STOs, ICOs, VCs: How do you know what fundraising method to choose for your startup?

2017 and 2018 has shown us that dramatically huge amounts of money have been raised through ICOs, more than $15 billion (based on And in Summer 2018, it even overtook Seed and Angel investments:


Given the numbers, it’s easy to see why startup founders should select ICO/STOs as their major source of fundraising. Following my #10kqachallenge (where I interview 10,000 experts in different niches: I asked VCs and crypto fund founders and executives about this question, and here’s how they answered:

Andrew Knight — Fund Manager at

Let’s start with a process of elimination. To run an ICO, your company first needs to have the right product and/or service offering that aligns with the utilization of a token economy. Should that be the case and the company wishes to pursue an ICO, they would need to invest heavily in their ICO campaign. These are by no means cheap and they can cost anywhere from hundreds of thousands to millions of dollars. In the current market, where ICOs are gaining little to no traction, this would be an unnecessarily high risk to take on.

During a market rally, as seen in 2017 and early 2018, an ICO is a great way for startups to raise capital without giving away any equity in their business. In a bear market with no sentiment toward ICOs left, it is simply not feasible.

With STOs and VCs left on the table we need to weigh the pros and cons. There has been a lot of talk about STOs being “the next big thing” in 2019. This chatter comes largely from the crypto community, shifting their attention from one digital asset to another. In my opinion, STOs have a very long road ahead of them in terms of regulatory clarity before investors start clamoring at the doors.

The majority of startups looking to do an STO these days are those that prepared themselves for an ICO, and the market fell out from under them before they raised the funds. In this instance they pivot to an STO to purvey the message to investors that they will be purchasing a token with intrinsic value. This way, all the work done and money spent on their ICO is not wasted and they can still raise funding. An STO does not necessarily mean that the token you issue represents a portion of equity. The token simply needs to be classified as a security by local legislation and governed by securities law. This means that companies can get creative with what their token represents. It can be anything from a revenue share model to preferred stock.

An STO bodes well for a startup that does not have access to traditional VC funding, whether that be because of where they are located geographically or their field of business, etc. An STO allows for the potential to raise funds from a greater pool of investors, at a valuation determined by the startup. It also allows for the potential of greater liquidity in the market, not otherwise seen in the startup stage. To opt for an STO, however, is an incredibly expensive task. The startup runs the risk of draining the small amount of funding it has to try and raise capital in a market that is not currently teeming with buyers.

Traditional VC funding seems like the safer route for startups at this point in time. It may be tougher to get the funding, and it may be more expensive in terms of equity to the founder, but you get the strategic partner needed to help extract the growth projections of the business. You also have no upfront costs to raise the capital, keeping cash flow intact should your funding application be rejected. In a few years, once the STO market has some clarity, an STO may make more sense for a Series A or B round. At this stage, an STO is better suited to particular business models, such as REIT’s, or for more established businesses that can afford the raise. For now, startups should tread with caution.

Gregory Gilman — Co-Founder and General Counsel at

Currently, there is no meaningful ICO market. It may return in the future, but, especially for US-based companies, it is not currently a viable option. STOs have great potential and I believe we will see a wave of STOs that successfully raise capital in the future, but the time hasn’t come yet. Most funds either can’t or won’t hold digital assets, and the custody and reporting pieces aren’t yet developed adequately for most institutional investors. But there are several companies working on solutions for these issues. One of the other major issues facing STOs is that the premise — that the investments will be liquid to a greater extent than the private company stock held by VCs — isn’t yet true. There aren’t any “security token” exchanges really operating yet. A few have commenced operations, but there isn’t volume yet. So investors in an STO have to make three leaps of faith. First, in the company itself so that the security becomes more inherently valuable over time. Second, that there will be more activity on the exchanges generally. And third, that the specific token they are purchasing will be liquid in the future. So VCs remain the only viable option at this point for the vast majority of startups.

Viktor Shpakovsky — Managing Partner at

If your company doesn’t work in the blockchain industry then you should only use the VC method. Nothing else. ICOs are a convenient way for companies that create some new blockchain infrastructure, but it’s just not for regular projects with no attitude toward the blockchain industry.
STOs are the new way, but I am sure it will take some more time to change the scheme you launch your company with tokenized shares, not just tokens backed with shares.

Dimitri Chupryna — Co-Founder, Managing Partner at

When considering fundraising for a startup, a founder needs to pick the proper instrument. ICOs are for issuing tokens to fundraise decentralized ecosystems; the target audience is future users. VCs are used to sell equity to investors; the target audience is sophisticated investors looking for a yield. STOs are also used to sell equity or other financial derivatives, however, in theory, there is going to be more liquidity because tokens may be easily traded on exchanges.

Stéphane Ifrah — CEO at

It’s difficult to know in advance which fundraising methodology to chose, as the best one is the one that allows you to access your required financing. VCs are traditional investors, so you need to have a traditional business profile to address any request they have, as they are studying a lot of files every year and only a few of them get financing. You’d rather have a finished product, the first clients, and a strong business case, as well as a top team of experienced people dedicated to the project.

For the other cases, you can have a go at an STO or an ICO, but this is not cost-free, so you will need to have raised some money initially (100–300k USD) before starting this journey. Depending on the legal nature of your token, you will have to choose between an ICO (utility token) and an STO (security token). An STO is a much tougher project as it requires to compliance with traditional fundraising rules and limitations. You will have to apply for a specific authorization in each country where you want to make your token sale and you will need a distributor which will add to cost. From a legal perspective, this will also require more work and be more expensive.

David Pakman — Partner at

In the US, where I focus most of my investment activity, the ICO path is a regulatory and legal challenge at the moment, and it is taking some real time to resolve. The full extent of the SEC’s expectations are not yet understood, and many product plans will have to be changed to fit the model. STOs similarly so. It is possible to file using Reg A+/D procedures, but this path places lots of restrictions on your product and platform, it is expensive, and it is still not open to most companies.

Raising equity capital is not appropriate for every project, but it does appear to be a way to build crypto projects until token sale models are better understood by regulators. The biggest unanswered question in my mind is: no matter how you start your project, as a security token on with no pre-sold token, how and when does it become a utility token?

Muneeb Ali — CEO, Blockstack PBC

You should look at the funding approach we used:

The fundraising method really depends on what you’re doing and, to a lesser extent, the market conditions. If the token is clearly a security (e.g. tokenized cap table) then token offerings outside of existing securities regulations are not an option. Our approach was to raise VC money when we were at the R&D stage (for years) and then work on a compliant legal framework (different from the “ICO” offerings that were going on) for the distribution of tokens in the genesis block of our Stacks blockchain.

Bart Stephens — Co-Founder & Managing Partner at

ICO regulation is unclear in the US; all are looking to the SEC’s position regarding that. So if you are going to choose ICOs, the U.S. is closed to you right now. Conducting an ICO and selling tokens to US unaccredited investors is very risky.

Regarding STOs — there are a lot of challenges that must be overcome. It looks like traditional VC investments rather than an ICO. Blockchain Capital was the first to create a security token (BCAP) and conduct an STO in April 2017. Regarding STOs, there is a custody solution that needs to be developed and companies like BitGo and Coinbase are working on that. Also, there needs to be more secondary market trading, which I predict will be more developed in 1–2 years.

For now, only the traditional VC investment method is probably the best route for startup Founders.

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