Historically, in the cryptocurrency market, VC funding has dwarfed token sales as a form of funding, but this year, things are different. According to a recent CoinDesk report, “So far in 2017, blockchain entrepreneurs have raised $327m through ICO offerings, a figure that now exceeds the $295m raised through VC funding.”
Myriads of Initial Coin Offerings are happening, more than one a day. So, what should you do? Is there a winning strategy to deal with all those ICOs? How can you find the needle in the haystack? The gem in the shit-pile?
The two prevalent strategies:
To put these strategies into context let’s use the simplest example of a small fish choosing between the two.
Five ICOs are happening tomorrow and Bob has 5 ethereum to invest, what should he do?
Option 1 – “Spray & Pray”: Invest 1 ETH on each ICO, wait for the sale to close and when it hits secondary exchange markets, a couple of days/weeks later, flip them for a healthy 50% profit. Selling to those who either missed the sale or where to cautious to join when it was taking place. Bob has lower expectations, he doesn’t care about the tech, the team, or the structure of the sale. He wants to have at least 7,5 ETH within a week by cashing on the hype of the period.
Option 2 – “Cherry Picking”: Identify the best of the five ICOs and invest all 5 ETH into it. This time Bob has done his due diligence and has devoted his precious time to research thoroughly, he is almost certain he has identified a winner. He will lock his 5 ETH and wait for the x10, after all this is something that will change the world! Bob wants 50 ETH at least.
To answer the question, of which strategy Bob should follow, we should look at Angel Investors and Venture Capitals from traditional markets. How do they deal with all those start-ups that envision their product/tech to be world-changing and leave humanity at awe?
Personally, I have had the pleasure of interacting with many angels with numerous investment strategies. All have the following in common; the companies that succeeded were never those they had expected to succeed at the time of investment.
Their success as seed investors most often came down to luck and did not seem to be correlated with the intensity of the research they had conducted.
Angels who, on average, had invested in less than eight companies had negative returns, while those who invested in more than eight companies on average had positive.
Think of it as buying an index fund of early stage start-ups (which isn’t otherwise available).
How do seasoned investors think?
Or take the words of Nassim Taleb as he observes in The Black Swan:
“There are so many things we can do if we focus on anti-knowledge, or what we do not know. Among many other benefits, you can set yourself up to collect serendipitous Black Swans by maximizing your exposure to them. Indeed, in some domains—such as scientific discovery and venture capital investments—there is a disproportionate payoff from the unknown, since you typically have little to lose and plenty to gain from a rare event.”
“contrary to social-science wisdom, almost no discovery, no technologies of note, came from design and planning—they were just Black Swans. The strategy for discovers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves. So, I disagree with the followers of Marx and those of Adam Smith: the reason for free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or “incentives” for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can.”
Everything points towards Option 1 – “Spray & Pray “ while managing your expectations and keeping an eye to your scattershot as it may have hit one of the winners! It might sound simplified but from a pure financial standpoint your best bet is relying on both statistical evidence and investing experience.
Of course, there is evidence that Cherry Picking has worked for some Angels. According to Peter Thiel,
There are two rules in VC investing that “I” follow
1) Only invest if the company can return the ENTIRE FUND
2) There can be no other rules
Everything else, is “hedging your bets”, which is “mentally preparing yourself to lose”. Therefore everything else outside of these two rules is “The spray & pray” approach.
Here in Whale’s Friend we follow a healthy mix of both strategies when approaching an ICO with a heavier weight on the Spray and Pray strategy since the “ICO craze” started.
a) Performing in-depth due diligence is difficult in this new industry, most teams are still providing concepts and not products
b) Anything new poses major risks such as team may disband before completion of the project. A team may pivot and release a completely different product.
c) You need a crystal ball make a serious long-term call on the viability of an application/technology, a shorter time horizon is prudent. Ride the FOMO wave and exit the ICO at a healthy profit immediately after it lists on an exchange.
Thanks for reading,