Venture capital affiliation in decentralized finance: evidence from ICOs in blockchain ecosystem

Initial coin offerings (ICOs) have emerged as a new form of digital and decentralized finance. They have the potential to disrupt conventional finance sources and expand capital-raising alternatives. However, their decentralized nature, lack of regulation, and market complexity, along with fraud events, have led to a crisis of trust. This crisis jeopardizes firms' fundraising success. This study examines the role of specialized venture capitalists (VCs) in overcoming transparency issues and restoring trust in the market and ICO issuers. Based on data from 191 ICOs, our results show that VC-backed firms have higher ICO success. This success is more pronounced for firms affiliated with VCs specializing in blockchain technologies, especially if ICO issuers are opaque and riskier. Specialist VC affiliation leads investors to buy more tokens. This effect increases with additional affiliations with other specialized VCs. For early-stage firms with a product/service, generalist VC affiliation also plays a certification role, enhancing the probability of ICO success.