As ICOs become mainstream, entrepreneurs may wonder if they are a fit for their ventures.
ICO, which stand for initial coin offering, is a means of crowdfunding that is being increasingly used by startups as a replacement or supplement to raising venture capital. Already the amount raised by ICOs in 2017*, $180 million, exceeds the $101 million raised in all of 2016.
What is an ICO?
In an ICO, tokens are sold to the general public, which in turn, provides something similar to equity ownership for the token holder. The selling of these tokens is referred to as a “token sale” or “crowd sale.” Blockchain, the digital ledger behind bitcoin, enables the creation of tokens that have value in and of themselves.
Until recently, ICOs had been limited to developers of early-stage startups that had blockchain-based components to their business. An example well-known in this community is the crowdsale of Ethereum. By selling off the cryptocurrency Ether, developers were able to fund the technical development of Ethereum’s blockchain-based distributed computing platform.
Recently, startups have shifted away from using ICOs for pure technical purposes. At the leading blockchain industry conference, Consensus 2017, only one out of five of the companies competing in the POW (Proof-of-Work) competition was technology based. Judges, all recognized venture capitalists, pointed out that this was not the case a year ago. Areas of these startups’’ businesses included peer-to-peer live streaming, medical records security and more.
Brock Pierce, Chief Strategy Officer at EOS commented “you are going to see companies with no blockchain element to their business emerge.” Pierce expressed this as a panelist at the sold-out Token Summit, the very first conference based on the token economy, held only a few days after Consensus. Sure enough Kik, a global messaging app, announced its token sale that very day. Kik became the first mainstream brand to embrace the token sale concept. Its’ size (100+ employees) and maturity (founded in 2009) also deviates from the structure of most companies previously conducting ICOs.
Leaders at both Consensus and Token Summit conferences pointed out a new way of startup thinking:
I have this idea, how to I integrate the blockchain into it?
So is an ICO right for you?
Before you turn to ICOs there are some items to consider.
1) Identify the reasons behind the ICO. As Dan Morehead, CEO Pantera Capital and Chairman, bitstamp, explains: “There are things in which tokenizing is integral for the network…. Then there are not.” Consider if your product actually needs the decentralization provided by blockchain technology or, if you are just going forward with a token offering because the cryptocurrency market is “hot”.
2) Have a product. While success stories like ethereum have raised funding with only an MVP (minimal viable product), experts caution against a “pre-sale”. Consensus panelists Preston Byrne, COO of distributed ledger startup Monax, and Peter Van Valkenburgh, Director of Research at Coin Center, pointed out that the most successful ICOs have a product with maturity. They pointed out Storj, which ICOed at one of the most successful token sales of all time ($20 million in 6 hours) as a positive example. The company provides cloud storage, a service that could compete with Microsoft and/or Amazon.
3) Have utility. The product built needs to have clear utilitarian value for the user. As Peter Van Valkenburg explains, “a token should not be about profit-sharing. It should be about access to utility.“ With a clear utilitarian value, there is less likelihood that your token could be considered a security and subject to securities law (a very grey area). Courts have ruled that co-op shares, for instance, are not securities as they provide living quarters for the shareholders, despite price fluctuations influenced by the market.
4) Start building a community. The value of your token depends on the value perceived by the community. Communities can take time to build. Thus, even if you are just thinking about an ICO, start building and engaging community members now. Means to do so which are popular for the token sale audience include: slack, reddit, Facebook and BitcoinTalk. Investor and author of "The Bitcoin Big Bang - How Alternative Currencies are About to Change the World" Brian Kelly iterates this point discussing his criteria for investment: “I want to see people are interacting via slack channel and other means… this shows that there’s a community even before launch.”
5) Be aware of the risk. Recognize that ICOs are extremely new, unregulated territory. While we are seeing startups raising millions through ICOs, the bubble could burst, similar the Dotcom boom in the 1990’s. Moreover, as experts such as the CEO and Founder Etherscan, Matthew Tan point out: an ICO gone bad could hinder your chance to raise venture funds in the future.
* As of May, numbers likely higher.