Ironically, we can鈥檛 even define 鈥淎I鈥� as a sector per se since almost every startup looking for some coin or decent press suddenly identifies as an 鈥淎I-centered-something-or-other.鈥�

But for the purists, the numbers don鈥檛 lie 鈥斅爋r in the very least they tell a clearer story than the prevalent 鈥淎I will save the world鈥� narrative.

In fact, early this week investors poured $700 million into two AI startups 鈥� and 鈥� and followed up mid-week with another $105 million to AI marketing platform . It seems we鈥檝e reached another level of the AI craze that has dominated the private markets since late last year.

Overall, $20 billion has been raised by (Fun fact: $20 billion could pay for one year.) But let鈥檚 definitely keep .

So much buzz

Are startups worried about the downturn? We guess it depends on who writes their checks.聽

In fact, , one of the oldest and more established venture firms in the U.S., earlier this year said it is earmarking $1 billion of its most recent fund solely for investments in artificial intelligence.

And that鈥檚 just one firm.

This week we published an interview with Bessemer partner , who aptly said of the AI movement: 鈥淟iterally trillions of dollars of value gets created when you have these massive tectonic shifts.鈥澛�

And what about AI IPOs?

But it鈥檚 not all unicorns and rainbows for AI. Just because funding to the sector is hot, that doesn鈥檛 mean the appetite on the public markets is at the same level.

If we look at public markets (and we did) it鈥檚 clear that an AI focus hasn鈥檛 been a recipe for stock market gains. This is evident looking at recent performance of the most highly valued AI-oriented companies to go public in the quarters leading up to the market peak.

Back to the future

Let鈥檚 circle back to those trillions that Bessemer鈥檚 Dholakia was talking about. While we aren鈥檛 seeing the fruit of those hefty AI investments just yet, the promise (or at least the hope) among investors and the journalists that cover them is that these startups will deliver sooner rather than later.

According to Dholakia, the 鈥渁doption curve on this one will be mind-blowingly fast.鈥澛�

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Related reading:

• More Big Money For AI: Insider Raises $105M
• AI Craze Hits New Level As Anthropic Locks Up $450M, Builder.ai Closes $250M Round础听
• Bessemer Partner On What鈥檚 Driving The Firm鈥檚 Billion-Dollar Bet On AI
• Recently Public AI-Focused Startups Are Not Hot
• The Writers鈥� Strike Is Trying To Keep AI From Taking Over Hollywood. Is It Too Late?

Illustration:

Meanwhile, the unemployment rate fell from May鈥檚 level but held at a historically high level, as millions of Americans remained out of work with the pandemic still under way.

Here were the main metrics from the Department of Labor鈥檚 report, compared to consensus estimates compiled by Bloomberg:

• Change in non-farm payrolls: +4.8 million vs. +3.23 million expected
• Unemployment rate: 11.1% vs. 12.5% expected
• Average hourly earnings, month on month: -1.2%vs. -0.8% expected
• Average hourly earnings, year on year: +5.0% vs. +5.3% expected

The June jobs report came following a massive upside surprise in May, during which the economy unexpectedly added payrolls, when a loss of more than 7 million jobs had been expected. May鈥檚 payrolls were upwardly revised by 190,000 to 2.699 million, while April鈥檚 payroll losses were revised down by 100,000 to 20.8 million.

Estimates for the June payrolls gain also spanned a wide range, though none of the more than 70 economists polled by Bloomberg expected to see net job losses for June.

鈥淲e are in a whole new world of trying to model what data is going to be, because there鈥檚 not an economist in the world that鈥檚 ever gone through a forced economic shutdown,鈥� Tom Essaye, Sevens Report Research founder, told Yahoo Finance鈥檚 The First Trade on Tuesday. 鈥淎nd that鈥檚 why a lot of these numbers are completely blowing past what the expectation is.鈥�

Other data had underscored the labor market鈥檚 steady improvement over the past two months. New jobless claims fell in each week since early April, and continuing unemployment claims began trending lower. Employment indices in each of the Institute for Supply Management鈥檚 and improved in the latest reports.

Still, ADP鈥檚 monthly jobs report Wednesday missed estimates, and showed net private payroll gains from May鈥檚 upwardly revised gain of more than 3 million.

The Department of Labor鈥檚 June jobs report was released on a Thursday, or a day earlier than typical, due to the market closures in observance of the Fourth of July holiday on Friday.

This post is breaking. Check back for updates.

鈥�

Emily McCormick is a reporter for Yahoo Finance.聽

Read more from Emily:

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ICOs have been the talk of the technology town for what seems like this entire summer. These new methods of crowdfunding have allowed companies to raise previously untold sums of money in the form of cryptocurrencies. Filecoin, a storage company, . There has been more than $1.2 billion total raised in ICOs so far in 2017, which far outpaces any previous year. It also outpaces VC investment in the blockchain space over the same period.

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Initial Coin Offerings allow companies to raise virtually unlimited amounts of money, from anyone who鈥檚 willing to join, without any significant friction. If a company at the earliest stage, usually pre-product and often even pre-team, can raise tens of millions in cryptocurrencies, why does anyone need VC investors?

The Economic Role VCs Play In An Efficient Capital Market

Traditionally, VC funds have filled an important gap in the funding chain. Their job is to act as connectors and distributors. Large pools of investor capital like endowments or corporations seek to be diversified across different asset classes, and the high-risk game of startup investing is one of them. But since the riskiest startups generally raise small amounts of money when compared to the assets under management of these institutions, it鈥檚 not realistic for money managers to invest directly in early-stage startups. Instead, they act as limited partners and delegate this task to VC funds. In exchange for a management fee and a nice chunk of profits, VCs will act as the capital distributor.

From the company side, there are also important benefits to the VC model. Instead of raising small amounts of capital from individuals, startups can pitch centralized bodies to invest relatively large amounts of capital. Logistically, it should be easier to raise a $2 million seed round from 4 investors than it is to raise from 20 individuals. Further down the company鈥檚 lifecycle, it鈥檚 also easier to keep 4 investors updated than it is to keep 20 individuals updated.

With this framework in mind, it鈥檚 easy to understand why ICOs are potentially disruptive. It鈥檚 a funding model that offers entrepreneurs a seamless process to do what they were unable to do before: raise money from masses of individuals with efficiency.

How ICOs Reduce The Importance Of The VC

Raising money from individuals is a real pain for entrepreneurs. limit who can invest in startup equity, requiring accreditation that depends on net worth and salary. Companies also are limited to raising only $1 million in equity crowdfunding every 12 months. And in addition to regulatory hurdles, startups need to find investors who are interested, negotiate and draft the proper terms, and actually get the capital. ICOs remove almost all of these roadblocks.

With an ICO, startups can raise as much cryptocurrency as they want at whatever terms they choose. No legal terms are drafted, investors are notified and acquired through the internet, and digital currencies are seamlessly sent over the web. Investors seem to be lining up for these coin offerings. So if you鈥檙e a blockchain-related startup today, it seems like you don鈥檛 really need VCs anymore. Why deal with greedy institutional investors when you can instantly raise as much as you want on a blockchain?

ICOs Are Actually Not All-Purpose

The assertion that ICO based financing will replace VCs assumes that the current trajectory of ICO volume (up and to the right) will continue (as much of the crypto community seems to project). Assuming the crypto community is correct, VCs will have to adapt by investing in ICOs or accept death. But this narrative has some serious flaws because there鈥檚 a strong chance that the trajectory won鈥檛 continue.

In fact, the premise of ICOs replacing VC funds rests on three key assumptions about the future of fundraising that are far from decided. We鈥檒l run through all three of these assumptions and see why there鈥檚 more than one side to this story.

Assumption #1: Initial Coin Offerings Are Relevant To All Companies

Buyers in an ICO never receive shares of the company. Instead, buyers get tokens, which are like tickets to the company鈥檚 show. Tokens should have some sort of connection to a company鈥檚 core product for users to enjoy the product鈥檚 full value. For example, to make money on Numerai鈥檚 , you need to . The problem is that a token-based business model just isn鈥檛 relevant to all companies.

For some companies, especially companies that involve significant use of a blockchain, tokens can be a helpful way to organize the product and drive use cases. For others, like businesses that sell to other businesses, tokens aren鈥檛 . Companies that aren鈥檛 related to blockchains at their core do not make for good token sales. In fact, we鈥檝e already seen backlash at startups like this who go ahead and .

Is it possible that every single company in the future will be in the blockchain space and will utilize a token-based business model? Yes. But I鈥檓 a believer in a balanced future where blockchain and non-blockchain companies live in harmony without insulting each other on Twitter. The vast majority of companies for whom tokens are irrelevant will not be able to ICO. An ICO is likely not a form of funding that鈥檚 relevant to every company out there, and its effectiveness must be judged accordingly.

Assumption #2: Initial Coin Offerings Will Steer Clear Of Regulatory Hurdles

Perhaps the biggest reason why ICOs have been so effective is the cloudiness of regulation in the space. Regulators have significantly hindered the growth of equity crowdfunding by capping rounds at $1 million per year, and passing stringent requirements for investors and reporting (although may change this going forward). This is for good reason: without the proper balance of regulation, investors can and will be swindled by unscrupulous entrepreneurs. ICOs have experienced little such regulation yet (aside from China, see below), and with the added benefit of the immediacy of cryptocurrency transfers, they鈥檝e truly taken advantage.

It鈥檚 exceedingly unlikely that this trend continues. As my friend Rick Schlesinger noted to me recently, regulators are generally reactionary; that means you can鈥檛 confuse inaction in the past with safety in the future. The SEC, which is the government body responsible for regulating securities law, has made it very clear that entities in this vertical fall into the purview of regulation. In late July, the commission investigating the DAO, an ethereum project gone wrong that did a $150 million ICO. The SEC classified the DAO tokens as bonafide securities, and it warned that ICOs with a similar form may also be subject to securities regulation. In the SEC鈥檚 鈥淒epending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities. If they are securities, the offer and sale of these virtual coins or tokens in an ICO are subject to the federal securities laws.鈥�

In addition to that memorandum, the SEC later about fraudulent ICOs and how to avoid them, which might reveal a bit about how they鈥檙e thinking about this.

China has already stepped forward on this issue, among .

How buyers react and whether they can avoid detection by legal bodies will set the stage for how attractive the uncapped upside of this funding model remains.

Assumption #3: It Will Continue To Be Easy To Raise Exorbitant Amounts Of Funding

One of the most striking elements of the ICO craze has been the sheer amount of capital being raised. So far, more than $200 million has gone into just two startups alone: Tezos and Filecoin. But with large amounts of capital come expectations of returns, and returns take time to materialize. As with any other risky asset class, many, if not most, of these ICOs will fail to return capital to their investors 鈥� such are the mechanics of early-stage investing. and herald some ICOs as 鈥渟cams,鈥� but this misses the point; VCs know that startups can fail for any number of totally legitimate and honest reasons. That鈥檚 why VC investors diversify and understand that chances are a small portion of a portfolio will return the bulk of fund capital invested.

As with any initial 鈥渂oom,鈥� there鈥檚 a period of inflated expectations. How else can you explain a team without a finished product, such as Tezos, raising more than $200 million? But many of these high-flying ICOs can and will fail. At that point, when a significant raise like Tezos ends up not returning capital, it鈥檚 possible we鈥檒l see a correction, Casual investors will pull out of the market, or institutional investors will adjust their allocations to account for the volatility in crypto investments.

Eventually, as the market begins to better understand the lifecycle of a blockchain company and the associated development risks, ICOs will likely shift towards more balanced sums and requirements. More seasoned investors will demand teams to demonstrate effectiveness (beta product, initial traction, etc.) before raising significant money. Another idea that a friend and I have been working on is milestone-based ICO fundraising 鈥� releasing funds in escrow when the business meets voted-on traction milestones.

VCs And ICOs Can Work Together

The future of ICOs is anything but decided 鈥� both market and regulatory factors are still up in the air. But what seems like the more likely outcome is not that ICO鈥檚 replace VCs, but rather that ICO鈥檚 work in conjunction with VCs to make up a more robust funding environment. There are a number of different funding mechanisms out there for startups: VC, debt, private equity, revenue-based financing, and more. As the dust settles, I think ICOs will establish themselves as a legitimate pillar of startup financing, albeit for specific types of companies.

We may see VCs invest early and companies raise ICOs once they have traction, or alternatively ICO early and raise VC funding when they have traction. It鈥檚 anyone鈥檚 guess how this plays out, but with the uncertainty surrounding ICOs firm conclusions in either direction are probably best avoided.

The more you research crypto the less you know. If you think I鈥檓 dead wrong, feel free to hit me up on .

iStockPhoto / Aleutie

For most companies, the IPO process is painful. Not because IPOs are technically challenging or overly complex, but because a lot of additional hard work is required and it鈥檚 not a situation people often find themselves in.

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Unfortunately, there are no secrets for making an IPO painless. Every IPO is arduous, but there is one effective way to make an IPO less painful: listen to your auditors.

Make It Stop

One of the primary goals of every IPO is to finish as quickly as possible. There are several reasons for this. The two most important are to ensure you get out before an IPO window shuts, and, of course, to make the pain stop.

Unfortunately, this is not easy to do. The IPO process is slow and cumbersome. Even in the best of circumstances, it takes several months and 聽to go through the motions. Therefore, every day matters, bringing us to two absolute truths that you learn from operating in the IPO world long enough:

• IPO Truth #1. The long pole in the tent of every IPO is the financial statement audit.
• IPO Truth #2. Fighting with your auditors and the SEC never makes an IPO go faster.

I felt compelled to discuss the topic of how to approach an IPO audit after 聽on Uber鈥檚 financial performance:

Uber is no longer reporting unadjusted net revenue to its investors, due to new guidance from the聽SEC.

It is unclear if Uber is currently working on an IPO officially. The company just hired its replacement CEO, and the world’s largest unicorn is still chugging along without a COO and CFO.

However, the new CEO also just stated an IPO is at least 18 months away, and the Axios comment indicates that the ridesharing company has, at least, discussed its revenue recognition with the SEC as part of a pre-clearance discussion. Pre-clearance of technical issues is a very common pre-IPO move and 18 months isn’t all that far away. Therefore, let鈥檚 assume Uber is in the IPO process.

Revenue And The SEC

Uber previously recognized revenue from its UberX services on a net basis (net of driver costs), while recognizing revenue from its UberPool services on a more aggressive gross basis. Without getting into the accounting weeds around gross versus net revenue recognition, these services seem very similar from an accounting point of view.

Therefore, what Uber was doing with its Pool revenue seemed aggressive. That鈥檚 notable as discussions with the SEC concerning gross versus net revenue accounting are known to go something like this:

1. If the conclusion is aggressive, you definitely lose.
2. If the conclusion is a tiny bit aggressive, you definitely lose.
3. If the conclusion is on the fence, you still lose.

Companies in the IPO process understandably love gross revenue, but the SEC doesn鈥檛; therefore, it would not be at all surprising to see the UberPool accounting position get overturned by the SEC. To be fair, the accounting guidance around this issue is convoluted, making it easy for a reader to get to their preferred conclusion.

The main point here, however, is that this is just not a good issue to fight with the SEC. A good IPO audit partner will know that.

Of course, an audit partner can only do so much 鈥� management needs to be smart and trust the advice of IPO experts to determine what battles are winnable.

Unfortunately, not trusting an IPO expert is not all that uncommon.

Many CEOs and founders of these exciting IPO companies have probably been told 鈥渘o鈥� by experts for years. If the company is a true disruptor, like Uber, then this is likely the case. Therefore, breaking the old rules may appear to be a standard part of the process.

But fighting with the SEC is different; the SEC can鈥檛 be bullied.

This also goes beyond gross versus net revenue conclusions. Battling the SEC on any issue is often challenging, and that’s not a dig. SEC regulators are just doing their job, and they get ridiculous questions all the time. So, even in the best of circumstances, and even if a company鈥檚 intentions are pure, the process of trying to convince the SEC to agree with a conclusion that isn鈥檛 black and white can be brutal and is almost always time-consuming. It is also important to note that the SEC is loaded with smart people who understand nuance. That means the SEC, for the most part, is adept at seeing right through bullshit. Said another way: the SEC knows what it is doing and is generally very good at it.

Again, a good IPO audit partner will steer you clear of these unnecessary and time-consuming conversations.

Be Smart

If you have been smart, done your homework, and hired a good IPO audit partner from a reputable firm, they are probably not going to lead you down the wrong path. That means, as a founder, you should listen. And don鈥檛 just listen in regards gross versus net revenue either.

Listen to all of it.

Understandably, this is not always easy to do as several accounting rules do not make sense in every circumstance . (A set of rules meant to cover every company in the world is going to have some issues.) But IPO audit partners, the smart ones at least, have to say 鈥渘o鈥� sometimes, even when pressed by a prized IPO client.

That鈥檚 because the SEC doesn鈥檛 give a damn about anything except getting to the right answer. If the book says a position is wrong, then the SEC also believes the position is wrong 鈥� simple as that. So just listen to your IPO audit partner because, at the end of the day, all he or she wants to do is get the right answers, avoid hassles with the SEC, get the IPO over with, and not piss off everyone too much.

IPOs are difficult enough. As a founder, don鈥檛 make them more difficult than they need to be.

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Conventional wisdom states that we live in a . The rise of accelerator and incubator programs like Y Combinator, a robust VC ecosystem with more capital than it can deploy, and the (via the public cloud) help make starting a new company today much easier than it once was.

Technology is becoming more mainstream and normalized, as once small and darling tech startups have grown to represent the modern economic world, with the likes of Facebook, Google, Amazon, and Apple dominating the headlines.

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On the other side of the spectrum, exiting a startup, the process that runs the virtuous and necessary startup funding cycle, has never been more achievable. , like GE and Walmart, are snapping up tech startups to bolster their digital presences, an activity that was usually relegated to the tech giants themselves. Leaving aside some fluctuations over the past few quarters, tech M&A value is . The IPO market hasn鈥檛 been stellar, but recent months have seen some major tech companies go public. An overflowing pen of unicorns also means that we might be in for some exciting new tech IPOs in the near future, although that floodgate hasn鈥檛 opened quite yet.

So you can get funded and advised, set up infrastructure for little cost, raise capital when you need it, and bring liquidity to those investors; all the factors driving new startup formation seem to be in place.

In my conversations with VCs, this topic comes up all the time. They鈥檙e floored with how many quality, fundable companies there are today. In the words of successful , 鈥渋t has never been easier to start a great business.鈥�

If it鈥檚 easier than ever to start a company, you might expect the number of new tech startups founded per year to be pretty high. Surprisingly, the data tells us a different story.

What If Startup Activity is Actually Far Lower Than (Almost) Ever?

, a nonprofit focused on advancing education and fostering entrepreneurship, publishes a called the 鈥淜auffman Index鈥� that measures various facets of startup activity. The graph of startup density, or the number of startups per 1,000 firms, doesn鈥檛 look like the hockey stick that we might expect to see:

Barring a slight pickup over the past decade or so, there are two important observations to note here. First, startup density has been decreasing since the Kauffman Foundation started measuring it in 1977. And second, the financial crisis (or more accurately, the time period immediately before it) kicked off the most significant downturn in entrepreneurial activity since the chart starts.

And despite incremental progress since 2010, we鈥檙e nowhere near pre-2008 startup activity levels. Other Kauffman Index measures show some slightly more promising figures, but not what we might expect given the 鈥済olden age鈥� narrative that seems so prevalent.

Tech vs. The Rest

In all fairness, these Kauffman Index measures relate to all kinds of startups (such as bakeries and auto parts manufacturers). The growth factors that we鈥檙e talking about, like accelerators and cheap cloud computing, largely focus on tech startups.

But here, too, the data shows lower activity than expected. The Kauffman Foundation also published a in 2013 about high-tech businesses; the attached graph, where the blue line represents the number of high-tech startups founded in a given year, shows a similar decline since 2008.

(ICT stands for Information and Computer Technology, a more concentrated group of high-tech startups.)

Instead of spurring record numbers of new tech startups, our 鈥済olden age鈥� hasn鈥檛 really helped company formation much at all. It turns out that the real golden age for startup formation was actually the 90鈥檚 and the Dotcom era. And that鈥檚 despite the high, fixed cost of infrastructure and less mature funding environments.

Another surprising and emerging trend is the founder age gap. Moving back to the original Kauffman Index, there鈥檚 a notable divergence between younger and older founders. Companies are increasingly being started by older people.

Why might that be the case? In the words of Fareed Zakaria, who : 鈥淵oung people today dress like Silicon Valley entrepreneurs, consume technology voraciously and talk about disruptive innovation. But they want to work at Goldman Sachs, McKinsey and Google.鈥�

Why Aren鈥檛 We Founding More Companies?

So what鈥檚 going on? Why haven鈥檛 the amazing resources that today鈥檚 startups enjoy led to increased tech startup formation? I鈥檒l suggest a few possibilities, and then I will return to the importance of what the data tells us.

Kids Like Good Jobs

One reason why more people might not be founding companies is opportunity 鈥� especially for young people exiting school. Simply put, there are far more attractive alternatives to startups than there used to be.

Tech giants like Facebook and Google, who , are hot destinations for graduating software engineers and other relevant majors. These companies simply didn鈥檛 exist at their current scale (or at all, in Facebook鈥檚 case) during the dot com era.

And it鈥檚 not just software companies that are embracing younger workers and creating a more welcoming workplace. Traditional juggernauts like GE have created , and banks like J.P. Morgan have begun . And finally, even leaving large corporations aside, there are lots of mid-to-larger companies like Github and Airbnb that offer dynamic and exciting work environments. In short, people may be dis-incentivized to start new companies when their alternate employment options are so attractive.

Zombie Unicorns?

Another potential reason is the double edged sword of a robust funding environment. Companies that might have died in previous cycles can stay alive and in business longer.

With less VC funding available 20 years ago, your company, to stay alive, needed to do one of the following:

1. Raise money from a limited cadre of investors.
2. Make enough money to support yourself.
3. Go public or be acquired.

There鈥檚 a lot more VC money around nowadays at all different stages (), and that gives companies more runway and flexibility to push off profitability or exit. Founders and employees who might otherwise be starting new companies can stick around right where they are.

These two possibilities 鈥� better employment opportunities and potentially lower company turnover 鈥� may help explain why today鈥檚 鈥済olden age鈥� of startups hasn鈥檛 actually resulted in more startups.

But the conclusion stands: we might not be forming companies at the rate that we think. It鈥檚 my personal belief that within reason, more startups are good for the economy and entrepreneurship should be encouraged. I hope that these statistics and this article can spur some dialogue on how we can parlay today鈥檚 ease of starting a company into tangible growth.

滨濒濒耻蝉迟谤补迟颈辞苍:听

Initial coin offerings (ICOs) are all that tech can talk about today, it seems.

What鈥檚 an ICO? An ICO is when a company, usually blockchain-related, sells 鈥渢okens鈥� (read: new cryptocurrencies or cryptoassets) that to their product. Value can mean that the new token owners have governance rights, product use rights, or any slew of other things.

And ICOs are quickly picking up steam. Bancor, a company without a finished product, . That sum was outdone days later by Status.im鈥檚 , which took less time to complete than Banco鈥檚 3 hour fundraising cycle.

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But the surface-level absurdity of a messaging company raising $275 million in hours highlights a cadre of problems ICOs have, and the tough questions that they鈥檙e forcing the tech community to answer.

Questions like: Is it irresponsible to raise so much money just because you can? How will naive investors be protected? What if this all crashes?

These questions will need to be answered before ICOs can become as mainstream as blockchain zealots say they will. Thankfully — but frequently forgotten — these problems have actually been dealt with before 鈥� five years ago to be exact.

Before ICOs Were Cool — The JOBS Act and the Equity Crowdfunding Craze

Passed in 2012 and implemented fully by mid-2016, Title III of the JOBS Act legalized equity crowdfunding for non-accredited investors. In English, Title III allows non-accredited investors, people without large new worths or super high incomes, to invest (limited) amounts into startups and receive equity in return. This was, and still is, a big deal.

Crowdfunding was prior to the JOBS Act. Kickstarter and Indiegogo became household names. But it was illegal to receive equity in return for your provided capital.

You either got a product in exchange, or you classified it as a donation. Title III was the first step on the path to changing that, and turning all of your friends into an armchair venture capitalist (hopefully not).

This new open door spurred a lot of . If there鈥檚 anything I鈥檝e learned from my time as a venture analyst, it鈥檚 that startup investing is very, very difficult. Success requires a diversified portfolio and, or, extreme luck.

That in mind, when it comes to equity crowdfunding: How are doctors and lawyers without any startup experience going to invest responsibly? How will founders maintain reporting and transparency to hundreds or thousands of investors? Aren鈥檛 we just opening the world鈥檚 wallet to scam artists?

Do these questions sound familiar?

ICOs and Equity Crowdfunding 鈥� Siblings?

They should, because they are the same questions being asked about ICOs. While we鈥檒l discuss the key differences in a moment, ICOs and equity crowdfunding share the same fundamental premise: raising funds for a new company from the crowd instead of an elite group.

Both are meant to democratize the funding process, and to allow people without 鈥減roprietary access,鈥� like venture capitalists, to be investors too.

And both face the same core problems that any open network does: trust, transparency, and accountability. Perhaps most importantly, both were and are heralded as 鈥渞evolutions鈥� that will displace existing systems and change the way we allocate capital.

The funny thing is, equity crowdfunding hasn鈥檛 really taken off to the degree that many expected.

It鈥檚 tough to estimate the numbers, but of equity crowdfunding was likely raised 2016, compared to around invested. All of these questions faded into the background as VC-backed startups took the lion鈥檚 share of success and media attention. Ironically, it鈥檚 taken a totally new format of funding (ICOs) that wasn鈥檛 even regulated in the first place to raise the same questions that worried us beforehand.

Distant Cousins

But for all the similarities that ICOs and Equity Crowdfunding share, there are a few key differences that should be noted. These disparities and the lens they offer can help explain why everyone is so much more excited about ICOs than they seem to be about equity crowdfunding.

The first and most important difference between ICOs and equity crowdfunding is that, well, ICOs have nothing to do with equity. Tokens are not the same thing as shares, and (generally) do not entitle you to the same things that shares do, like voting and reporting rights.

In fact, removing the need to raise equity and debt is one of the most interesting features of Blockchain-based companies. Tokens are all used differently depending on how the given company鈥檚 business model is designed. For example, crowdsourced hedge fund Numerai鈥檚 recently issued Numeraire token allows data scientists to stake the token on the success of their machine learning models. They get dollar based payouts for predicting the stock market effectively, and lose their tokens if their predictions are poor.

The second key difference is the reason why these ICOs are in the news 鈥� they鈥檙e not regulated at all! There are no mandatory reporting requirements, no limits on the amount allowed to be raised (hello, Status.im), and no regulations on what value tokens need to provide. Equity crowdfunding does have all of these requirements. It鈥檚 really the Wild West out there in ICO land.

One more contrast is community reaction to ICOs. Unlike equity crowdfunding, ICO鈥檚 have taken off like rockets. It鈥檚 partially unfair since equity crowdfunding sums are limited to $1M per year per company, but the scale that ICOs are seeing is unprecedented. Not only are the sums raised really large ($275 million), but they鈥檙e as oversubscribed as a YC company鈥檚 seed round.

The two largest ICOs were done in under 3 hours, and there were significant lines to get in. Institutional cryptocurrency investors have even created 鈥渟niper wallets鈥� that in ICOs before the average investor can. At this pace, ICOs really might catch up to venture funding before we know it.

So What Do We Have Here?

So are equity crowdfunding and ICOs similar? In some ways. They鈥檙e based on the same basic premise and share structural ties. But the kinds of freedoms and flexibilities that ICOs enjoy compared to equity crowdfunding are significant. It鈥檚 no surprise that we鈥檙e quick to point out the problems we might soon face with this new funding contraption.

These problems are going to take a while to sort themselves out. It鈥檚 likely we will see a few spectacular failures and successes before the market finds a comfortable middle ground. And it鈥檚 anybody鈥檚 guess how and when the regulatory bodies enter the equation. Until then, understanding that these questions have been asked before might do a bit to comfort the qualms.

In effect, the major difference between ICOs and equity crowdfunding is the same as what makes the whole cryptocurrency 鈥渞evolution鈥� unique 鈥� a focus on decentralization, empowering the common node, and ignoring anyone who tries to reel it in (including the government). ICOs do present the same problems as equity crowdfunding 鈥� but at a much larger and more extreme scale. And the cypherpunks wouldn鈥檛 have it any other way.

Correction: Article originally stated Status.im raised 275m based on reporting from The Merkel.聽We have since updated.

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