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Lesław Pietrewicz Studia i Materiaïy, 1/2018 (27), cz. 2: 65– 78 ISSN 1733-9758, © Wydziaï ZarzÈdzania UW DOI 10.7172/1733-9758.2018.27.6 Emerging Trends in Entrepreneurial Finance: The Rise of ICOs Lesïaw Pietrewicz* Initial Coin Offering (ICO), a fundamentally new funding model, can be viewed as “the next big thing” in entrepreneurial finance. ICOs are unregulated issuances of cryprocurrencies used by blockchain startups to fund the development of distributed applications where users interact directly with each other rather than through a central hub of the company which developed and controls the application. The aim of this exploratory study is to explain the spectacular rise of the ICOs and their relevance for entrepreneurial finance. The main finding is that ICOs effectively change the landscape of entrepreneurial finance, shifting barriers to capital formation, enabling funding previously unfundable projects, supporting new organizational and governance forms, democratizing finance, and contributing to the building of sharing digital economy. Keywords: entrepreneurial finance, Initial Coin Offering, cryptocurrency, token, blockchain. Submitted: 28.11.17 | Accepted: 01.02.18 Nowe trendy w finansowaniu przedsi ÚbiorczoĂci. Rozkwit ICO ICO, czyli Initial Coin Offering, to zasadniczo nowy model finansowania, który mo ĝna postrzegaÊ jako prze ïom w finansowaniu przedsi ÚbiorczoĂci. ICO to nieregulowane emisje kryptowalut wykorzystywane przez start-upy rozwijajÈce technologiÚ blockchain, czyli ïañcu- cha bloków, do finansowania rozwoju rozproszonych aplikacji, dzi Úki którym uĝytkownicy wchodzÈ ze sob È w interakcje bez konieczno Ăci korzystania z centralnego o Ărodka, którym tradycyjnie by ïa firma rozwijaj Èca aplikacjÚ, ustalaj Èca reguïy i czerpi Èca z tego zyski. Celem przeprowadzonych studiów rozpoznawczych by ïo wyja Ănienie ěróde ï spektakularnego rozwoju ICO i jego znaczenie w finansowaniu przedsi ÚbiorczoĂci. Przeprowadzone analizy pokazaïy, w jaki sposób ta nowatorska forma pozyskiwania kapita ïu zmienia obraz rynku finansowa- nia przedsi Úbiorczo Ăci, obni ĝaj Èc bariery tworzenia kapita ïu, umo ĝliwiaj Èc finansowanie projektów, które wcze Ăniej nie miaïy takiej mo ĝliwoĂci, wspierajÈc nowe formy organizacji ibnadzoru, demokratyzujÈc dost Úp do zysków z kapita ïu i wspieraj Èc budow Ú cyfrowej gospo- darki wspóïdzielenia. Sïowa kluczowe: finansowanie przedsi ÚbiorczoĂci, Initial Coin Offering, kryptowaluta, token, ïañcuch bloków. Nadesïany: 28.11.17 | Zaakceptowany do druku: 01.02.18 JEL: G38, L17, L26 * Lesïaw Pietrewicz – PhD, Institute of Economics, Polish Academy of Sciences. Correspondence address: Polska Akademia Nauk, Nowy ¥wiat 72, 00-330 Warszawa; e-mail: [email protected]. 1. Introduction of which 564 were classified as tokens (total market cap $59.9 billion), and 896 as coins, For finance professionals, 2017 was the with the total market cap of $495.3 billion. year of cryptocurrencies. Terms like alt- In comparison, the Swiss Association for coins, digital currency, Bitcoin, token, ICO Standardization, which maintains the Inter- hit the headlines of business media around national Standards Organization database, the world, and the prices of the most popu- lists 177 national currencies presently in lar cryptocurrencies skyrocketed, leaving use. many people wondering what these really These spectacular developments moti- were and what their intrinsic value might vate the current study, which aims to be. Expressions like frenzy, hype, fad, and explain the spectacular rise of the ICO and craze were the order of the day for the its relevance for entrepreneurial finance. first time since the internet stock bubble Following the argument by Davis and Mar- at the turn of the century. Undiscouraged, quis (2005, p. 334), the “problem-driven in April 2017 Japan officially recognized approach” has been assumed in this study, bitcoin as a legal tender (Keirns, 2017), in oriented “toward explaining events in the August 2017 Estonia became the first coun- world – starting with the question ‘why is it try to consider launching a national crypto- that …?’”, and not beginning with hypoth- currency, soon followed by Venezuela and eses deduced from existing theories. Such Russia, and in September the idea of cen- an approach is particularly pertinent dur- tral bank cryptocurrencies was scrutinized ing a time of significant social and eco- by analysts of the Bank of International nomic change (Davis & Marquis, 2005), Settlements (Bech & Garratt, 2017). The of which “the spectacular rise of the ICO” world’s most influential financial institu- (the research problem) will be argued to be tions, including global investment banks an important part. J.P. b Morgan Chase, Deutsche Bank and Given the very early stage of devel- HSBC, global “Big 4” consultancy firms opment of the ICO practice, this paper (Deloitte, EY, KPMG and PwC) and tech presents an exploratory study, by its nature giants such as IBM have invested in devel- aiming to diagnose the situation and dis- oping competencies related to blockchain cover new ideas rather than to offer conclu- (Barnett, 2017; Green, 2017; Hackett, sive answers to existing questions. As such, 2017), the distributed ledger technology it follows a tradition of exploratory studies underpinning cryptocurrencies. And block- about new phenomena in entrepreneurship chain startups raised more money through (e.g. Alvord, Brown, & Letts, 2004; Guer- Initial Coin Offerings (ICOs hereafter) rero, Cunningham, & Urbano, 2015; Hano- than through traditional venture capital hov & Baldacchino, 2017; Mollick, 2014; financing (Ernst & Young, 2017). Rice, 2002; Roure & Maidique, 1986; Tan, According to the research website Coin- Shao, & Li, 2013). schedule, blockchain startups raised $96.4m Exploratory research is “aimed at devel- in ICOs in 2016 (excluding DAO), and more oping basic understanding, uncovering than $3.7 billion in 2017, an almost 40-fold novel insights, and exploring and pursu- increase. The number of ICOs surged from ing innovative concepts – that is research 46 in 2016 to 235 in 2017, and the average aimed at meeting future needs” (National size of an ICO rose from $2.1m to $15.7m Research Council, 1993, p. 10). Thus, the over that time (Coinschedule.com). The study aims to explore the nature of the largest ICO to date brought more than studied phenomenon of ICOs and result in $250m (Protocol Labs in September 2017), its better understanding. As very little sys- and 5 ICOs raised $100m or more each (in tematic research has been done on the topic 2017). A further quantum leap is expected, of ICOs, virtually all empirical evidence, with Telegram, the encrypted messaging with the exception of some of rudimentary service, seeking $1.2bn in two installments statistics, is case-based. As scholars, we are in February and March 2018. now at the phase of making sense of the The enormous success of this new form new phenomenon of ICOs, trying to iden- of raising capital translates into a growing tify and understand sources of their spec- number of cryptocurrencies in circulation. tacular success, deduct underlying princi- As of 24 January 2018, there were 1491 ples, assess impact on the business world. cryptocurrencies listed on CoinMarketCap, Instead of using unstructured interviews, 66 Studia i Materia ïy 1/2018 (27), cz. 2 which is the most popular primary data col- of a seamless digital payments system, lection method in exploratory research, this independent of central banks and govern- study is based primarily on blogs written by ments, that would work on a global scale. cryptocurrency, blockchain, fintech, finance It began in 2008, when Satoshi Nakamoto and entrepreneurship experts, and relevant published the famous white paper (https:// articles in professional finance and tech- bitcoin.org/bitcoin.pdf) introducing the nology online media (mostly Bloomberg idea of bitcoin, the first digital currency Markets, Bloomberg Technology, Business that would be impossible to counterfeit. Insider, and Financial Times) as providing The idea was based on a combination of the most hands-on and up-to-date informa- advanced decentralized encryption, ano- tion and insights into the studied emerging nymity and immutability, which were the phenomenon. As with every exploratory building blocks of the blockchain technol- research project, this study is an attempt to ogy (Marvin, 2017). Bitcoin was introduced lay the groundwork that will lead to future to the market in 2009 and a network for research, and all the conclusions derived in sending value online gradually developed. this paper should be viewed as hypotheses In January 2012, a white paper titled to be verified in further studies. “The Second Bitcoin White Paper” was The structure of the paper reflects its published. It proposed that the existing Bit- aims specified above. The first section coin network be used as a protocol layer, on shortly introduces the concept of ICO, out- top of which new currency layers with new lines its origins and puts it in the context rules can be built (Shin, 2017). The idea of the underlying blockchain technology materialized in 2013, with the launch of the to explain its mechanisms, and interprets first ICO, Mastercoin (now called Omni), major developments on the ICO market. and a tipping point came in 2017 with 235 The second section focuses on the nature ICOs and $3,700m raised (Coinsched- and types of tokens, i.e. the instruments ule.com), a huge majority of which took launched in ICOs, and the third analyzes place on the Ethereum blockchain (ICO in sources of ICO success. The fourth section 2014), rather than Bitcoin blockchain, but relates ICOs to selected major sources of based on the same concept as outlined in entrepreneurial finance, namely crowd- “The Second Bitcoin White Paper” (Shin, funding and venture capital funding, and 2017), with new features added. the final section concludes. While a lot of confusion exists in the cryptocurrency terminology (Bennington, 2017), two major types of cryptocurrencies 2. The Origins of ICOs must be distinguished at this point – coins ICOs are such a novelty that they are and tokens – to explain the origins, evolu- called “the wild west” of the tech (Cheng, tion and prospects of ICOs.
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