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Blockchain Start-ups – 3 Factors To Consider:
With 2017’s meteoric rise in the market value of Bitcoin signaling that cryptocurrencies have captured the public’s imagination, there has been an attendant increase in the number of initial coin offerings (ICOs) as entrepreneurs rushed to raise capital to fund the development of blockchain applications for a wide range of use cases, some industry vertical specific, others more horizontal in nature. With the amount of funds raised via ICOs outpacing traditional early-stage VC funding, the rise of the blockchain sector is creating disruption in the process of capital formation as it moves well beyond crowd-funding with institutional investors such as family offices considering cryptocurrencies a new alternative asset category. With this disruption, investors should be mindful that traditional due diligence practices are potentially not being followed as ICOs rush to market, an element of risk that should not be overlooked. Among other things, failure to perform proper due diligence increases the likelihood of prospective capital loss so unless one likes experiencing 100% losses on capital committed here are three factors to keep in mind when considering ICOs:
-Size of addressable market: Generally the larger the addressable end market, the better unless there happens to be a niche market opportunity capable of generating sustainably high returns;
-Credible business model: For a blockchain coin to be adopted it needs to offer superior performance (i.e. lower transaction costs, faster transaction execution, greater transparency) than existing applications with ability to improve performance over time at rate faster than competitors at less cost; and
-Business team credibility: A track record of previous success by the management team indicates an awareness of the risks and pitfalls associated with launching a new venture and the need to allocate available capital effectively.
These factors are by no means exclusive, but should serve to eliminate from consideration a number of candidates and in the process mitigate the risk of prospective capital loss.
Company Selection – What’s Important:
At present there are only a small number of publicly traded “pure play” blockchain companies, a number that given the sector’s popularity can only be expected to increase over time as firms either pivot into the sector or IPOs occur. Ticker symbols for some of the current “pure play” blockchain companies: BTCS Inc. (BTCS), Marathon Patent Group (MARA), MGT Capital (MGTI), Riot Blockchain, Inc. (RIOT), all of which traded at elevated valuations relative assets, revenues and earnings (if any). Given the nature of supply and demand in the capital markets, expect supply (i.e. the number of public companies in the sector) to grow to a point where demand is more than filled. As such, investors should consider the same three factors outlined above in considering public companies in trying to determine which subset will come to dominate the sector.