The invention of Bitcoin is the perfect example of the adage: “If you can’t find a way, create one.” The traditional financial system was desperately in need of disruption due to the fractional reserve lending system and the federal reserve’s ability to print money out of thin air. The now legendary paper by Satoshi Nakamoto described Bitcoin as a novel “peer-to-peer electronic cash system,” and its impact has left people questioning “what is money?” and “how else can we use this technology?”
To say that blockchain technology, the mother code of Bitcoin, is a genuinely disruptive and revolutionary technology would be a gross understatement. The scope of its influence touches nearly every aspect of human endeavors. Coupled with the growth of smartphones and 5G technology, those who understand its capabilities are building on the blockchain to solve real-world problems. These visionaries gave rise to many blockchain-powered enterprises and introduced the world to a new way to raise funds – the ICO, or Initial Coin Offering.
Why Are ICOs Exciting?
ICOs are changing the startup landscape because they provide liquidity for founders without relinquishing equity, a process typically done when raising funds through venture capitalists. This type of crowdfunding allows founders the liberty to pursue their vision for their project. In the traditional VC model, entrepreneurs ran the risk of being “pushed out” of a significant share and forced to take a direction they are not comfortable taking.
With ICOs, entrepreneurs now have liquidity at the secondary stage, solving their most significant problems. ICOs help teams raise money, giving them the ability to sail through the difficult period between conceptualization and profitability, a period typically associated with negative cash flow.
ICOs also allow projects to be funded that might never have been funded through traditional models. Who would have given $150 million for the Ethereum DAO, for instance? In an ICO, all you need is a few thousand investors who see the value of your vision and believe in your project. This, in effect, is a truly democratic way to start a new business rather than approach a few capitalists to fund a dream. ICOs have brought in a paradigm shift in how novel companies are starting with far more experimentation in tech than ever before.
ICOs Have Helped Raise Serious Money
While an ICO is a swift way to raise funds by ditching the traditional lengthy funding process and the hassles surrounding it, the absence of any regulations often exposes investors to high risks. It is a high risk, high return market. 2017, also known as the “Year of the ICOs” saw as many as 913 attempted ICOs. Only 434 were classified as “successful,” a figure that is just 48% of the total. And yet ICOs raised as much as $5.6 billion in funding.
Another Side to the Same Coin?
A genuinely simple way to raise money notwithstanding, ICOs have also become notorious for being labeled as scams and securities fraud. Armed with less than a team, a white paper, and a smart website, ICOs can raise money from anyone with a computer and cryptocurrencies. Scamsters duped investors of more than $400 million last year and left behind them a digital graveyard of abandoned social media accounts, websites, Telegram groups and simply vanished with the money, much to the dismay and heartbreak of thousands of investors.
Profiles of blockchain and crypto advisors are being “kidnapped” by scam ICOs and put up on their websites with a complete disregard for all forms of civility. The onus is now on these advisors to scour the internet for such sites that put up their profiles. The advisors then have to make the community aware that they have nothing to do with such mischievous ICOs, to protect their reputations. However, this has also created a bad scenario for entirely legit ICOs looking to raise funds for a solid business proposition. But according to many experts, things are changing for the better with more informed and educated investors looking to put the consternation of bad ICOs behind in a bid to support revolutionary ideas.
The Current State of the ICO Market
While everybody lauds the successful ICOs that have raised millions of dollars or talks about the hundreds of scam ICOs that deceived honest people of millions of dollars, more than half of the ICOs launched simply weren’t successful, even though they had a brilliant idea. We may never know what happened to such teams and how they fizzled into obscurity.
Before going the ICO route, teams need to ask themselves, “Why do we want to do an ICO?” “Is that path the most efficient?” The SEC and other legal watchdogs are carefully monitoring the scene, and teams should be aware of the legalities surrounding the ICO process. It is wise to include legal experts, a successful marketing team and leading blockchain advisors to guide anyone interested in doing an ICO.
To understand their perception of the current ICO market, I talked to a few experts from the field who shared their views on how good, reputable teams with great ideas can succeed in the ICO market and raise funds for their vision to take shape.
Gavin Nation, co-Founder and Project Manager of Hilynk (previously YagooFace), said that the current ICO market is actually very bullish, however pretty “flakey,” because most companies trying to run an ICO only look for “big names.” This, in his opinion, is bad practice. “It’s not just a bunch of reputed advisors on your board that assures success, you also need other, more crucial, ingredients.” Gavin believes that overall, the “ICO climate now is very good.”
Gavin explained further.
“Investors are becoming smarter, thanks to the minefield of scam ICOs out there. They are now looking very carefully at projects trying to raise funds through ICOs. Even the smallest investor is doing due diligence. Who are the advisors, what is their contribution to the blockchain industry, whether the company has a minimum viable product (MVP), the country the company is registered in, where the core team is from, the qualifications of the team members and their public profiles on social media platforms like LinkedIn – everything is being carefully scrutinized, which is a great thing.”
Hilynk is a social media solutions app that allows its users to consolidate all of their social media assets within a single platform. With an MVP ready, they are now looking at raising funds mostly from private investors before deciding whether to go the ICO route. “We created an MVP before we could approach investors for funds. I think the plan was simple – a white paper isn’t enough, we need to show more proof that the idea can actually work,” said Gavin.
“The current ICO market is very fuzzy due to unpredictable regulations in various countries with a massive user base. The roller coaster ride of the overall market in last few months has added another layer of uncertainty. However the raising of over a billion dollars’ worth of investment in ICOs in the first quarter of 2018 is a great sign of market consolidation and augurs well for the future too.”
On the question of how legitimate companies can regain investor confidence in the face of massive ICO scams, Tayyab’s comments mirrored Gavin’s thoughts. “Product-ready projects are gaining more attention compared to promise-ready projects. Projects with MVP, strong team, and better community management make a winning combination and assure investors while attracting them,” he said.
“More businesses now are taking a serious look at how to implement blockchain in their infrastructures as they see value in the tracking and transparency blockchain offers. Blockchain is slowly but surely making its way in our everyday life and is changing our economic perspectives on how we interact and trade with each other.”
When I asked Eric’s opinion on the state of the current ICO market, he said, “Currently the ICO market is getting mature and the structure to run a successful ICO is clearly defined. Investors are getting savvier and are now doing research before investing blindly in projects that promise large gains.” Jetcoin Institute is disrupting the media, entertainment and sports industry through its democratic and open platform that can be used to launch the careers of any talented individual from these fields. It changes the traditional fan-celebrity relationships by bringing the two closer. Fans get a chance to “invest” in the dreams and aspirations of the celebrity and gain through the success of the celebrity.
Is There a Secret to Running a Successful ICO?
While talking to Gavin, I asked him if there was a secret behind running a successful ICO. Gavin said:
“I think a lot of companies are looking at the ones that have successfully raised their target amount. They are looking to emulate their success, but if you do not have a great idea backed by robust technology and a seriously talented and motivated team, you cannot go too far. There are quite a few good companies providing ICO services because they have been there and done that. I think it is worthwhile to take professional help if you wish to succeed in the ICO market.”
Tayyab, however, was a bit guarded in his response about ICO services providers.
“There are probably hundreds of ICO services providers that seem legit but are actually a professional trap. Finding the right ICO services providers under one roof is pretty difficult. Anyone can claim to run ICO services but what entrepreneurs need to look at is whether the guys were able to run a successful ICO themselves? Do they have the team, the wherewithal to help other ICOs succeed? Most ICO service providers charge exorbitant fees and offer an empty promise to deliver, however entrepreneurs need to do their own due diligence before handing over the reins of their ICO to such companies.”
Eric was more open to the idea of utilizing ICO services. He said that ICO services did offer tremendous value to companies planning their own ICOs.
“Running an ICO is not an easy game. There are too many aspects to be covered by a single team. ICO services offer a holistic approach to running an ICO – from recruiting the right advisors to managing the community to creating a robust marketing strategy and everything in between and what comes later. While they are focusing on running the show, the management team can still concentrate on the core business proposition and how to better it.”
These gentlemen understand that bringing more transparency to how the funds are being used post-ICO by writing better crowdfunding rules on smart contracts would help investors keep track of their funds. Code can be written in such a way that after the end of the ICO phase, stakeholders (investors) can track the progress of the project and vote on it. If they are dissatisfied, smart contracts refund their investments. And if they are satisfied with the development of the project, the same rules will release funds to the team in predefined stages. These changes can go a long way in ensuring that investors regain their confidence in the ICO landscape knowing well that their money is safe and will be used in the manner it was intended.
In The United States
Although ICO’s are very much at large in other countries, the regulatory environment of the United States does not support this eco-system. ICOs found a way to subside existing securities laws, and the SEC is not a fan of them. To do a legal raise in the US, the best course of action is to do a security token offering or STO. These offerings are executed under existing securities laws and millions of dollars are being poured into building the Security Token infrastructure. Unfortunately, this type of offering does not allow unaccredited investors to get involved, but it does provide a level of legitimacy.
ICOs are democratizing the financial landscape, but the shortage of robust regulations has created a complicated scenario and a unique set of challenges for genuine enterprises to raise funds through this route. The concept of ICO is still in its infancy, but the rate at which innovations have occurred in the blockchain space shows that the ICO market has room to mature. Before governments finalize regulation, it is in the best interests of the network and the community to apply its own set of rules to keep with the democratic philosophy of decentralization which is at the heart of blockchain technology. ICOs allow new wealth creation methods for average investors and offer an exciting way for entrepreneurs to raise funds quickly. It would be worthwhile for entrepreneurs to take professional help to run their ICOs while they focus on building their business.