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Sun 4 Feb 2018 08:49 AM

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Crypto insiders sit out Telegram's bid for record $2bn ICO

Dubai-based company's ICO has attracted major investors with its $2 billion target

Crypto insiders sit out Telegram's bid for record $2bn ICO

There’s a disconnect among investors eyeing what could be the largest initial coin offering ever.

Some of the biggest venture capital firms have signalled interest in an ICO from Telegram, while long-time cryptocurrency investors are skipping it.

The Dubai-based company’s ICO has attracted major investors with its $2 billion target, a well-known brand and a user base for its encrypted messaging service in the millions.

Sequoia Capital and Benchmark Capital expressed interest in buying coins for the so-called TON network, according to three people familiar with the conversations who weren’t authorised to speak publicly, and the Financial Times recently reported that Kleiner Perkins Caufield & Byers is investing.

But while venture-capital heavyweights are stepping forward, cryptocurrency-focused funds are stepping back. Charles Noyes of Pantera Capital, which invested in Bitcoin since 2013 and manages about $800 million of blockchain-related assets, said they passed on the digital token offer.

The outsised demand for the ICO is a reflection that the sector is getting overheated because there’s little substance to the project’s white paper, he said.

“My primary concern with it is that, in the first offering institutions are seriously looking at, they’re promising something that will somehow be radically better than everything else out there, with no real explanation of how that will happen or outside scrutiny of those claims,” Noyes said.

On the one hand, big names jumping into what could be the largest ICO yet and the possibility of billions of dollars of money raised may be a sign that coin offerings are becoming more mainstream and lucrative. While on the other, it could show an overextended market as some of the biggest dedicated cryptocurrency funds pass on the deal.

Telegram’s push to raise cash comes amid increased scrutiny of digital tokens by the Securities and Exchange Commission as they try to rein in the offerings that fall under their regulatory umbrella. ICOs were used to raise an estimated $3.7 billion last year even though some of the companies behind them have laid out scant business plans.

Investors who missed last year’s cryptocurrency boom see Telegram’s offering as a chance to grab some of those gains, Bart Stephens, managing partner at Blockchain Capital, which also declined to invest in the ICO, said in an email interview.

“Venture investors with deep domain expertise in the blockchain technology sector and crypto ecosystem are passing,” he said. “Generalist VC firms who feel that they have so far missed the boat on crypto appear to be interested.”

Emails to Telegram and Benchmark Capital seeking comments weren’t answered, while other venture firms mentioned declined to comment.

The coin offering valuations have become too irrational, said Carlos Mosquera, who has invested in Bitcoin since 2013 and now runs Solidus Capital, a cryptocurrency fund, and also skipped on the offer.

“The supposed adults in the room are getting into these ridiculous deals, getting their chips in just in case,” he said by phone. “It’s casino money.”

Some venture firms are also passing. Softbank’s Vision Fund spoke with the Telegram team about the coin sale but decided to pass on the investment, according to a person familiar with the talks. Fortress, which is owned by Softbank, isn’t investing in the deal either, the person said.

Nick Tomaino, who manages Peter Thiel and Marc Andreessen-backed cryptocurrency fund 1confirmation, said he also passed on the deal as he’s skeptical that the team will be able to deliver on its promises.

“It’s a big-name ICO, attracting big-name investors, but I ultimately believe the effort requires deep technical expertise and historical context on crypto-economics, consensus mechanisms, and scalability, which they don’t have,” Tomaino said by phone.

The project that would be funded by the ICO aims to become a mainstream payment system, and would include multi-blockchain architecture that can withstand transaction volumes and speed to compete with Visa Inc. and Mastercard Inc., according to proposals for the offering. It also includes a digital wallet that will be integrated with its messaging application.

ICO participants would be investing in what’s known as a Simple Agreement for Future Tokens, or a contract that secures the right to receive tokens once they’re listed in cryptocurrency exchanges. Telegram expects its tokens, which will be called Grams, to be listed in January 2019, or end of 2019 at the latest, after which participants in at least the private sale will be refunded, according to the documents. The private sale closes next month, while the public sale begins in March.

Telegram founder Pavel Durov, who got more than $300 million for selling his stake in social network, has been using his own funds to develop and run Telegram.

Gregory Klumov, co-founder of platform and crypto investor, said Durov is taking advantage of the ICO wave to get some extra cash.

“With growing user base, he would’ve eventually run out of money. Therefore he opted for an ICO as a mechanism to raise funds without getting outside investors into Telegram’s shareholder capital,” Gregory Klumov, co-founder of platform and crypto investor, said in a phone interview.

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