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Series-A Still Trumps ICOs

Fintech startups may find that Initial coin offerings could be a difficult route to raise initial and early capital.

“There was a discussion at the firm this week regarding one of our companies that did an ICO at some point, and we discouraged it,” said Kamran Ansari, a venture partner at venture capital firm Greycroft during a fireside chat at the Empire Startup Demo Day.

Navigating an ICO through regulatory waters is challenging, Donna Parisi, a partner and the global head of fintech at Shearman & Sterling, told Markets Media after the fireside chat.

“Recent enforcement actions are going to make it even more challenging,” she said. “The Securities and Exchange Commission is taking a pretty strict approach as to when something is a security offering.”

The emergency injunction against messaging-platform provider Telegram Group and TON Issuer by the SEC to prevent their planned sale of $1.7 billion of token to US investors by the end of October is the latest example of ICOs that have gone wrong.

It is doubtful whether ICOs would replace the typical Series-A funding rounds, according to Ansari.

“I don’t want to say that it is a fad,” he said. “I’m not sure if it is going to be a sustained thing that would have a meaningful impact on the Series-A investing.”

For fintech startups that seek to raise subsequent capital, Ansari also recommended that the firms avoid taking their companies public.

In its 13 years of existence, Greycroft only has had only on exit in which the company conducted an initial public offering, he noted.
“There are few VC-back companies that have the scale, sophistication, and systems in place to forecast a quarter,” said Ansari. “It is a rare few companies that can do that.”

Instead, startups should develop relationships with additional venture-capital investors before the company has to resort to additional pitch sessions.

“There are fewer firms as you get to the later stages,” he said. “The funnel narrows. There are not as many firms doing Series-C rounds as there are doing seed rounds.”

Companies that chase these funds also should be prepared to cast their nets much broader than they might initially plan.

Although there is roughly the same number of Series-B and Series-C institutional venture-capital firms, there are also corporate venture arms, private equity firms, hedge funds, and family offices that could be a source of funding for later-stage companies.

“We are seeing a trend where family offices are becoming more sophisticated and active investors,” said Parisi. “They really want to be a partner [with startups] and can bring things to the table, such as distribution channels.”