The real problems of ICOs in hardware

I will try to avoid the word “bubble” in this article because that’s not really been the problem for most (if not all) ICOs in the past year. One would have thought that, by being a hardware investor, I wouldn’t be bombarded by this topic as much. And they could not be more wrong — in the past few months, I’ve had at least a dozen hardware startups coming to us pitching ICOs, or hinting about ICOs, hoping that I’d get excited and want to get in in whatever way. I turned them all down. In fact, I gave a “thanks but no thanks” to all of them immediately without arranging a 2nd call or meeting. Why? There are multiple layers of problems to tackle here. I. if you’re not building a decentralized product, ICO does not make sense at all. The proclaimed advantage of a startup ICO, as opposed to “traditional” venture funding, is that the token owners could benefit “directly” from the “production” of the underlying business of the startup, whether it’s in the forms of intangible goods or (if lucky) actual cash dividends. By weaving the tokens into a decentralized service or product, it supposedly ensures that founders or owners of the company are not in sole command of the distribution of profits. On the contrary, if the core product is not decentralized, the blockchain of the ICO effectively runs as a separate, independent loop, requiring human decisions again to tie some sort of business returns to it — Good luck with that! Given this, most of the hardware ICO proposals don’t really make sense because even if the products are connected to the cloud, most of them are by no means decentralized systems. II. The bigger problem in most (if not all) ICOs, including software ones, is the misalignment of interest. While the notion that many VCs are not exactly “smart money” and sometimes do more harm than good is not without merits, it doesn’t take away from the fact that at almost every successful startup, a good capital structure aligning the interest among all stakeholders exists. Especially between VC funds and founders. As frustration piles up after being declined by one VC after another, it’s not hard to understand the temptation founders are faced with when it comes to ICO, which seems to promise: - large sums of capital raised in a short time - no equity dilution - no VC board members breathing down your necks afterward, i.e. no oversight and governance But if capital is the only determinant for a founder with a great idea or even a great product to be successful, we should be inundated with thousands of unicorns on the market now. III. Good VCs bring a lot of resources that the founders wouldn’t have been able to locate just by themselves. Even for the leanest, software consumer-facing startups, hiring is still key to the growth of a company. And faced with the competition for talent in Silicon Valley, a reputable VC with a strong network might just be the key for a startup to secure a key hire away from Google or Facebook.

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