This is episode 2 of our deep dive in the fundamental problems of ICO investing. If you have not seen episode 1, please check it out first. These articles are meant to educate investors and propose a better system. One that protects investors and reduces scams.
So when looking into Investopedia for VC we get:
Venture capital is financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Although it can be risky for the investors who put up the funds, the potential for above-average returns is an attractive payoff.
So the usual VC investment strategy is: Buy 10 startups and hope that 1 or 2 do a 100x in the long run and cover the loss of the other ones. So that means VCs are supposed to hold their investments for several years. Up until recently, VCs gave funds in return for a large part of the equity in the company and a say in the future of named startups.
However… ICOs do not sell equity, they sell tokens. Tokens usually will be used for some form of the utility of the ecosystem once the project is complete. So here is the tricky part, if and ICO promises returns on the investment it would classify as a security and the ICO would now be an STO. So why invest in a coin, which by legal definition, should not increase in value? Because most of us know it probably will increase in value anyway, at least in the short term.
The token market compared to the equity market, has a lot more liquidity in fresh startup projects. It’s quite easy to sell coins a day after the startup gets listed on exchanges. Usually, the price per token is now even higher than what they bought it for. Venture capitalists could pull in instant profits if they wanted to. It’s important to highlight that is usually not the case in the “Real World”.
In the real world, this is much harder. Therefore the traditional VC Fund strategy makes more sense. Buy 10 projects hope that one becomes the next Facebook a few years later and cash in the profits.
How do VCs work?
Let’s take a look…
A venture Capital is made up of the general partners, investors and the fund manager. General Partners run the Venture Capital firm and make the investment decisions on behalf of the fund. They typically put in personal capital up to 1-2% of the VC Fund size to show their commitment to investors. Investors are all types of funds, individuals partners, companies or just people with a lot of money. Together they make up the VC fund, that can invest into new startups.
The first thing you should notice is that the management has the responsibility to make money for their investors. After speaking to several VCs, most of them agreed. However, some of the older traditional funds told us, that a VCs responsibility is to stay loyal to their investment strategy which was presented to their investors.
If the investment strategy is not clearly defined, then the management team has pretty much all the freedom in the world. They can do what they want as long as they generate profits for their investors.
Traditional Venture Capitalist (VCs) vs Crypto Vagina Clubs (VCs)
In the last episode, we looked into the emergence of new venture capitalists in the blockchain space. Early 2018, a bunch of new VCs popped up. The idea was pretty simple ICOs started to prefer “smart money” over decentralized funds (Ma & Pa money). People that knew their way around ICOs in 2017 made a LOT of profits, but in 2018 ICOs started to capped their public sales.
(Capping is when an ICO limit the allocation of each investor to small amounts of only few 1000s dollars)
So to get around this problem a lot of these fresh millionaires get together and fund their own new Venture Capital. Obviously, they had no idea what they were doing, but nobody really looked into these new funds too closely. It was the birth of the Vagina Clubs.
(Vagina Club, slang insult for VCs without any formal license that invests only into ICOs.)
The fundamental problem
Now that we have a slight insight into the space, let’s examine the problem with Vagina Clubs investing in ICOs.
Vagina Clubs usually only care about generating profits. They have no interest in investing long term. The just want to make money.
The best and fastest way to make money is to buy cheap low sell high.
I know its no secret, but the difference between us and them is that VCs can decide what price they want to buy it and also what price the token should be sold for.
Let’s take a look at this illustration:
You get the idea. ICOs can decide the price for investors.
The problem is the lack of transparency. If ICOs would tell all their investors that they are paying 25 times more than other people, then nobody would be throwing money at them.
But they need those retail investors because someone always needs to hold the bags of those Vagina Clubs and seed investors.
In 2017 the private sale allocation was much smaller compared to the public sale allocations. Somewhere around 20/80 percent. If 80% of people pay the normal price then there is a lot of room for growth, but not the other way around. The token price comes right down to the private sale price or even the seed price.
How to make quick money with ICOs
Step 1: Make a new VC:
You will need a few people that made good money in 2017 with ICO investing. A fancy logo and a good name for your new Venture Capital. Just pick a few letters and add capital at the end. So let’s take FBT Capital. Sound pretty good already. Now all you need is a respectable logo and a nice looking website. Add some known companies list them as official partners on the homepage. Don´t worry if you never met these companies, nobody will check anyway. Plus everybody does it. You’ll be fine.
Step 2: Find a target:
Choose a good project, there are many ICO influencers that give their research to the public for free! Awesome, now all you need to do is pick a project that looks good, find out what conferences they will go to and you’re all set up. All you need is a nice suit and a ticket to one of the 100s blockchain conferences all around the world. Tickets cost about 200 to 1000 USD and you probably need a plane ticket as well. If you book it early enough you can get those transatlantic for a few 100 bucks.
Step 3: Seduction and lies:
Once you found your target, approach. Tell them your representative of a large known VC or even better a Family Office! ICOs love Family offices! Show them your website, tell them about all the creative benefits you will bring them. Mention your impressive network of fintech companies and how you will connect them to influential people. That should close the deal. Don´t forget to ask for crazy discounts, after all, we are here to make good money. Now that you bought your tokens for 20% of the public sale price your read for the final step!
Step 4: Exchange, Pool or OTC
You have your cheap tokens. Wait for exchange listing tokens will start at the ICO price, so you can pool in some instant profits. If you don´t want to wait that long you can sell your tokens to some OTC broker, or if you know some pools and there is enough demand you can even sell it to some pools for ICO Price.
Step 5: Repeat
In the next episode, we will look into 2 projects in detail and shine the light on some famous Venture Capitals, that are nothing more than Vagina Clubs. We will also look into how some of the largest exchanges in the world are involved in manufactured Pump & Dumps and break down the process of generating hyped projects.
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Past few projects that are now at an average of 80% loss, which is around the price that private sale price.