Traditional VC investment vs. bitcoin IPO

Question

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

• https://btct.co/

• https://bitfunder.com/

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?

Answer 1

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.

Answer 2

This is ultimately a question where you may have to choose between liquidity and control. Traditional VC investments are a lot more liquid, in other words, they likely have a lot more money to offer, than any bitcoin stock market. At the current exchange rate, the amount you'd like to raise is equivalent to roughly 15,000 bitcoins (on the 1.5 million end of the the range, anyway).

Localbitcoins - you're a popular enough exchange that you may very well be able to raise that much in a bitcoin IPO.

I imagine it'd be a lot easier with a traditional VC to make that kind of money though, and that would be in fiat already for the marketing efforts that you're planning. But the catch is that the money the VC provides will likely have strings attached, they'll want some control of your business in return for that kind of money, or as you said, the 4 - 5 year exit plan.

The other issue that you have to consider here is this: what are you looking for in return for this money? Are you just thinking of the money going towards shares of stock, as in a bitcoin exchange? Or do you want business advice for your business as well? A bitcoin exchange can definitely provide liquidity, how much, I don't know. But if you want business advice, then you are likely better off with a traditional VC since they will be able to provide that for you.

Answer 3

Now I am looking for advices what would be pros and cons of both options: VC investment vs. bitcoin crowdfunding.

LocalBitcoins provides an escrow that facilitates person-to-person transfer of cash in exchange for bitcoins. The U.S. regulator FinCEN has provided guidance that clearly describes that as being a money transmitter service.

If LocalBitcoins wants to raise funds from investors from the U.S., including from venture capitalists, it will likely need to pivot to where it is registered as a money transmitter (in all states where it is necessary) and comply with the AML/KYC requirements that such licensing entails. In this manner, those who trade through LocalBitcoins might be serving as agents of LocalBitcoins. That is a huge shift from LocalBitcoin's current approach.

If LocalBitcoins wants to raise funds via direct investment (e.g., IPO and listing through a cyber-equities market exchange) then it should be aware of the current status of equity crowdfunding in the U.S. -- (i.e., it is still not legal to solicit investment from the U.S. as the SEC is still doing rulemaking for equity crowdfunding). Regardless, no cyber-equities exchanges (such as BitFunder) would be considered to be a "crowdfunding portal" so even once the SEC has completed their rulemaking raising funds through cyber-equities markets would still not be something that could be offered and comply with the securities regulations.

LocalBitcoins has already built a core Bitcoin exchange service and possibly could raise capital without having to solicit funds from U.S. investors, regardless of whether that is from venture capital or via equity crowdfunding.

Answer 4

I don't understand what kind of advice you expect to receive without providing even a hint about what is it that you are trying to develop. How can you possibly get any "fans" without explaining the idea. 0,7M - 1,5M USD investment???? Nothing in this industry costs that much, unless you spend most of that on massive business promotion. But, if that's the case you do not need to get all the funds at once, from the start, especially if the idea is any good.

Answer 5

I recommend http://mpex.co , because unlike other exchanges:

It had shown (most recently for S.MG) it is capable to raise the amount of money you need quickly.

You are entering into PGP signed contract with real person who runs it.

As for the law questions, you need to see lawyer in any case. Most of the. bitcoin stocks currently listed are bitcoin economy enterprises with little footprint in fiat economy, thus they can get away with staying in the gray zone. If your business allows this, you can do likewise.

Update: Maybe you can hire as a consultant someone who is experienced in murky waters of bitcoin finance and has proven reliable service. Make proper agreement with incentives for things to go smoothly. I'd like to recommend myself based on CoinBr.com service which is running since October already.

Answer 6

Definately do consider angel groups, in particular Bit Angels. They're a distributed worldwide group of angel investors interested in investing in Bitcoin businesses.

Outside of Bit Angels, you can definately raise around USD 1M from angels, though you'll have to pitch many of them. Gust and AngelList are the best platforms. See this Quora question for the difference between.