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Share your research with Venture Capital: An International Journal of Entrepreneurial Finance

Deadline: 30 June 2019

Disruptive Innovation in the Entrepreneurial Finance Market?

Blockchain, Initial Coin Offerings and the Emergence of New Technologies

The market for entrepreneurial finance – from start-up to private equity – is undergoing the most rapid and far-reaching change since the dot.com crash of the late 1990s/early 2000s (Harrison and Mason 2019; Kenney and Zysman 2019; Wright et al 2019). This reflects both changes in the supply of equity finance as new providers (accelerators, mini-VC funds, sovereign wealth funds, equity crowdfunders and others) enter the market, and changes in the demand for equity finance from new-technology based start-ups (eg in fintech) which face challenges in raising capital from traditional sources.

The most recent entrant to the early-stage risk capital market, seen by some as a genuinely disruptive innovation that will fundamentally transform the market (Lipusch 2018), is the blockchain-based Initial Coin Offering (ICO). Although there is still some definitional opaqueness, an ICO can be defined as an open call ‘for funding promoted by organizations, companies, and entrepreneurs to raise money through cryptocurrencies, in exchange for a “token” that can be sold on the Internet or used in the future to obtain products or services and, at times, profits’ (Adhami, Giudici and Martinazzi 2018, 1). This definition is very similar in practice to that of a crowdfunding campaign (Adhami and Giudici 2018), where fiat currency is collected (Belleflamme et al 2014). 

Table 1 summarises the key features of established and new actors in the entrepreneurial finance market. The key characteristics of ICOs are as follows: first, they are based on an open call for investment on the web, with a focus on seed funding and pre-selling; second, the demand for funding is from new ventures with an idea and/or a proof of concept focused on open source technology; third, the supply of capital is primarily from developers and customers who believe in the merits of a particular technology and are motivated by a combination of return on investment, hedonic and altruistic concerns; fourth, capital allocations from successful ICOs are focused on R&D, marketing and operations activities; fifth, transactions costs are low given the direct contacts between capital seekers and capital providers, but this is accompanied by no or limited regulation and limited investor protection.

ICO funding has grown significantly: 2017 data suggest ICOs worldwide raised $5.3bn, compared with US and European VC of $71.8bn and $4.3bn and accumulated crowdfunding investment of $3.4bn (Kickstarter) and $483m (Crowdcube) (Adhami et al 2018); ICO funding had exceeded early-stage VC investment by June 2017 (Lipusch 2018); and in 2017 equity investors deployed $1bn in 215 deals in blockchain startups compared to ICO fundraising of over $5bn across almost 800 deals (Li and Mann 2018). In terms of ICO activity the US, UK, Russian Federation, Switzerland and Singapore dominate; in terms of funds raised Switzerland and the US dominate the global industry, with Israel, Singapore, France and Serbia also prominent. This locational pattern reflects, in part, the distribution and location of new, blockchain related, technology ventures raising capital (eg in the US, UK, Switzerland, Israel), but it also reflects the relative ease of launching such activities in some jurisdictions (eg Russian Federation, Serbia, Switzerland) and suggests that this category of capital raising is from the outset more internationalised that traditional VC.

The potential importance of the ICO mechanism is four-fold (Adhami et al 2018). First, using blockchain technology it reduces the cost of capital raising through the disintermediation of the market by avoiding intermediaries (eg crowdfunding platforms) and payment agents (banks, credit card circuits), and in so doing contributes to the democratisation of venture capital. Second, ICOs favour open-source project development and decentralised business, generating a built-in customer base. Indeed, their role in incentivising the creation of new protocol technologies has been reinforced by the initial reluctance and subsequent herding behaviour of VC investors to invest in open source technologies due to the inability to enforce ownership on these technologies (Lipusch 2018), a clear illustration of selection bias in the entrepreneurial finance market (Franke et al 2008; Mollick and Robb 2016). Third, ICOs play a key role in launching peer-to-peer platforms, which can create value for entrepreneurs and users and increase social welfare through positive network effects (network externalities) and the aggregation of dispersed information about platform quality (Li and Mann 2018). Finally, the token mechanism in ICOs allows funders to create a secondary market for their investments, unlike the essential illiquidity of conventional equity-based, lending-based or reward-based contracts.

Based on the volume of ICO fund raising, some commentators have concluded that ‘the ICO phenomenon cannot be neglected or hastily marked as a scam’ (Adhami et al 2018, 1), although others have been more equivocal in arguing that ‘this startling growth could be interpreted as evidence of either a valuable innovation, or a dangerous bubble’ (Li and Mann 2018, 2). That it may be the latter is suggested by more recent data that shows a collapse of the ICO market in 2018Q3 in what looks like a classic boom-bust cycle. Total ICO fund raising grew from zero in March 2017 to around US$900m by November 2017 and a peak of just over US$2500m in February 2018, falling to under US$600m in June 2018 and to under US$200m in September 2018 (Harrison and Mason 2019). This is a reflection of a wider trend in the cryptocurrency markets as Bitcoin, which had a peak market price of almost $20,000, was trading below $4000 by late 2018, having lost over 75% of its value since 2017.

Furthermore, industry estimates suggest that almost 50% of ICOs failed to raise any money at all, of those that did raise money half lasted less than four months (Benedetti and Kostovetsky 2018),and almost 80% of ICOs in 2017 were estimated to be scams (Satis Group 2018). This is likely to reinforce pressure for increased regulatory attention (Enyi and Le 2017). ICOs presently bypass any regulation that governs businesses placing securities with retail investors in a process characterised by the absence of official prospectuses, with limited or no protection for investors and very limited information disclosure. As of September 2017 China and South Korea have banned ICOs and regulatory scrutiny is increasing in other jurisdictions. Nevertheless, despite concerns about the information asymmetries and opaqueness surrounding ICO projects and the related risks to investors, a number of jurisdictions, including the EU and Australia have supported ICOs as a new and innovative way of raising capital for fin-tech startups (European Commission 2018; Australia 2018). Given the wider concerns about the unequal distributional consequences of blockchain technology (Hughes 2017), the ICO phenomenon, whether transient bubble or lasting disruptive innovation, represents fertile ground for entrepreneurial finance research in which an ethics perspective as well as a technical perspective will play an important part.                       

Against this background, this Special Issue is interested in papers which explore the following questions, among others:

  • Is the blockchain/ICO phenomenon a fundamental change in the entrepreneurial finance market or just another bubble, such as the Tulip mania in the 17th century or the dot.com crash?
  • What will the entrepreneurial finance market need to look like to meet the needs of the ventures, industries and technologies at the heart of the ‘fourth industrial revolution’?
  • What are the characteristics of companies using ICOs to raise finance, in terms of sector and technology – is the ICO supporting the emergence of new technologies overlooked by the traditional VC industry?
  • What are the mechanisms of the ICO, in terms of investment process, screening, due diligence etc, and how effective/ineffective are these by comparison with the traditional VC/IPO funding sources?
  • How are investment mechanisms evolving as, for example, ICOs based on utility tokens are supplanted by STOs (Security Token Offerings), and what are the implications, if any, for the interface with traditional VC finance?
  • Who invests in ICOs and why – what determines the allocation of capital into this market? Is this institutional or individual capital? Are ICO investors new to the entrepreneurial finance market? Do they differ demographic, economic and geographical profile from other risk capital investors? Do investors invest only in ICOs or is this part of a deliberate portfolio diversification strategy?
  • What are the motivations of investors in ICOs? Do return on investment (ROI) considerations outweigh hedonic or altruistic concerns?
  • What, if any, are the synergies between ICO investors and other participants in the entrepreneurial finance market? Do companies raising capital through an ICO also raise finance from other actors (VC, PE, angels, crowdfunders) in the entrepreneurial finance market?
  • What is the role of regulation in shaping the evolution of this market and how does this vary across jurisdictions?
  • How and in what way do ICOs facilitate the international flow of entrepreneurial finance, and to what extent does this reinforce or mitigate the increasing concentration of the supply of and demand for VC/PE in global cities?
  • What are the distributional justice implications of blockchain/ICOs in terms of inclusivity and widening the already existing gap in reaping the benefits of the ‘digital dividend’
  • What are the implications of the dynamics of blockchain/ICO technologies for the role of trust in entrepreneurial finance transactions?
  • Do the network externality effects attributed to blockchain/ICO solve the problem of trust in transacting with third parties (and with it overcome agency issues in such relationships) as the network is open, electronic transactions are automatically verified and recorded through cryptographic algorithms without human intervention (Atzori 2015)?
  • Does the ICO process – based around soliciting investment on the basis of a ‘white paper’ rather than an authorised prospectus – intensify rather than reduce information asymmetries and agency problems?

Submission Guidelines

We welcome submissions on these and other issues arising from the rise and fall of the ICO phenomenon from a wide range of disciplinary and methodological perspectives. Papers should be prepared according to the format specified for the Journal. 

Papers should be submitted as Word files to the Special Issue Editors at Richard Harrison, Colin Mason, and Yannis Pierrakis with the subject line ‘ICO Special Issue’.

The timeline for the Special Issue is as follows:

  • Submissions due: 30 June 2019                    
  • First round reviews and decisions communicated: 30 September 2019        
  • Revised submissions due: 30 November 2019         
  • Final decisions communicated: 30 December 2019         
  • Final papers due: 31 January 2020              
  • Special Issue published: Summer 2020                  

Venture Capital

Visit Journal Articles


Adhami S and Giudici G (2018) Token it easy: analysing the rush of initial coin offerings, SSRN working paper

Adhami S, Giudici G and Martinazzi S (2018) Why do businesses go crypto? An empirical analysis of initial coin offerings, Journal of Economics and Business. https://doi.org/10.1016/j.jeconbus.2018.04.001

Atzori, M (2015) Blockchain technology and decentralized governance: is the State still necessary? Available at SSRN: https://ssrn.com/abstract=2709713 or https://doi.org/10.2139/ssrn.2709713

Australia (2008) http://asic.gov.au/regularory-resources/digital-transformation/initial-coin-offerings/

Belleflamme P, Lambert T and Schwienbacher A (2014) Crowdfunding: tapping the right crowd, Journal of Business Venturing 29, 585-609

Benedetti, Hugo E and Kostovetsky, Leonard, Digital Tulips? Returns to Investors in Initial Coin Offerings (May 20, 2018). Available at SSRN: https://ssrn.com/abstract=3182169 or http://dx.doi.org/10.2139/ssrn.3182169

Enyi J and Li N (2017) The legal nature of cryptocurrencies in the US and the applicable rules, SSRN working paper

European Commission (2018) FinTech action plan: for a more competitive and innovative European financial sector,  https://ec.europa.eu/info/sites/info/files/180308-action-plan-fintech_en.pdf

Franke N, Gruber M, Harhoff D and Henkel J (2008) Venture capitalists’ evaluation of start-up teams: trade-offs, knock-out criteria, and the impact of VC experience, Entrepreneurship Theory and Practice 32, 459-483

Harrison R T and Mason C M (2019) Venture Capital twenty years on: reflections on the evolution of a field, Venture Capital: An International Journal of Entrepreneurial Finance 21 (1)

Hughes K (2017) Blockchain, the greater good and human civil rights, Metaphilosophy 48, 654-665

Kenney M and Zysman J (2019) Unicorns, Cheshire cats and the new dilemmas of entrepreneurial finance, Venture Capital: An International Journal of Entrepreneurial Finance 21 (1)

Li J and Mann W (2018) initial coin offering and platform building, paper presented at Southern California Private Equity Conference, La Jolla CA, 2 March 2018

Lipusch N (2018) Initial coin offerings – a paradigm shift in funding disruptive innovation, SSRN working paper

Mollick E and Robb A (2016) Democratizing innovation and capital access: the role of crowdfunding, California Management Review 58, 72-87 Satis Group (2018) https://research.bloomberg.com/pub/res/d28giW28tf6G7T_Wr77aU0gDgFQ

Wright M, Pruthi S, Amess K and Alperovych Y (2019) Private equity: where we have been and the road ahead, Venture Capital: An International Journal of Entrepreneurial Finance 21 (1)

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