Thinking about the formation of crypto capital: Why would the return of public offerings be so beneficial?

Author: Regan Bozman , former first employee of CoinList, now co-founder of Lattice Capital

Compiled by: Felix, PANews

The strong return of ICOs (initial coin offerings/public offerings) is extremely beneficial to the crypto space and has laid a stronger foundation of token holders for this cycle.

The story begins in 2010 when Naval, a well-known investor, saw an opportunity to introduce retail investors to venture capital and democratize the asset class.

He launched AngelList, and by 2013, the platform had helped startups raise more than $200 million.

AngelList’s original product was an email list (hence the name) for connecting startups with investors.

It sounds silly and basic, but Naval has become so influential in Silicon Valley that a ton of companies, including Uber, have raised money through this email list.

In 2014, AngelList launched Syndicates, which was a turning point.

Syndicates transformed AngelList from a platform-centric investor to a lead-centric investor.

Keep this distinction in mind; we'll come back to it later.

Equity crowdfunding never finds PMF (product-market fit) due to adverse selection — why would a great startup that could raise money from VCs want to raise money from a random platform?

(Note: Adverse selection refers to the situation where the party with information advantage cannot know the true situation of the party with information disadvantage before the transaction occurs, which leads to the party with information disadvantage making the wrong choice)

Syndicates flip that idea on its head by focusing investments on one lead investor rather than AngelList itself.

Syndicates provide leverage to angel investors who have deal experience but not necessarily capital.

For example, John Smith is an influential marketer that startup founders want to work with, but he lacks funding.

John Smith received a $300,000 quota on a hot deal. He invested $1,000, formed a syndicate, raised another $299,000, and then won. Then:

• The startup started working with him
• He evaluated his investment
• Retail investors gain access to investment opportunities

Syndicates quickly grew, funding hundreds of companies, including Pillback and Brex.

It also helped launch the careers of many influential venture capitalists such as Semil Shah and Ed Roman.

Anyway…back to crypto.

In 2016, I moved to San Francisco, worked on AngelList’s venture capital team, and started doing cryptocurrency trading here and there, but that’s not the point.

In addition to startup equity, venture capital funds are subject to regulatory restrictions that make public offerings challenging.

However, Naval became a true crypto believer earlier than most, spinning off CoinList from AngelList in 2017 to focus solely on cryptocurrencies.

CoinList’s mission is to build a seamless, compliant way for companies to conduct initial token offerings.

Interestingly, CoinList does not deal with the adverse selection problem faced by AngelList, and therefore remains platform-centric.

While a fast-growing seed-stage SaaS company has no interest in 1,000 retail backers, every company in crypto wants as many backers as possible.

The fact that CoinList found a truly insane PMF on day one, with the first customer being Filecoin, raising $200M, speaks volumes.

There were some nice sales during that cycle like Stacks, but by the second quarter of 2018, things took a sharp turn for the worse.

CoinList hadn’t earned any revenue from token sales in over a year, and the situation was dire.

Regan Bozman (the author of this article), Mike Zajko (formerly CoinList's Director of Sales), and other CoinLista members would go to the bar on Friday afternoons, drink six pints of Guinness, and wonder what the hell they were doing.

But the market recovered, and by the end of 2019, the team wanted to issue tokens again. It quickly helped launch ALGO, NEAR, SOL, and a few other tokens.

The token sale offering is largely the same — the team still wants as many token holders as possible.

The big difference is that by now, most lawyers are telling teams to avoid the U.S. entirely. So these are sales that exclude U.S. persons.

CoinList has had its ups and downs but has launched a range of tokens that have made users a lot of money.

At the end of the day, if you’re in this business, this is your KPI.

Starting in 2022, the rules of the game shift from token sales to airdrops.

Once OP and ARB abandoned public token sales, most blue chip teams issuing tokens would have listened to their lawyers’ advice and done so.

Eigenlayer, ZKSync, Jito, Morpho, Magic Eden, none of them conducted ICO.

This resulted in a challenging first nine months of this cycle.

The market structure transfers most of the returns from retail investors to venture capitalists.

Retail investors are in this business to make money, and the disruption of token sales is a huge setback.

I have spoken to dozens of founders about token offerings over the last year. Almost all of them understand the benefits of a public sale and want to do it, but it is difficult to go against the advice of lawyers. So the market has been stagnant.

That all changed in the fourth quarter of last year. Trump’s election opened up the design space for launching tokens.

• Cobie launches Echo, a public sale platform
• Matty launches Legion public sale platform

Public offerings have returned strongly.

I have a lot of respect for both teams, but the core products of these two sites are not new.

• Legion is an on-chain CoinList — platform-centric
• Echo is an AngelList on the chain — centered on leaders

When CoinList launched in 2017, it wasn’t feasible to build this business on-chain, but if it were to be rebuilt today, it would take this approach and not take custody of user assets.

One of the biggest challenges CoinList faces is that the costs of running a centralized crypto company in the United States are very high, and it is difficult to generate sustained profitability without sufficient recurring revenue (such as trading fees).

Legion may be able to run due diligence faster and more easily than CoinList because it is not based in the United States.

This will obviously have a negative impact on subsequent development, but it also means that it can scale up faster.

Echo’s core product is Syndicates, the on-chain version of AngelList.

Leaders like CMS Holdings bring their ongoing deals to Echo.

• They get free leverage
• The project expands its community
• Retail investors get priority access

This is a really cool model, I wish I could come up with this one.

AngelList’s Syndicates will always hit a wall in normal venture capital because when anything goes public, adverse selection is inevitable.

Their core business is now driven primarily by Funds rather than Syndicates.

But this adverse selection doesn’t (largely) exist in crypto, because teams don’t worry about whether their metrics are public (it’s all on-chain), and they actively want a large community.

Hats off to Cobie, he really is the GOAT.

Additionally, AngelList had to spend years building the financial infrastructure to manage its business.

The software used to manage capital tables, allocations, accounting, and carried interest for hundreds of funds and tens of thousands of investors around the world is numerous and extremely complex.

Blockchain solves this problem. Echo is able to handle incoming funds, manage the ledger, and process distribution on the chain, making it a hundred times more efficient.

Now they still have the same incentive problem that AngelList has, which is free leverage on deal leads.

And there’s also some potential adverse selection, as heavily oversubscribed deals may not make it to the Echo.

If you manage a fund but you only receive distributions from that fund in a trade, rather than your Echo Syndicate distributions, then you have a fiduciary responsibility to your investors to give priority to that fund.

So in theory, any given best deal might not make it to the Echo.

But this is a known risk and a basket of early trades on this platform are likely to make money.

I am still very optimistic about Echo and expect that by the end of this year, more than 50% of reliable encryption teams will raise part of their funds on Echo. This is great for the field and returns to the original intention of the creation.

PS: Lattice Capital could invest if Cobie were no longer anonymous.

Related reading: From being the center of attention to being forgotten by the crowd, what happened to CoinList, once the “first stop for new listings”?