The Hidden Costs of Initial Coin Offerings

Jeffrey J. Bussgang; Ramana  Nanda

Article | Harvard Business Review (website)

The Hidden Costs of Initial Coin Offerings

Abstract

In recent years, much has been written about how the Blockchain is poised to transform traditional industries such as banking, real estate, and healthcare. More recently, it has gained attention as a way to finance new ventures, through what is known as an Initial Coin Offering (ICO). Less noticed, though, is ICOs appear almost antithetical to the standard approach to financing a risky venture. Structured experimentation, popularized by Eric Ries' The Lean Startup, has been widely embraced as the gold standard for how to approach the commercialization of radical new ideas. From Boston to Beijing to Bangalore, entrepreneurs and investors rattle off the importance of designing focused experiments to test hypotheses in a capital-efficient fashion in order to achieve product-market fit. But ICOs substantially limit the benefits associated with such staged experimentation, for three reasons.

Keywords: Initial Coin Offerings; Business Ventures; Entrepreneurship; Finance;

Format: Electronic

Citation:

Bussgang, Jeffrey J., and Ramana Nanda. "The Hidden Costs of Initial Coin Offerings." Harvard Business Review (website) (November 7, 2018).

Exploiting random assignment of judges to panels at Harvard Business School’s New Venture Competition (NVC) between 2000 and 2015, we find that exposure to more venture capitalist (VC) judges increases male participants’ chances of starting a VC-backed startup after HBS much more than this exposure increases female participants’ chances. A survey suggests this is in part because male participants more often proactively reach out to VC judges after the NVC. Our results suggest that networking frictions are an important reason men benefit more than women from exposure to VCs. Such frictions can help explain part of the gender gap in entrepreneurship, and also have implications for how to design networking opportunities to facilitate financing of the best (rather than just the best networked) ideas.

In 2018, Initial Coin Offerings (ICOs) were an emerging fundraising method for blockchain-based projects. As the ecosystem grew, there were many open questions on regulation, pricing, and even which projects were a good fit for blockchain. However, there was already some emerging consensus on the benefits and challenges of building with blockchain and emerging best practices for Initial Coin Offerings.

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The Hidden Costs of Initial Coin Offerings

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