The formation of capital of thinking encryption: Why is the return of public sale beneficial?

Author: Regan Bozman, formerly the first employee of CoinList, is now a co-founder of Lattice Capital

Compilation: Felix,

The strong return of ICO (Initial Coin Offering/Public Offering) is very beneficial to the cryptocurrency field and has laid a stronger foundation for token holders in this cycle.

This story began in 2010, when well-known investor Naval saw an opportunity to bring retail investors into venture capital and democratize asset classes.

He launched AngelList, and by 2013, the platform had helped startups raise over 200 million dollars.

AngelList’s initial product was an email list (hence the name) that connected startup companies with investors.

This sounds stupid and basic, but Naval is very influential in Silicon Valley, and many companies, including Uber, raise money through this email list.

In 2014, AngelList launched Syndicates, which was a turning point.

Syndicates will transform AngelList from platform-centric investors to lead-centric investors.

Remember this distinction, it will be discussed later.

Due to the reverse selection, equity crowdfunding has never found PMF (product and market reaching the best fit) - why would an excellent startup that can raise funds from VCs want to raise funds from a random platform?

(Note: Reverse selection refers to the true situation of the party in the information advantage before the transaction occurs, which cannot be known to the party in the information disadvantage, leading to the wrong choice of the party in the information disadvantage)

Syndicates completely subverts this idea by focusing the investment on a primary investor rather than on AngelList itself.

Syndicates provide leverage for angel investors who have trading experience but not necessarily capital.

For example, John Smith is a highly influential marketer that many startup founders want to collaborate with, but he lacks funding.

John Smith secured a quota of $300,000 in a hot deal. He invested $1000, formed a consortium, raised an additional $299,000, and then succeeded. Afterwards:

• This startup company begins to work with him
• He evaluated his investment amount
• Retail investors have gained investment opportunities

Syndicates have rapidly developed and provided funding for hundreds of companies such as Pillback and Brex.

It also helped many influential venture capitalists, such as Semil Shah and Ed Roman, start their careers.

Anyway… back to the cryptocurrency field.

In 2016, I moved to San Francisco and worked on the venture capital team at AngelList, starting to trade cryptocurrencies everywhere, but that’s not the point.

In addition to the equity of start-up companies, venture capital funds are also subject to regulatory restrictions, making public offerings challenging.

However, Naval became a true crypto believer earlier than most, spinning off CoinList from AngelList in 2017 to focus on cryptocurrencies.

CoinList’s mission is to provide a seamless, compliant way for companies to conduct token offerings.

Interestingly, CoinList did not address the reverse selection problem faced by AngelList, and thus always centered on the platform.

While a fast-growing seed-stage SaaS company has no interest in 1000 retail supporters, every company in the cryptocurrency industry wants to gain as many supporters as possible.

CoinList found true PMF on the first day, with Filecoin as its first client, raising $200 million. This fact says it all.

During that cycle, there were some good project sales like Stacks, but by the second quarter of 2018, the situation took a sharp turn for the worse.

CoinList has not generated any revenue from token sales for over a year, and the situation is very bad.

Regan Bozman (the author of this article), Mike Zajko (former sales director of CoinList), and other members of CoinList will go to the bar on Friday afternoon, drink 6 pints of Guinness stout, and then contemplate what they are doing.

But the market has recovered, and by the end of 2019, the team wanted to issue tokens again. Soon after, they helped launch ALGO, NEAR, SOL, and some other tokens.

Token sales products are generally the same - the team still wants as many token holders as possible.

The biggest difference is that by now, most lawyers have told teams to avoid the US altogether. Therefore, these are sales that exclude Americans.

CoinList has experienced ups and downs, but has launched a series of tokens that have made users a lot of money.

At the end of the day, if you are in this industry, this is the KPI.

Starting in 2022, the rules of the game shifted from token sales to airdrops.

Once OP and ARB give up public token sales, most of the blue-chip teams issuing tokens will listen to the advice of lawyers, and indeed they did so.

Eigenlayer, ZKSync, Jito, Morpho, Magic Eden, none of them conducted an ICO.

This has made the first nine months of this cycle challenging.

Market structure will transfer most of the returns from retail investors to venture capitalists.

Retail investors engage in this industry to make money, and the interruption of token sales is a huge setback.

Last year, I discussed token issuance with dozens of founders. Almost everyone understands the benefits of public sales and wants to do so, but it’s difficult to go against legal advice. As a result, the market has been stagnant.

All of this changed in the fourth quarter of last year. Trump’s election opened up design space for launching tokens.

• Cobie Launches Public Sale Platform Echo
• Matty launches the public sale platform Legion

Public offering makes a strong comeback.

I have great respect for these two teams, but the core products of these two websites are not new.

• Legion is an on-chain CoinList - centered around the platform
• Echo is an on-chain AngelList - centered around leaders

When CoinList was launched in 2017, it was not feasible to build the business on-chain, but if it were to be rebuilt today, this approach would be taken without custody of user assets.

One of the biggest challenges CoinList faces is the high cost of operating a centralized cryptocurrency company in the United States. It is difficult to sustain profitability if recurring revenue, such as transaction fees, is insufficient.

Legion may conduct due diligence faster and easier than CoinList because it is not within the United States.

This obviously has a negative impact on subsequent development, but it also means that it can be scaled up more quickly.

Echo’s core product is AngelList’s on-chain version of Syndicates.

Leaders like CMSHoldings bring their trades to Echo.

• They get free leverage
• The project has expanded its community.
• Retail investors are given priority access

It’s a really great model, and I hope I can come up with it.

AngelList’s Syndicates always encounter bottlenecks in normal venture capital because when anything becomes public, reverse selection is inevitably present.

Their core business is now mainly driven by funds instead of Syndicates.

However, this kind of reverse selection (to a large extent) does not exist in cryptocurrency, because the team is not worried about whether their metrics are public (all on the chain), and they actively want a large community.

Salute to Cobie, he is really the GOAT.

In addition, AngelList had to spend several years building financial infrastructure to manage its business.

The software quantity for managing capital tables, distributions, accounts, and associated rights of hundreds of funds and tens of thousands of investors globally is large and extremely complex.

Blockchain solves this problem. Echo is able to process incoming funds, manage the ledger, and process on-chain distributions with a hundred-fold increase in efficiency.

Now they still face the same incentive problem as AngelList, which is the free leverage on transaction leads.

And there are also some potential reverse choices, as a large number of over-subscribed trades may not enter Echo.

If you manage a fund, but can only obtain the allocation of the fund in trading, not your Echo Syndicate’s allocation, then you have a fiduciary duty to the investors and must prioritize the fund.

So in theory, any given best trade may not be able to enter Echo.

However, this is a known risk, and a basket of early trades on this platform is likely to make money.

I still have great confidence in Echo. By the end of this year, I expect that over 50% of the reliable encryption teams will raise some funds on Echo. This is great for the field, returning to the original intention of its establishment.

PS: If Cobie is no longer anonymous, Lattice Capital can invest.

Related reading: From being highly anticipated to being forgotten, what happened to the once “first stop for new coin offerings” CoinList?