are greedy, be afraid. We are much closer to the latter scenario in crypto right now and while I am not afraid for my investments and USV’s investments in this sector, I am afraid for the sector and those who are being the most greedy right now. I am cautioning our portfolio companies to tread carefully and we are treading carefully. And I would advise all of you to do the same.