The Venture Capital Take on Spotting Good and Bad Initial Coin Offerings

A little while back we did a post about which tech companies behaved like which great house on Game of Thrones. We threw in a bonus non-house at the end, the Brotherhood Without Banners, which we said was represented in the real world of technology by all the companies and coders slowly building a decentralized infrastructure for digital communication.

We were surprised to hear eBay alum and Andreessen Horowitz partner Chris Dixon basically echo that sentiment (without the show comparison) on the latest episode of his firm’s podcast. Dixon discussed cryptocurrency and the power of decentralized applications with a co-founder of Coinbase, Fred Ehrsam. Together, the two predicted that with enough time all the scrappy weekend devs working to create internet money, distributed file sharing and a new social media would eventually overtake tech’s present giants.

Both Dixon and Ehrsam agree that this new way of building networks has powerful advantages. Networks are no good if no one is using them, but cryptocurrencies give a financial incentive for people to get in early. That’s really powerful. Provided they keep using it, the network can later reward people with its intrinsic value.

Deep in the new episode, the two offer their tips for spotting fool’s gold in the rush to monetize these new networks by creating money out of electrons.

Good signs for a crypto project that plans to run a sale:

  • There’s actual running code or a plausible white paper and a team that could write code.
  • It matches the stage of the industry with the ambitions of the project. For example, Ethereum can’t run enough transactions to compete with Facebook yet, so don’t try. There could be ideas a bit closer to the ground that could work, though. 
  • It should look like it needs the blockchain to work, or, as Ehrsam put it, “Does this feel like a uniquely enabled behavior of the blockchain?” Barnes & Noble tried to graft a bookstore onto the internet but Amazon made a bookstore for the internet. okstore on the internet.

Red flags:

  • Tokens that extract value from the network. So, every time someone does X, we get a tiny cut. 
  • Raising money for another investment vehicle. If someone is running a coin to buy land in Ecuador, run away. The market has that solved. 
  • Releasing a white paper that is really just a marketing brochure.

For folks that decide to buy in, Dixon said, “Treat it like an investment that could go to zero.”

The Venture Capital Take on Spotting Good and Bad Initial Coin Offerings