What does a tech startup do after raising $232 million selling digital coins to investors? Set up a VC fund

  • Tech startup Tezos raised $232 million in July through
    an “initial coin offering”;
  • Spending $50 million on venture investing, rest being
    put into stocks, bonds, and precious metals;
  • An unusual use of funds from a tech business, likely to
    fuel criticism of ICO sector.


cash pallet skid breaking bad
Startups are raising hundreds of millions selling new
digital coins online.

Breaking
Bad


LONDON — Early-stage tech companies are enjoying a funding boom
in 2017, raising over $1 billion so far this year through
so-called Initial Coin Offerings.

ICOs involve
selling newly created digital currencies online
. This new
method of fundraising was pioneered by Ethereum in 2014 and has
caught on with investors and startups this year after a big rally
for Ethereum’s Ether currency.

One startup plumped for an ICO is Tezos. It
raised $232 million selling “
tezzies
back in July
, the biggest ever ICO at the time.

Tezos is building a database-like platform for banks and other
corporates to use to write “smart contracts” on. It uses
blockchain technology, originally developed to underpin bitcoin,
and competes with other startups like Ethereum and
Bancor. Tezos has been in development since 2014 and is the
brainchild of husband and wife team Arthur and Kathleen Breitman,
former Morgan Stanley and Accenture workers respectively.

What has the company been doing with its huge pile of cash since
raising it? Investing it, apparently.


Crowdfund Insider reports
that Tezos is committing $50
million to venture capital investing, backing companies that are
building on its platform. As for the rest of its cash, it’s
investing it in “things like stocks, bonds and precious metals,”
according to the report.

This is all pretty unusual.

Firstly, tech companies don’t often double up as venture capital
offices — it’s not their area of expertise. Those that do have
venture capital arms — Salesforce or Google, for example — tend
to be Goliaths who are making enough spare cash to justify it,
not early stage ventures.


Tezos
Tezos’s website.
Tezos

Investing in companies that use its platform is also pretty close
to paying people to use its product — never a good look. Tezos
would no doubt argue that it is simply seeding the beginning of a
rich tech ecosystem but one VC described it to me as like a
tarmac company investing in car manufacturers to drum up business
for roads.

Investing in stocks, bonds, and precious metals is relatively
unusual too. Companies usually raise money to build products,
launch new markets, and generally fund expansion. Traditional
investment institutions would get skittish if their money was put
into stocks or bonds — the investment will be part of a
diversified portfolio that would most likely already contain
stocks and bonds, so a startup would be undercutting the funder’s
logic and risk management.

Tezos say putting its cash into stocks, bonds, and precious
metals “will ensure that our organization is resilient in good
times, and bad times,”
Crowdfund Insider says.

However, it’s bound to fuel the debate around whether ICOs are a
good idea or not. Critics believe that many of the businesses
raising money in this way are extremely high-risk, meaning
investors could lose big. They also believe that a lot of these
businesses are just raising as much money as they can, rather
than enough to pay for a costed and well-planned business
proposition.

As David Rutter, a Wall Street veteran who now runs fintech
company R3CEV,
told Business Insider earlier this year:
“Many of them are
based on powerpoint decks and not a lot more, not fundamentally
sound business plans.”

An ICO can be set up in as little as an hour and many startups
are raising millions with little more than a white paper — a
document outlining their idea.

Rutter said: “Of course you would, if you can go and make $10
million or $15 million or $20 million on an ICO in a matter of
hours, based on a really well put together powerpoint — if you
think that’s good for the economy and the world and young
entrepreneurs, that’s fine. I don’t.”

While Tezos’ investment activities are relatively unusual,
they’re actually pretty vanilla compared to ideas it floated
ahead of its fundraising. Tezos said in
a document ahead of its fundraising
that if it raised more
than $20 million its “Mars-shot” idea — a far-out plan that would
likely not come to much — was to: “Negotiate with a small
nation-state the recognition of Tezos as one of their official
state currencies, which would immediately give Tezos favorable
treatment in terms of financial regulation. Attempt negotiations
to purchase or lease sovereign land.”

Compared to establishing the great nation of Tezosistan,
investing in stocks and bonds looks pretty tame.

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