1Mby1M Virtual Accelerator Investor Forum: With Andrew Romans of Rubicon Venture Capital (Part 6)

Sramana Mitra: The only danger I’m seeing in what you’re saying is there are a lot of artificially-bloated billion-dollar valuation companies out there. Your point is well-taken that showing that you can get to these high valuations and up round is great for your LPs. Some of it right now is also distorted just because there is so much capital there. The NEAs of the world have so much capital. They’re really driving up valuations and overfunding companies.

Andrew Romans: The SEC doesn’t even understand what these deals actually look like. Most people don’t either. People just say, “That company raised money at $70 million valuation.” People are structuring deals in very creative, synthetic ways. Sometimes someone says, “I’ll sell you stock in this privately held company at a $20 billion valuation but if the company goes public and the valuation of the stock is below $20 billion but above $8 billion, you will have the option to sell the shares at a 20% discount.”

They’re building these structured clauses into the contract between the buyer and seller. Some VCs say, “I can return my whole fund based on my Uber investment.” In reality, the buyer has got a near risk-free investment to make 2x. Some of them say stuff like, “I’ll buy stocks from you. If I make more, I will share 50/50 of any upside with you.” They do that in a way that gives the valuation of the company that Tech Crunch writes about. It is artificial.

Sramana Mitra: There’s a lot of artificial bloating going on. Let’s switch the discussion to another topic that you are passionate about – ICOs. Tell us a bit about what your thoughts are. How do you see ICOs playing out in the capital raising world?

Andrew Romans: I’m currently writing a book on ICOs. If anyone is hearing this and has the experience of a very successful ICO, I’d love to hear from you. I’m interviewing people that have successfully ICO’d. I’ve invested in some ICOs. One of our portfolio companies had a very successful ICO that I invested in personally. A lot of people think that this is a fat bubble that’s going to go away.

There’s a huge amount of uncertainty of what’s going to happen with regulators. It’s not just for startups. You’re going to see large corporations doing ICOs. Someone like Domino’s could offer tokens to people to buy that very bad pizza. They could raise money. Costco has my family lending them $100 a year to give me something like cash back. If I don’t go above a certain point, I get the money back anyway. That’s zero-cost debt possibly in the hundreds of millions of dollars. They should create their own token economy.

ICOs are going to get bigger. Imagine that you raise a hundred million fund to invest only into ICOs. If you invest above a certain dollar value into the ICO, you get a 50% discount on the token if you’re in the pre-sell. If you invest in the first offer up to a specific amount, you get another discount. When the public sell happens, it may go up. If you’re just able to get out at the initial point offering and you have a 50% discount, you can literally get liquid quickly.

If you offer them to invest in the regular startup, you don’t have a vibrant secondary market for every single company especially the early stage ones. One of the reasons we avoid healthcare life science is that there’s no secondary market for them. Why should they invest in regular equity? I think you’re going to see more and more people raise funds that are focused on investing in utility and asset-backed securities.

They benefit from those discounts that are offered at the moment. It might go up and down like a roller coaster. For the entrepreneur if you can raise money without getting diluted and not have the hassle of VCs on your board, that’s appealing to a lot of entrepreneurs. It’s appealing to a lot of VCs. We raise $30 million per unicorn without any dilution to the company and in a way that engages with their customer and community.

Sramana Mitra: I think the assumption is that the token economy in whichever token economy you are funding works.

Andrew Romans: That’s right. You don’t get a lot of rights and privileges in a token. Most VCs are scratching their head saying, “I’m not going to invest in a token like it’s an Amsterdam tulip bubble. I want to buy equity, help the company, and as I help the company, I benefit.” Just the speculation doesn’t feel comfortable to most VCs. We’re seeing more and more pegging of the value of the token to the value of the company. That will start making more sense to your classic value-added Silicon Valley minded VC.

There seems to be certain elements of bad broiler room reverse show merger security fraud stuff. I have seen a lot of startups that struck out with angels and struck out with VCs. The unfundable have done ICOs. Those that may invest in that are very short term and will exit as soon as they can. At the same time, having a Blockchain database underpinning money does make sense. These companies have real revenue already and it is a sensible ICO.

This segment is part 6 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Andrew Romans of Rubicon Venture Capital
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