Behind The Headlines Of The Latest Crypto Launch

Everyone in our industry is talking about cryptocurrencies. Most are au fait with Initial Coin Offerings (ICOs), which are effectively a way for early-stage companies to raise capital by issuing “coins” or tokens without selling equity.

But I’m surprised there hasn’t been more focus and comment on the latest blockbuster transaction to hit the cryptocurrency market. I’m talking about Telegram.

The encrypted messaging service (think Whatsapp with a focus on privacy, delivered via cutting edge encryption) is seeking $1.2 – $2 billion to build “an infinite sharding paradigm achieved through a variant of the Byzantine Fault Tolerant protocol.” If that sounds pretentious and obscure to you, you’re not alone.

Despite widespread raised eyebrows amongst technologists and investors, the deal looks set to be a blowout. At circa £2 billion, it’s far larger than its nearest comparables and attracted far more press coverage. Cryptocurrency acolytes have been swarming all over the Telegram transaction, but capital markets professionals have been slower to appreciate its significance. In many ways, this is a watershed moment with profound implications for global capital markets.

Why is this deal so special? The answer lies in the investor base. Telegram has managed to attract high-profile institutional money from a number of international sources. The deal presents a fundamental shift in the way that cryptocurrencies and the so-called “token economy” are viewed by the global investor base.

Telegram plans to build a new blockchain for its cryptocurrency – The “Telegram Open Network” – rather than build on Ethereum or other established platforms. Quite why the company needs billions of dollars to do this is beyond me, but seemingly not beyond the top tier VC and fund management community who backed the deal. The FT’s Lex column echoes my concerns when it says, “Some investors take the weird jargon of the messaging app’s white paper seriously.” And a West Coast cryptocurrency investor who passed on the round called the “hyperbolic claims” of the company a “huge red flag.”

Regardless of the wider debate surrounding the long term viability of this rush to digital assets, it’s clear that cryptos are no longer the preserve of programmers, futurologists and speculative day-traders. They have entered the domain of high finance, claiming a seat at the top table alongside established asset classes. Silicon Valley’s lead investors – like Kleiner Perkins Caufield & Byers, Benchmark and Sequoia Capital – piled into the deal with $20 million tickets. Startups may be using ICOs to bypass VCs for capital, but that doesn’t stop VCs from getting involved and hedging their bets on the future of capital markets.

I’ve been following the Telegram ICO from the sidelines for some time. It might sound ridiculous, but it’s certainly a very clever, well thought out strategy that demonstrates a sophisticated understanding of how institutional money works. The deal is in fiat money with tokens, meaning that institutional investors, prohibited from purchasing Bitcoin and other cryptocurrencies, can finally play in a crypto offering. And it seems FOMO is a big driver of demand in this case.

Another fascinating aspect of this ICO is the “tourist” element. Real pros are remaining on the sidelines, but high-profile VCs are taking down $100 million clips being offered by resellers. Advisors receiving allocations with a discount then flip them and pocket the spread. There’s big money to be made in flipping deals, just like in the new issue bond market. So, whilst Telegram insists the deal is sold out, allocations are being offered all over the place.

This deal also differs from most ICOs, in that tokens are not immediately tradable. Instead, they are subject to 1-2 year lockups. This might seem attractive to VCs, accustomed to long exits, but for anyone involved in ICOs it’s deeply alarming. This market changes dramatically in two months, let alone two years.

For me, this is just the beginning of a trend towards large startups, typically equity funded, turning to ICOs in order to raise growth capital. Avoiding dilution while tapping into the craze for crypto assets is a no-brainer for most entrepreneurs. Startups that struggle to raise capital in the traditional VC market will increasingly turn to ICOs in order to arbitrage the naivety of investors.

Who knows, perhaps we need to go through this chaotic phase in order to establish crypto as a bonafide asset class? We need failures, successes, mass adoption and the scams that come with it, in order to work out if and how tokenization can create real value. In many ways, this iterative process mirrors the development of other capital markets.

I can’t predict the future with certainty but I can tell you this. Hold on tight. It’s bound to get interesting.