Week 8-ICOs and Venture Capital

RMIT Classification: Trusted
—
ICOs and Venture Capital
Sinclair Davidson
RMIT Blockchain Innovation Hub
1
NEW VENTURE DEVELOPMENT
2
- Stages of New Venture Development
3
- The Sequence of New Venture Financing
• Seed financing
• R&D financing
• Start-up financing
• First-stage financing
• Second-stage financing
• Third-stage financing
• Mezzanine financing
• Bridge financing
4
- The New Venture Business Plan
• Presents the conclusions of the strategic

planning exercise, i.e., the strategic planning
comes first
• Writing and circulating a business plan too

early can be a costly mistake
• Different than for an established business

o uncertainty about assumptions
o milestones and real options
o used for raising capital
5
- Overview of the Business Plan
• Focus on the purposes and uses of the plan
• Identify and support key assumptions
• Highlight critical factors for success or failure
• Delineate milestones so users can evaluate success
• Include financial projections to test the plan, commit the

entrepreneur, and facilitate negotiation
6
- Outline of a Typical Business Plan
Executive Summary
I. Background and Purpose of Venture
II. Market Analysis
III. Products and Services
IV. Development, Production, and Operations
V. Organization and Management
VI. Ownership and Control
VII. Financial Information
7
- What Makes a Business Plan Convincing?
• Demonstrate understanding of the technology, market, risks,

and customer needs
• Defensible assumptions that yield testable hypotheses
• Credible evidence of irrevocable commitment
• Evidence of reputation and certification
• Signals the quality and capabilities of the team
8
- Example: Loliware case
• https://www.youtube.com/watch?v=CJ1UDIklPS0
The 100% all-natural, non-GMO, compostable, edible cups

were seen by many to be the perfect solution to the growing
plastic problem.
9
- Example: SignalVault case
The SignalVault protects

your new RFID enabled
credit/debit cards from
hackers & identity thieves by
making your information
invisible to hackers without
batteries, charging or
activation.
https://www.youtube.com/watch?v=-lQZiGxJUBg
https://www.signal-vault.com/products/copy-of-shark-tank-special-signalvault-
credit-debit-card-protector
10
- Some Pitfalls to Avoid in the Business Plan
1. Failing to identify clearly the customer problem that the

venture would address
2. Failing to identify clearly a narrow target market
3. Relying on a business model that does not make economic

sense
4. Relying on a highly credentialed team that lacks the critical

expertise the venture needs
5. Failing to recognize the threats and potential problems
11
- Top 10 causes of small business failure

• No market need: 42 percent
• Ran out of cash: 29 percent
• Not the right team: 23 percent
• Got outcompeted: 19 percent
• Pricing / Cost issues: 18 percent
• User un-friendly product: 17 percent
• Product without a business model: 17 percent
• Poor marketing: 14 percent
• Ignore customers: 14 percent
• Product mistimed: 13 percent
o https://smallbiztrends.com/2019/03/startup-statistics-small-business.html
12
- Sources of new venture finance
13
- Now crowd-funding
14
Angel Investors
• Individual freelance investors usually interested in

investing fairly small amounts in early-stage
ventures
• Willing to invest over long horizons
• Often bring significant industry experience and
are interested in active involvement
15
Venture Capital
• Venture Capital (VC) funds are organized as limited partnerships

o Limited partners (LPs) provide most of the capital
o General partner (GP) is responsible for managing the fund,
including investment selection, working with entrepreneurs,
and harvesting the investments
• Focused on equity investment in high-risk ventures with large

potential return
16
Asset-Based Lenders
• Asset-based lenders, or “secured lenders,” provide debt capital to

businesses that have assets that can serve as collateral
o rely on the ability to liquidate business assets for debt
servicing if necessary (rather than cash flow)
17
Venture Leasing
• An entrepreneur who requires tangible assets can lease, rather

than purchase them
• Usually involves assets that are key to the operation of the venture
• The lessor’s return may be tied to the financial performance of the

venture
• Tax advantages to leasing as compared to owning
18
Mezzanine Capital
• Capital raised after the firm has established a record of positive net
income with revenues approaching $10 million or more
o subordinated debt or preferred equity
o a hybrid of senior debt and common equity “sweeteners”
o often provided by some VC firms or other private equity funds
19
Debt
• Pros
o interest is tax deductible
o debt is usually less expensive than equity
o no loss of control
• Cons
o cash flow required for interest and principal payments
o senior to equity and has contractual rights in the case of
financial distress
20
Private Placements
• Both equity and debt can be issued via “private placement”

o Examples: Venture Capital and angel investments
• Benefits
o can be faster and less expensive than a public offering
o limits disclosure of strategic information
o facilitates monitoring
21
INITIAL PUBLIC OFFERING (IPO)
22
- Going Public – Some Terminology
• IPO (Initial Public Offering)

o primary market transaction
o issuing firm raises capital by selling new shares to investors
• Seasoned Offering
o venture that is already public can raise additional capital by
issuing new shares in a subsequent primary offering
• Secondary Offering
o sale of shares by existing investors
o a means of harvesting, does not yield capital for the firm
23
- Initial Public Offering
• First sale of equity to public investors
• IPOs provide a very small fraction of overall new venture funding
• Provides exit for VCs and other investors in high-risk, high-growth

ventures
• Company raises capital by selling registered equity shares to the

public via a formal offering process
24
- Initial Public Offering: Airbnb case
25
- Initial Public Offering: Grab case

• Hong Kong
(CNN
Business)The
Southeast Asian
unicorn Grab had
a rough first day
on Wall Street.
• The Singaporean
startup closed
down nearly 21%
Thursday as it
began trading on
New York's
Nasdaq.
https://edition.cnn.com/2021/12/02/investing/grab-ipo-spac-nasdaq-intl-hnk/index.html
26
- Initial Public Offering
• Pros
o establishes outside market for the venture’s shares
 investor feedback on managerial decisions
 can be used to effect acquisitions
 employee stock incentives
o large amounts of capital can be raised
• Cons
o relatively expensive
o disclosure requirements
o focus on short-term earnings
27
INITIAL COIN OFFERING (ICO)
28
- Introduction to ICOs
• https://youtu.be/WZwMt42CzH0
29
- What is an ICO?
• An Initial Coin Offering is a fundraising mechanism in which

new projects sell their underlying crypto tokens in exchange
for bitcoin and ether.
• Crypto tokens are crowd funding units sold by projects in

order to develop a product/service or finance expansion or for
some other purpose.
• Crypto tokens represent rights:

o For a future service
o To access the platform
o For an investment return
30
- ICO example: Ethereum
https://icodrops.com/ethereum/
31
- ICO example: Kyber Network
https://coinmarketcap.com/currencies/kyber-network/
32
- ICO US$ raised
33
- ICO market August 2019
34
- History of tokens sale
• https://www.youtube.com/watch?v=yQ7zRWujaYE
35
- ICO v IPO
• ICOs are crowd-funding mechanisms related to the blockchain

technology.
• Most of the companies undertaking an ICOs do not have a product

to present to the public, some of them have proof of concept,
others have proof-of-stake.
• ICOs offer tokens at a price that hopefully will appreciate.
• IPOs are the distribution of shareholdings to the public through

investment banks.
• IPOs offer dividends and capital gains from company profit.
36
- ICO v IPO
37
- Why are ICOs popular?
• Opportunity to diversify into other crypto currency or assets

o There are few opportunities to divest crypto at present (except
conversion to fiat)
• Ability to immediately trade in secondary market

o Many VC investments cannot be immediately traded
• Passion for new technology and applications
38
Sharing the benefits
39
- Problems
40
- ICO Risks
• Business Risk
o Is this a viable business?
 Competitors
 Changes in technology
o Governance
 Founder motivation
 Business experience
 Salaries
• Regulatory and Legal Risk

o Taxation
o Security laws
o Consumer protection laws
41
- ICO Risks
• Investment Risks
o Valuation?
o Secondary market?
o Non-performance
• Token Risks
o Hacked wallets
o Stolen tokens
o Bad code
42
- What makes an ICO successful?
43
- Best Practice
44
- What to look for in an ICO whitepaper
• Company Information
• The Product
• The Team (Buy the team?)
• Target Users
• Problem v Solution
• Token Value and Distribution
• Road Map
45
- Are ICOs scams?
• A recent industry study claimed that 80% of all ICOs are scams.
o Rort is the Australian word for scam.
• In this paper, we investigate the question whether these scams are

as common as claimed.
46
Are ICOs scams?

• What is a scam?
o the term scam is not being used identically by all scholars,
practitioners and the broader media.
o On the contrary, we believe that investors frequently
mistake a poor economic performance for a scam and that this
misjudgement is then further conveyed and amplified by the
broader media.
o The Oxford Dictionary defines a scam as “[a] dishonest
scheme; a fraud.”
o In turn, a fraud is an unlawful, respectively criminal act
as it "consists of some deceitful practice or wilful device,
resorted to with intent to deprive another of his right, or in
some manner to do him an injury“.
o A scam is a deliberate betrayal of trust.
47
Are ICOs scams?
• Economic performance is the evaluation of a firm's success

measured in monetary terms.
• The survival rate of (all) new ventures is approximately 60% after

the first year and 10% over ten years.
• The survival rate of new technology ventures is 36% after four

years and 21.9% after five years.
48
Are ICOs scams?
• Method
o All ICOs for 2016 were investigated for subsequent allegations
of fraud or wrong-doing by searching a media database.
o The financial performance of the ICO was recorded.
• Results
o 6.7% of projects were identified as possible scams with 2.2%
definitely scams
o There was a 49% failure rate (or 51% survival rate).
49
- How do you spot an ICO scam?

• Lack of open team profiles: If an ICO doesn’t provide social profiles of the team members, it’s
quite likely to be a scam. Try to find a team that has at least one member having a successful
crypto project under his/her belt.
• Compromised or missing escrow: Absence of an escrow account is the biggest red flag to
look out for. Similarly, if an escrow releases 100% funds to the project team after ICO, it’s a bad
escrow, and should be considered as a red flag. Fund releasing should happen gradually such as
20% after token distribution, 40% after beta release, and similar milestones.
• No technical details in the whitepaper: If an ICO promises to disrupt an established industry

without providing any technical or operational details, it qualifies as a scam. Good whitepapers
have charts, calculations, specifications, and even code at times.
• Unrealistic goals: If an ICO makes bold claims without an economic plan or roadmap to support
it, it’s best to avoid investing. Further, even if the team has offered a roadmap, you have to do
your own research and judge the feasibility of the project.
• Missing code repository: This is another sure shot method to spotting an ICO scam. If the
company is unwilling to release its code to public repositories such as Github, avoid the ICO
altogether.
o https://icowatchlist.com/education/how-do-you-spot-an-ICO-scam
50
- ICOs and Institutional Investors
51
- ICOs and Institutional Investors

Highlights
• Examines the role of institutional investors in initial coin

offerings (ICOs).
• Assesses the determinants of post-ICO performance for

565 ICO ventures.
• Empirical analysis of buy-and-hold abnormal returns

(BHAR).
• Institutional investor backing is associated with higher

post-ICO performance.
Fisch, C., & Momtaz, P. P. (2020). Institutional investors and post-ICO performance: an
empirical analysis of investor returns in initial coin offerings (ICOs). Journal of Corporate
Finance, 64, 101679.
52
THANK YOU!
53

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RMIT Classification: Trusted

RMIT Blockchain Innovation Hub

NEW VENTURE DEVELOPMENT

- Stages of New Venture Development

- The Sequence of New Venture Financing

- The New Venture Business Plan

• Presents the conclusions of the strategic

• Writing and circulating a business plan too

• Different than for an established business

- Overview of the Business Plan

• Focus on the purposes and uses of the plan

• Identify and support key assumptions

• Highlight critical factors for success or failure

• Delineate milestones so users can evaluate success

• Include financial projections to test the plan, commit the

- Outline of a Typical Business Plan

I. Background and Purpose of Venture

II. Market Analysis

III. Products and Services

IV. Development, Production, and Operations

V. Organization and Management

VI. Ownership and Control

VII. Financial Information

- What Makes a Business Plan Convincing?

• Demonstrate understanding of the technology, market, risks,

• Defensible assumptions that yield testable hypotheses

• Credible evidence of irrevocable commitment

• Evidence of reputation and certification

• Signals the quality and capabilities of the team

- Example: Loliware case

The 100% all-natural, non-GMO, compostable, edible cups

- Example: SignalVault case

The SignalVault protects

- Some Pitfalls to Avoid in the Business Plan

1. Failing to identify clearly the customer problem that the

2. Failing to identify clearly a narrow target market

3. Relying on a business model that does not make economic

4. Relying on a highly credentialed team that lacks the critical

5. Failing to recognize the threats and potential problems

- Top 10 causes of small business failure

- Sources of new venture finance

• Individual freelance investors usually interested in

• Venture Capital (VC) funds are organized as limited partnerships

• Focused on equity investment in high-risk ventures with large

• Asset-based lenders, or “secured lenders,” provide debt capital to

• An entrepreneur who requires tangible assets can lease, rather

• The lessor’s return may be tied to the financial performance of the

• Tax advantages to leasing as compared to owning

• Both equity and debt can be issued via “private placement”

INITIAL PUBLIC OFFERING (IPO)

- Going Public – Some Terminology

• IPO (Initial Public Offering)

- Initial Public Offering

• First sale of equity to public investors

• IPOs provide a very small fraction of overall new venture funding

• Provides exit for VCs and other investors in high-risk, high-growth

• Company raises capital by selling registered equity shares to the

- Initial Public Offering: Airbnb case