(R)evolution in Entrepreneurial Finance? The Relationship between Cryptocurrency and Venture Capital Markets examines aspects of cryptocurrency and existing funding methods for startups such as Venture Capital (VC) financing. Initial Coin Offerings (ICOs) is an increasingly popular form of fundraising using cryptocurrencies in entrepreneurial finance. ICOs issue tokens as a means of payment to token-holders, who are typically investors and users of blockchain-based projects. In 2018, startups around the world raised $11.6 billion in funding through ICOs, while traditional channels such as Early Stage Venture Capital raised $12 billion. The authors raise the question of how cryptocurrencies can contribute to entrepreneurial finance, and whether they pose disruptions or synergies to traditional financing sources. They propose a model where entrepreneurs can choose between ICO and VC funding, focusing on unique comparative advantages offered by the two strategies.

Their key findings are that while ICOs allow firms to build a large initial customer base and exploit network effects in early stages of funding, VCs improve outcomes in later stages with value-adding services like monitoring and advising. This is because investors in ICOs are usually retail investors and also users of the product, hence the large initial customer base, though they may lack expertise in offering strategic advice to the firm. Based on these findings, the authors propose that token-based finance can complement VC financing in early versus late stages of funding. However, the lack of transparency and regulatory oversight in cryptocurrency markets can limit the advantages of mixed funding, and the large network effects of ICOs may be offset by this limitation. In highly efficient venture markets, decentralized finance can alleviate firms’ financial constraints and complement traditional entrepreneurial finance methods.