Crypto Startups Increasingly Forced to Launch Tokens, and It\'s an Unfortunate Thing for the Industry

That's according to Elliot Chun, a partner at Architect Partners, a firm that advises crypto companies on financing strategies.

Crypto startups are increasingly being forced to launch tokens in order to raise capital, a move that is ultimately "unfortunate" for the industry, according to one crypto advisor.

“I hate it,” Elliot Chun, a partner at Architect Partners, told DL News. “It's bad for companies, because most companies shouldn't even have a token in the first place.”

Chun's firm advises crypto companies on financing strategies. He explained that while some crypto firms, such as those involved in Bitcoin mining, can still raise capital without offering investors a quick way to cash out, that isn't the case for most companies in the crypto space.

“Most people who have invested in tokenless crypto firms haven't seen a return of capital yet,” Chun said. “Generally speaking, if you invested in BitGo, Anchorage, Fireblocks, or any other custodians — there hasn't been a return of capital for investors.”

While stablecoin issuer Circle has already filed for an initial public offering, and crypto exchange Kraken is considering the same, the Securities and Exchange Commission's (SEC) hostility toward crypto has made it difficult for firms to follow through on their ambitions.

That leaves tokens as the only viable way for investors to cash out of their crypto investments quickly. As a result, crypto venture funds that don't invest in token-issuing firms are having a hard time raising capital.

“It's difficult for [crypto] investors to come in, because they don't want to get locked up for seven to 10 years,” Chun said.

“Investors are driven by one thing, and that's investment return,” he added. “That's their job.”

Coinbase Ventures, Andreessen Horowitz, and Galaxy Digital — three major crypto venture-capital firms — didn't immediately return requests for comment.

According to Robert Le, a senior analyst at Pitchbook, a provider of private market data, this isn't a problem for investors with backgrounds in traditional finance, who are accustomed to having long-term horizons.

However, Le told DL News that traditional venture funds are still traumatized by the 2022 bear market and by the collapse of crypto exchange FTX, and have yet to step back into the crypto market.

“They're still licking their wounds from last year's downturn,” Le said. “They're slowly starting to get back into the market, but it's still very early on in the process.”

Le added that the crypto industry's increasing focus on tokens is also having a negative impact on the types of founders that are being funded.

“It creates a really bad dynamic,” Le said. “If the token's price goes up, it's really exciting for the founders and employees, but then it drops 90% and the founders lose interest and leave early.”

“It leads to a scenario where founders are really pressured to keep the token's price up, which isn't good for anyone in the long run,” he added.

Launched tokens can also expose founders to lawsuits and criminal investigations, Chun said.

“Sooner or later, regulators will revisit how some of these token airdrops happened,” he said. “You're going to get a knock on the door.”

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