There has been a veritable explosion in the use of initial coin offerings (abbreviated ICO, sometimes also referred to as a token generating event or TGE, or a WTFLOL) to fund startups. Calculating the total investment in these offerings is complicated, but Coindesk puts the total right now at about $3.8 billion cumulatively, with the bulk invested in 2017.

That total volume pales in comparison to overall venture funding, which was approximately $41 billion last year and has hit highs of as much as $60 billion. But it is much more in line with early-stage VC funding, with some analysts suggesting that total ICO volume is now higher than angel and seed financing.

For many founders, there is now a clear fork in the road for financing their companies: continue along a traditional venture capital fundraise path, or find a way to jam tokens into their business and raise capital through an ICO. This week in San Francisco, I was surprised by just how many founders seem to be thinking about exactly this decision, even if capital fundraising wasn’t necessary in the short-term. Inevitably, the question would be asked: which should I choose?

John Biggs has covered how to properly raise an ICO before on TechCrunch, and he has some great advice for going that direction. But too often we get swept up in tactics when we should really be focused on strategy. A few major factors are important — around signaling, governance, user engagement, and general risk — and are worth considering before making the decision.

Signaling

Like Vatican-watchers during a conclave or newly graduated transit planners, venture capitalists are obsessed with signals. Signals, otherwise known as heuristics, allow VCs in an information-deprived environment like a startup ecosystem to try to glean what is “really happening” about a startup, without directly asking a founder.

Unfortunately, there are few chasms as wide as the perceptions of ICOs between founders and VCs.

VCs will talk about “signaling risk” to describe everything from taking seed money from a large venture fund to putting together a party round without a lead. Conveniently, the signals that VCs explain to entrepreneurs always seem to line up perfectly with their fund strategy, while making every other VC firm look like a bad option.

Signals are in many ways hogwash, but they should not be ignored. Venture capitalists are fragile creatures, and a single bad signal can be the difference between investing in a startup and ignoring it entirely.

Unfortunately, there are few chasms as wide as the perceptions of ICOs between founders and VCs. Traditional venture capitalists have — with some exceptions such as Sequoia, A16Z and Union Square Ventures — largely eschewed ICOs as a legitimate path of funding.

The VCs I have talked to in recent weeks have repeatedly emphasized that their worst companies are now prepping ICOs, given that they have limited hope of raising from traditional VCs. There is also a general impression that companies that attempted to raise venture capital 6-12 months ago are now launching ICOs, indicating that those who failed to fundraise are choosing an alternative path.

This creates a dilemma for a founder. An ICO may be a perfectly legitimate option that perfectly matches their startup’s business model. But conducting an ICO may send a negative signal to traditional equity investors that they failed at fundraising and therefore are choosing the next best alternative.

The way out of this situation is two-fold. First, every decision that a founder makes is going to be a positive or negative signal to some venture capitalist. At the end of the day, deep pragmatism is required since founders just need to raise capital for their businesses to keep the lights on and the employees paid. So, if you have a shot at traditional venture capital, go ahead and take that route first. The negative signaling only works in one direction — ICO investors (at least for now) don’t seem to care that startups have failed to fundraise on Sand Hill.

Second, VCs love success and want to back successful founders. Launching an ICO may be a risk, but it is also an opportunity to show how well a company can run the operations required to maximize their return in the ICO. That negative ICO signal only lasts until the money — that beautiful, non-dilutive financing — starts to roll into a startup. So while there is negative signaling risk of talking about an ICO, there is definitely the potential for positive signaling upon successful completion.

Governance

In the traditional model of venture capital, a partner at a VC firm will invest capital into a business while becoming a director on that startup’s board. Like preferred shares, mandating a board seat is a safety valve to ensure that the firm’s capital is prudently spent.

ICOs completely eschew this notion of corporate governance. Buying tokens does not provide the buyer (in most circumstances) with any governance rights of any kind. A company can literally ICO one day and disappear the next, an event that has actually happened in the past few weeks.

For founders, few things are as attractive in the ICO model than the ability to maintain control of their companies. Indeed, when the topic of an ICO has come up in my conversations, most founders actually emphasized the benefits of governance as their number one consideration, rather than the ability to get more capital into their business.

While mediocre boards can harm a company, the flip side is also true: great boards can help steer a company to fantastical returns.

I think it is worth stepping back and asking why we are in this situation. Vinod Khosla, as is his wont, years ago posited that venture capitalists, on average, add negative value to the company. Certainly that is the perception among founders, who find it highly annoying that a group of people mostly uninvolved in a company show up once a quarter to berate the management team then send the costs of their trip back to the company for payment. Even worse, as generalists, VCs are often not even the most qualified board member available.

For founders looking to avoid governance, it might be time to do some serious soul-searching. What exactly is the fear of having a board? Is it the fear of getting fired, or being held accountable? Is it just the annoyance of all of it? While mediocre boards can harm a company, the flip side is also true: great boards can help steer a company to fantastical returns. Like every part of company building, there is an opportunity for gains and losses depending on the quality of the people you work with.

In my mind, the ideal scenario is an ICO, but coupled with a concerted search for the best board member(s) available to help drive the vision of the company. That keeps the CEO and founders in charge, but also forces them to ask what kinds of skills might be helpful for the company, and also show some level of humility that they might not always know the answers.

User engagement

Among financing options for companies, ICOs are fairly unique in their relatively democratic operation. Not since Google’s IPO in 2004, which used a Dutch auction model allowing retail investors to join in, have everyday people had the option to jump into a company’s cap table so easily and reap the potential growth of that startup. That might lead to irrational exuberance and extreme losses, but it should also be perceived as a tremendous re-opening of the capital markets beyond just a few elite investors.

Unlike traditional equity investments, carefully selecting investors in an ICO can have serious product growth consequences. While some ICO investors are high-net-worth individuals or institutions and are just buying to return capital, many other tokens are purchased by potential users of a product who are excited to see its development and launch. Call this the “Kickstarter model” of raising capital.

While venture capital can’t create growth, ICO capital can. If the ICO process itself drives adoption for a product, a startup might find that the first 1,000 or even first 100,000 user problem has largely vanished during the fundraise process itself. The startup is not just getting capital, but also its first customers.

While this approach may not work for all startups pursuing an ICO, those startups that can connect their fundraise to product growth have a unique opportunity to parallelize multiple objectives for the company — and that can accelerate success in a very competitive environment.

Risk

The final part of the decision that I would emphasize is around the broad notion of risk. Traditional venture capital is a very well-trodden path. Docs are mostly standardized in the angel and seed rounds, and language in later rounds has been carefully reviewed by lawyers. Plus, when disagreements turn heated, the courts have seen most variations of challenges, and resolution can be relatively quick and predictable.

Compare that to the crypto space. We still don’t know how the SEC, the IRS, or the alphabet soup of other financial regulators are going to come down on ICOs. We don’t know how taxes are going to be handled five years from now. Given that building a company is not an instantaneous event, but rather one that can take a decade or more, startups have to prepare not just for this regulatory environment, but for future ones as well.

That said, clearly ICOs are becoming very popular. While much of the law around them is unclear today, this area of policy is not going to remain unchartered for very long. The answers to many of our questions are likely to come quickly, given that regulators are increasingly turning their attention to this market. So it might not take long to get some more clarity on what an ICO means for a startup and for many of these general risks to disappear.

Ultimately, this issue is mostly a question of risk tolerance on the part of founders. There is immense risk in everything that a startup does. Adding more risk by doing an ICO may not matter that much in the scheme of things. But if a founder can grab one thing like traditional venture capital that is relatively known and stable, it might be worth considering whether one less thing to worry about it is worth it.

Yes, good companies can ICO, even if many don’t

I started this article out with a question: do good companies ICO? I think the answer is a resounding yes, but each startup has a unique situation. Rather than follow the hype cycle, think much more deeply and analytically about what the benefits and weaknesses are with ICOs and traditional venture capital. There are huge challenges around signaling, governance, user engagement, and risk that are worth debating and getting feedback on from trusted professionals.

I do think there is negative signal around an ICO. I do think many of the companies that have chosen this path have attempted to fundraise in the Valley and have failed (I have seen this personally). But ultimately, that doesn’t really matter if the capital raised leads to a great company. Everyone wants to be part of success, and so if you focus on building strong and durable businesses, everyone from individual ICO investors to the most conservative, traditional VCs are going to ultimately show up.