2017’s ICO Market Grew Nearly 100x From Q1 To Q4

After the year crypto had in 2017, it is hard to believe that bitcoin, altcoins, and initial coin offerings (ICOs) went years as hardly known commodities, relegated to subreddits and obscure forums.

However, now even my fellow gym rats (a term I use endearingly) in Oregon have heard of crypto and its incredible, bubble-like ascent. After all, it is hard to keep quiet about a technology that seemingly conjures billions of dollars worth of value seemingly overnight.

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These pages have documented the crypto phenomenon, with some amused derision, a number of times. And now that 2017 has come to a close, we can take a closer look at just how much ICOs have grown over 2017, and how traditional venture capitalists are investing in startups that power crypto using the blockchain.

ICOs Boom in 2017

Although reporting indicates that ICOs have been around since 2013, the funding model was relatively nascent until last year. Essentially, an ICO is kind of like crowdfunding, except backers receive newly-created tokens. It’s a way for companies in the crypto economy to raise capital and fund development. And, arguably, the booming popularity of raising funds through an ICO have helped put crypto into the mainstream.

According to Crunchbase’s tracking of ICOs, 2017 got off to a slow start. Only seven ICOs were documented in the first quarter of the year, raising an estimated $28 million. But by the next quarter, the number of ICOs increased by nearly 4 times to 25 known ICOs, while dollars raised increased by an estimated $402 million, bringing in a total estimated sum of $680 million.¹

The pace of funding continued to raise across deal counts and amounts as 2017 marched forward. In the third quarter, ICOs broke over an estimated billion dollars raised for the first time and doubled the number of known deals. By the fourth quarter, known ICO deals and the estimated amounts raised nearly doubled again.

The end of year result? An estimated $4.9 billion was raised through ICOs in 2017, around the same amount reported by the Wall Street Journal in mid-December of last year.

A little under one billion of that amount went into two crypto-based startups, according to Crunchbase.

Taking the top spot for the year was Block.one, which raised $700 million in the fourth quarter as a result of its ICO. The company, which aims to create software “that promises to handle millions of transactions per second,” according to the Wall Street Journal, is now valued at $4.5 billion. And like many crypto startups, it has little to show from a product perspective.

Following Block.one’s massive ICO is Filecoin, which has raised an estimated $258 million. The company aims to create a distributed data storage network, and those who choose to participate in its network will earn the company’s crypto currency in exchange for computing resources. Filecoin is also notable for its buy-in from traditional VC investors such as Andreessen Horowitz, Union Square Ventures, and Winklevoss Capital.

But while ICOs appear to be an incredibly expeditious way to raise an immense out of cash, it’s not known if the wild ride will continue. An incredible number of ICOs lack well-developed teams and are almost embarrassingly short of any reasonable business plan. And regulators aren’t ignorant. The SEC has issued guidance that ICOs can, indeed, be securities—putting ICOs in the same regulatory bucket as traditional public offerings.

It’s a messy world. And it’s one that may still yet justify capital from well-established tech investors.

New Technology, Same Investors

Prior to the popularity of ICOs, the main means of raising funds for a crypto startup followed a more traditional startup fundraising model: pounding the pavement of Sand Hill Road.

And pound they did. From 2012 to 2016, startups that developed or harnessed blockchain technology raised increasing sums of money from venture capitalists. Using data provided by Coindesk (a news publication that focuses on crypto), here’s how funding played out from 2012 to 2017 for blockchain-based startups, which you can observe in the chart below:

However, as you can see, deal counts peaked in 2014 and have not recovered since. And 2017 also marked the first time totals for funding into the space took a hit. (Crunchbase data indicates similar funding direction.)

There are a number of factors that could contribute to this dip.

It’s possible that VCs, much as they did with Filecoin, are quietly participating in funding events via ICOs. There is also talk that startups, especially early-stage startups, are forgoing the sometimes onerous terms VCs offer in favor of an ICO. Simply put: who needs venture capital when you can raise your seed, early, and late-stage funding all in one swoop, without all that pesky due diligence and talk of preferred shares with a coin offering?

Additionally, blockchain funding is experiencing a seed-stage crunch—a woe of the broader US startup and venture market. In 2014, an estimated 65 known seed-stage deals were reported in the CoinDesk dataset. By 2017, however, that number dropped to an estimated 11 known seed-stage startups being funded. Over half of the blockchain startups which raised VC funds are recorded as being based in the United States.

How long this boom will carry on is anyone’s guess. ICOs could continue to be popular funding methods, especially if VC interest in blockchain startups continues to decline, regulation stays uncertain, and the environment for early-stage startups maintains its drought-like conditions.

Or the bubble could pop tomorrow, marking 2018 as the year HODL breaks.

1. Crunchbase added ICO tracking in 2017. The funding method’s nascency means that we are walking in new pastures. As such, we have a slightly lower levels of confidence that any single dataset is fully accurate when it comes to ICOs. Datasets (some of which we have used in reporting) can differ in terms of when a funding is recorded, and, say, in terms handling pre-sales to ICOs proper. Regardless, Crunchbase News checked Crunchbase data against other data sources (using only intervals when they appeared to be updated regularly) and found our results to be contentedly in-line directionally.

Illustration: Li-Anne Dias