Could ICO’s make capital more accessible in South Africa?

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The ongoing problem that we face in Africa is that it is relatively difficult for start-ups and existing
businesses to raise capital to further expand and develop their enterprise. There are essentially three
ways in which capital can be raised externally. The business can seek venture capital from private
equity firms or from venture capitalist (which is a more specialised form of venture capital), another
alternative is to apply for a business loan. The third option they have is that they can opt to become
a listed public company, and raise money by selling a percentage of ownership in their company in
the format of shares, either privately or publicly.

The problem with these three options is that they are not easily accessible to small businesses and
start-ups, particularly in the African context. In comparison to other parts of the world such as the
United States, raising capital is much more accessible than it is in Africa. Businesses or individuals
can even raise money successfully through online crowd funding. In America crowdfunding has
raised over $34 billion. In Africa we have not seen quiet the same numbers, for example in South
Africa only in 2017, did one of the larger crowdfunding platforms hit the $5 million mark, this
undoubtedly dwarfs in comparison to the amount of money raised in South Africa. The comparably
less aggressive fund raising environment in Africa can be attributed to many reasons, but
fundamentally its knuckles down to the conservative business culture , the law regulating venture
capital and the economic climate of the continent. Therefore, in order for most businesses to secure
funding they have to be well established, have a proven track record and a be considered as a very
low risk investment.

As a result the number of businesses that qualify for funding are limited and this breeds other social
and economic problems, fundamentally the stagnation of economic growth and the acceleration of
unemployment and poverty. Without a sustainable business eco system that generates new
businesses and facilitate the growth of existing business , the economy will plateau which will result
in detrimental economic consequences. Therefore, we have to explore alternative capital raising
methods that could produce more satisfactory results.

Initial Coin Offerings (ICO’s) may be the better alternative. ICO’s are comparable to Initial Public
Offerings (IPO’s) , but with significant differences. ICO’s are similar to IPO’s in that they are both
channels of raising capital. IPO’s are the first listing of the companies shares, and used as a tool to
raise a huge round of capital for a company, by selling the shares in the company to the public.
ICO’s are similar to IPO’s in this regard, in that an ICO, is also the first time this cryptocurrency is
offered to the public. The ICO allows investors to exchange existing cryptocurrencies of immediate
liquid value such as Bitcoin for a newly create token or cryptocurrency like the StartupCoin.
Investors do this with the anticipation that the new cryptocurrency will rise in value, like the shares
in a company and this will allow them to profit from the investment. A good example of an
infamous ICO would be Ripple, which in the 4th of January had a market capital of $331 billion. As
the underlying company or project of the cryptocurrency performs well so does the cryptocurrency.
There are fundamental differences between IPO’s and ICO’s, which could distinguish ICO’s as a
more favorable channel of raising capital. ICO’s are an open ended system which is currently
unregulated. Therefore unlike in the cases of mainstream methods of raising capital, there are no formal requirements that have to be met to set up and issue ICO’s. This means all businesses of any
size and shape can issue there own ICO’s to raise capital for their business. Where ICO’s can be
further distinguished particularly to IPO’s and venture capital, is that ICO’s can be bought by
investors without the distribution of ownership through means of equity. Therefore ICO’s allow the
company to retain as much equity as possible.We can use IPO’s as a measuring standard to make a
quantitative comparison of the raising power of ICO’s. According to CNBC, ICO’s collectively
raised over $1.25 billion in 2017 and have raised more than early stage venture capital. Forbes has
reported that in by the second quarter of 2018 ICO’s had raised an impressive 45% of what tradition
IPO’s had raised.

However, with this being said the ICO market is a relatively young market and historical data is
limited.ICO’s are still generally regarded as a high risk market, that experiences high volatility, and
is also susceptible to scams such as pump and dump. This does not however negate the potential of
ICO’s to offer start-ups and small businesses a more accessible and less bureaucratic
mechanism for raising capital to start and grow their businesses, which is critical for sustainable
economic growth.

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