ICOs Let Startups Bypass VCs and Raise Millions in Days

The $12.9 Billion Experiment That Let Startups Skip the VCs

In 2017, a startup called Filecoin raised $257 million in under an hour. No venture capitalists wrote a check. No board seats were traded. No pitch decks were presented behind closed doors. Instead, the company sold digital tokens to a global crowd of strangers on the internet. The investors got something that looked vaguely like a stock certificate but wasn’t. The startup got cash. And a question hung in the air: Is this real?

Sabrina Howell, Marina Niessner, and David Yermack wanted an answer. So they gathered data on more than 1,500 initial coin offerings that collectively raised $12.9 billion. Their 2019 paper in the Review of Financial Studies is the most comprehensive look yet at whether ICOs actually work as a way to finance growth (Howell et al., 2019). The answer is more interesting than a simple yes or no.

What Actually Happens to Companies That Raise Money This Way

The authors tracked what happened to the startups after their ICOs. They measured success in two concrete ways: whether the company hired more employees and whether it avoided going under. This is not a flimsy metric. Employment growth is a hard signal that a company is building something real. Avoiding failure is the baseline.

The results were mixed but meaningful. Some ICOs produced thriving companies. Most did not. But the pattern was not random. The authors found that certain characteristics predicted success with statistical significance. Disclosure mattered. Startups that published detailed white papers, shared their code, and explained their business models were more likely to survive and grow. Credible commitment mattered. Companies that locked up their founders’ tokens for a period of time signaled that they were in it for the long haul. Quality signals mattered. Having a well known advisor or a strong technical team made a difference.

This is the part that surprised me. The ICO market, which looked like the Wild West, actually had a logic. The crowd was not throwing money at random. They were reading, evaluating, and making decisions based on information. Imperfect information, sure. But not chaos.

The Token Effect: Why Liquidity Changes Everything

The most striking finding in the paper is about what happens when a token gets listed on an exchange. The authors used an instrumental variables approach to isolate the causal effect of exchange listing on company outcomes. This is a fancy way of saying they tried to rule out the possibility that successful companies simply get listed, rather than listing causing success.

Their result: Exchange listing causes higher future employment (Howell et al., 2019). This is not correlation. This is causation, as best as econometric methods can establish it.

Think about what that means. When a startup’s token becomes tradable on an exchange, something changes in the company’s real operations. It hires more people. It grows. The authors argue that access to token liquidity has important real consequences. A token that can be sold is more valuable to early employees and investors. That liquidity makes it easier to attract talent and capital. It also provides a continuous price signal that helps the company understand how the market values its progress.

This is the mechanism that venture capital does not provide. A VC investment gives you money and advice, but your shares are locked up for years. An ICO gives you money and a liquid market that prices your project every second of every day. That has consequences.

The Dark Side: What the Data Does Not Show

The paper is careful about what it claims. The sample of 1,500 ICOs is large, but it is not random. The authors collected data from ICO listing websites and token exchanges. This means they missed the many ICOs that never got listed anywhere. The ones that failed before they even had a chance to be counted. The selection bias runs in favor of the visible and the surviving.

The authors also cannot track what happened to the money. A startup that raised $50 million in an ICO and then spent it on salaries and servers looks the same in the data as a startup that raised $50 million and then spent it on Lamborghinis and Miami condos. Employment growth captures the good outcome. Enterprise failure captures the bad. But there is a middle ground where the money just disappears into inefficiency.

There is also the question of regulation. The paper was published in 2019. The SEC had already started cracking down on ICOs that looked like unregistered securities offerings. The legal environment has shifted dramatically since then. The findings in the paper describe a market that existed in a specific regulatory window. It is not clear that the same dynamics would hold today, with different rules and different enforcement.

Why This Paper Matters Beyond Crypto

The ICO boom is often dismissed as a speculative mania, a footnote in the history of financial bubbles. That is a mistake. The mechanism that Howell, Niessner, and Yermack studied is a genuine innovation in entrepreneurial finance. It combines elements of crowdfunding, venture capital, and public offerings into something new.

The key insight is that tokens allow startups to sell a piece of their future ecosystem before that ecosystem exists. A venture capitalist buys equity in a company. An ICO buyer buys a token that will be useful on a platform that does not yet exist. That is a fundamentally different bet. The token buyer is speculating on adoption, not just on company value. The two are related, but they are not the same.

This has implications for how we think about early stage finance. The traditional model requires a small number of sophisticated investors to make concentrated bets. The ICO model allows a large number of unsophisticated investors to make small bets. The data suggests that this crowd can, under the right conditions, make reasonable decisions. The disclosure and commitment signals that the authors identified are the same signals that VCs look for. The crowd just uses them differently.

What This Actually Means

• ▸Disclosure is not optional. Startups that hide information fail. The crowd punishes opacity the same way VCs do. If you are raising money from strangers, tell them exactly what you are building and how you plan to build it.

• ▸Token liquidity is a feature, not a bug. The ability to trade tokens on an exchange has real operational effects. It helps companies hire and grow. Any ICO design that ignores secondary market dynamics is missing the point.

• ▸Signals of commitment matter more than hype. Locking founder tokens, publishing code, and recruiting credible advisors are not marketing tactics. They are survival strategies. The data shows they predict real outcomes.

• ▸The crowd is not stupid, but it is not a VC substitute. The ICO market worked for some companies. It did not work for most. The mechanism is real, but it is not a replacement for venture capital. It is a supplement that works best for companies with clear token utility and strong fundamentals.

• ▸Regulation will shape the future, but the mechanism is here to stay. The specific form of ICOs that existed in 2017 and 2018 may be dead. But the idea of selling tokens to fund development is not going away. It is too useful. The question is what regulatory framework allows it to work without the fraud and the mania.