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Updated Sun, 22 May 2022 01:44:44 GMT

Traditional VC investment vs. bitcoin IPO


There are few Bitcoin "stock exchanges" trading mainly BTC mining company pass-through shares, like

We are planning to get investment for our Bitcoin-related business. Instead of traditional Silicon Valley-style venture capital investment, we are investigating the opportunity of doing "Bitcoin IPO" and liquidate some of the company shares through pass-through exchanges.

We are looking for 0,7M - 1,5M USD investment. This money would be spent to expand and internationalize our business and enable Bitcoin interaction for more people in across the world. We really need to convert the investment to fiat currency in some point, as for marketing efforts (Google ads, etc.) are paid in fiat currency.

Now I am looking for advice on what would be pros and cons of both options: VC investment vs. Bitcoin crowdfunding. We are pretty sure that doing a Bitcoin IPO first would close the door for VC investment, as our stock and IPR would get tainted with nameless Bitcoin investors of whose shares could not be bought back easily (am I correct?). However, we are also keen on doing a Bitcoin IPO because that way we could have more control over the company (not giving away voting rights) and steer the company to the direction more beneficial to the Bitcoin ecosystem instead of a 4-5 years exit plan.

I am mainly looking advice on:

  • Valuation in both scenarios. We believe we could get higher valuation through a Bitcoin IPO.

  • How much goodwill Bitcoin fans and current Bitcoin millionaires have to build the ecosystem

  • Credibility: a VC investment would give us more real-world credibility

  • Bitcoin is hot in old-fashioned VC industry right now. We have been contacted by several world-class VCs by themselves to discuss with us.

  • The legal implications: what is the relationship between pass-through shares and real shares? Should we move to live underground after a Bitcoin IPO to avoid possible later legal mess?

  • Should we found the company in some tax haven where laws are more relaxed (e.g. Seychelles)

  • It seems that the Bitcoin stock exchange industry is little shady, and it's hard to trust pseudonyms. Is it still too early to go there, as it might be that stock exchanges will be crashing within a year, like fiat money exchanges have, and we end up with a complete mess and lost information on shareholders, dividends and ownership?




Solution

You definitely need to consult with lawyers experienced with VC and crowd funding.

In this climate, it would be pretty easy for you guys to get very favorable VC terms, considering the general funding environment, the recency of other VC events in bitcoin, and their relative valuations. Given the popularity of your service, it probably wouldn't be too difficult to raise the money you needed through bitcoin ipo either. Having options is good, as you can play the options against each other for better valuation and terms. I am not familiar with bitcoin IPOs, so I will comment mostly on going on the VC track or not.

VC funding could boost you to the next level

Strategically, it really depends on what you guys want the money for, how you perceive future risks, and where you see yourself in the future. VC money typically ties you into a fast hiring and fast growth track, and execution towards an exit in 4-5 years as you guys already noted. If you find yourself strained because of growth capital, engineering talent, lack of the right contacts, and you think it is a land grab situation, then VC funding makes total sense. If you need top engineers, VC money could help with legitimacy and source talent. If you need industry advisors, VC funding could help you get in touch with important and busy people. But VC funding comes at a price.

VC funding could kill you

In an emerging environment like bitcoin, the strings attached with VC funding could kill you. An example I saw was the emergence of penny auction websites a couple years ago. There were many sites with a lot of VC funding. Off the top of my head, swoopo ($14 million), bigdeal ($4.5 million). They both failed to navigate the legal compliance, customer satisfaction, credit card processing, and user acquisition aspects of penny auctions, and are now dead. In contrast, there are still several privately funded penny auctions that are very much thriving, including quibids, bidcactus, beezid. I personally think the VC funded startups were not able to deploy the funds effectively, and weren't able to stay scrappy and flexible long enough to get big like the non-VC funded penny auctions.

Another Alternative - Angel Investors

You also leave out a 3rd option: Angel Investors. This group are not bound by the restrictions of a formal investment thesis and time sensitive returns expectations. If you are looking for $700k to $1.5 million, raising an angel round maybe viable.

What Would I Do?

Keep in mind, I am some random guy on the internet, who has cursory knowledge of your business. I view VC funding as rocket fuel, only to be used when the rocket is already pointed and going in the right direction. Given the general uncertainty of bitcoin and early phases of adoption, and given your strong position as a more decentralized bitcoin exchange, I would try to hold off VC funding for X months, and try to use other funding sources while maintaining flexibility and control. Revisit the issue after X months and decide if the lack of it has caused you to miss your goals.





Comments (3)

  • +0 – Thanks for very insightful response John. We are not sure if there is angel investors available in 700k-1500k class, but all tips are welcome. We are pretty sure we are going to do what you would do in "What would I do" :) — Jun 24, 2013 at 19:35  
  • +0 – I think the best approach for you guys is to find an "anchor" angel that adds value, you guys get along with really well, is credible, and willing to put up the first funds. I'd be open to a quick online chat or a few emails to figure out if I could help you guys more. I think what you've done so far is great, btw. — Jun 25, 2013 at 14:52  
  • +0 – Hi John. Can you drop an email to support at localbitcoins dot com. — Jun 27, 2013 at 09:26  


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