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Venture Capital Vs Token Offering: What’s right for you

Venture Capital Vs Token Offering

If you’re reading this article, then there’s a good chance you’re interested in startups and how these early-stage ventures raise capital. In this article, we won’t go into the nitty-gritty differences between traditional venture capital and token offerings.But instead dive deep into years of data on Token offerings like ICOs, STOs, and IEOs. And draw insights from it such as “What’s the average funding bracket for a token offering?”.

The startup financing cycle

Imagine you’re a startup that’s got a great idea, an even better team and a brilliant plan to achieve your goals. And the only thing that’s stopping you is the access to sufficient funds to scale at the place you want. 

You can raise capital from a group of investors that believe in your idea, in exchange for equity. The startup financing cycle looks something like this.

Venture Capital Vs Token Offering

Source

A rather complex and cumbersome process than often takes months with dozens of legal hurdles. Faced with several challenges, often the trickiest part of investing in Ventures is not putting money your in, that’s the relatively easy part. The challenge is getting it out, hopefully, more than what you put in. 

An overview of Token Offerings

Token Offerings like Initial Coin Offerings (Utility tokens), Security Token Offerings ( STOs) and Initial Exchange Offerings (IEOs) paved the way for a simpler and much more faster alternative to the Venture Capital route which wasn’t as accessible to everyone.

The ease of launching a token offering when compared to traditional fundraising mechanisms and added benefits paved the way to their widespread adoption. 

In the few years since its inception, over 5000 token offerings have taken place and have raised as much as $30 billion, according to InWara’s Market Intelligence Platform.

Let’s dive right into this year’s worth of data. Here’s what a scatter plot of this data, arranged by the Funds raised would look like.

Venture Capital Vs Token Offering

Source: InWara’s Market Intelligence Platform

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Except for a few outliers that have raised more than $100 million (a rare occurrence), a majority of the token raises are below the $100 million range (still an exceptional amount). A much more detailed look at the same data would look like this.

Equity funding Vs Token Offering
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M — Less than or equal to $5 million

E — Between $5–10 million, including 10.

D- Between $10–25 million.

C- Between $25–50 million.

B- Between $50–100 million. 
A- Between $100–500 million.

S- Greater than $500 million.

Now you get the bigger picture right? While it’s easy to get carried with exuberantly successful token offering projects EOS which raised $4.1 billion, Telegram ($1.7 billion), LEO ( $1 billion). The fact is, these token offerings are a rarity. As much as 47% of the token offering projects launched so far have raised less than $5 million.

So what’s the average funding bracket for a token offering? ~13.6 million. Excluding the extreme outliers like EOS and Telegram which raised more than $500 million. Including them, the average jumps to ~18 million.

What do we learn from this? That token offerings like an ICO or an IEO are largely used by early stage ventures to raise enough funds to get their projects off the ground. But it’s significantly higher than seed funding. On average VC-backed startups raise $1.7 million in seed funding, that’s 1/8th of that of token offerings. 

We’re assuming that these startups use the surplus of funds to avoid having to raise capital again. And that does seem to be the case as since 2013, there have been only a few instances of startups raising capital, post conducting a token offering. Just 3.4% of startups raised capital post conducting a token offering event.

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