- Many new crypto firms have an incentive to raise capital by issuing tokens.
- That’s because crypto investment firms have a relatively small investment horizon and seek quick payouts in the form of token launches.
- But that creates misaligned incentives between firms and their investors.
Crypto startups are increasingly forced to launch tokens. And it’s an unfortunate thing for the industry.
That’s according to Elliot Chun, a partner at Architect Partners, a firm that advises crypto companies on financing strategies.
“I hate it,” Chun told DL News. “It’s bad for companies, because most companies shouldn’t even have a token in the first place.
“They have to come up with some sort of bastardised token structure that makes sense legally, but puts the founders at risk,” he added.
No exit
The problem, Chun said, is that it’s increasingly difficult for crypto firms to raise capital if they don’t provide their investors with a way to cash out relatively quickly.
Apart from Bitcoin mining firms, only one major crypto company, Coinbase, has gone public so far.
While stablecoin issuer Circle has already filed for an initial public offering, and crypto exchange Kraken is considering the same, the Securities and Exchange Commission’s adversity toward crypto has made it difficult for firms to follow through on their ambitions.
That means most people who have invested in tokenless crypto firms haven’t been able to cash out yet.
“Generally speaking, if you invested in BitGo, Anchorage, Fireblocks, or any other custodians — there hasn’t been a return of capital for investors,” Chun said.
Investment horizons
Waiting a decade for your payout isn’t a problem for investors with backgrounds in traditional finance, who are accustomed to having long-term horizons, Robert Le, a senior analyst at PitchBook, a provider of private market data, told DL News.
But traditional venture funds are still traumatised by the 2022 bear market and by the collapse of crypto exchange FTX, Le said, and have yet to step back into the crypto market.
That means the crypto industry is mostly raising capital for crypto-native funds — and these firms tend to make investments with expectations of a quicker payout.
Since they cannot exit through an IPO, crypto venture funds naturally give more attention to teams promising to launch a token.
“It’s difficult for [crypto] investors to come in, because they don’t want to get locked up for seven to 10 years,” Chun said.
”Investors are driven by one thing, and that’s investment return,” he added. “That’s their job.”
Coinbase Ventures, Andreessen Horowitz, and Galaxy Digital — three major crypto venture-capital firms — didn’t immediately return requests for comment.
Risks in issuing a token
The problem is that oftentimes tokens don’t really have any reason to exist. And they often become net negatives for the companies that issue them.
“It brings a lot of speculation,” Le said. If the token’s price goes up, “it’s really exciting for the founders and employees, but then it drops 90% and the founders lose interest and leave early.”
“It creates a really bad dynamic,” Le added.
Launched tokens can also expose founders to lawsuits and criminal investigations, Chun said.
Sooner or later, “regulators will revisit how some of these token airdrops happened,” he said. “You’re going to get a knock on the door.”
Tom Carreras is a markets correspondent for DL News. Got a tip about crypto firms and venture capitalists? Reach out at tcarreras@dlnews.com
