In 2016, blockchain startups suddenly started to see an upsurge in the "investment landscape (collectively absorbing some $200m [£160m])" with ICO or Initial Coin Offerings, according to the International Business Times. While this entire mechanism is based on a hypothetical foundation, ICOs still seem to have gained momentum this year. Considering that crowdfunding is one of the most popular forms of investment today, it would be interesting to apply ICO to crowdfunding. However, considering the constant crests and troughs in the cryptocurrency market, would ICO actually benefit the crowdfunding model?
I have been in the crowdfunding space for a while now and I feel it’s still too volatile. I’ve personally invested in a few ICOs. Some turned out to be a profitable investment and others...not so much. I can’t help but notice that many startups are switching to the ICO model for funding as opposed to the venture capital model. Unlike in crowdfunding, with ICOs you can instantly address millions of people regarding investment. Only those who truly understand the intricacies of this method will be able to master it and use it successfully.
Many blockchain startups have raised millions of dollars with just a whitepaper and a website. But, before we consider how to move ahead with this new fundraising opportunity in crowdfunding, let’s first get down to the details of what an ICO is and how is it related to crowdfunding.
What Is Crowdfunding?
Ever since taking loans from banks has become more and more difficult, startups began crowdfunding. Put simply, crowdfunding is a method for raising money for your business or idea with the collective efforts of other individuals. They can be your family, friends or just about anyone who is willing to back your project in return for a piece of the pie. You can feature an end product, service or even a simple "thank you," depending on the amount of money pledged. You as the campaign creator are the deciding factor. Recently, The World Bank Group predicted that global investment in crowdfunding will hit $93 billion by 2025. That’s more any other traditional fundraising method for startups.
What Is An ICO?
An ICO, or Initial Coin Offering, is a great strategy for venture capitalists and banks to bypass the regulated capital-raising process. Bitcoin and other cryptocurrencies are fundamental requirements of this form of fundraising. Ethereum, for example, is a cryptocurrency project that has raised $18 million in ICO and reached an approximate $1 billion market cap in 2016. As a startup founder, you can set a predetermined goal for ICO-funded projects. However, that goal usually refers to the pre-designated price of tokens that cannot be altered during the Initial Coin Offering phase. As a result, the token supply can be considered static.
Projects with a dynamic funding goal can also have static supplies, where the tokens are distributed based on the funds received. You can determine funds received for a dynamic token supply by looking at the price of these static tokens (for example., 1 ETH equals 1 token). Every time one Ether is sent, a new token is generated. You can limit your goal or the time frame. Overall, this form of fundraising removes a lot of hassle that is quite common with the venture capital process.
There have been fluctuations in the cryptocurrency industry. ICO projects need to go through a due diligence process that is quite complicated compared to the current model used by regulated crowdfunding platforms like Kickstarter and Indiegogo. Because ICO is unregulated, the possibility of fraud or scams should be on your radar. In order to pacify investors, ICO projects must offer them a level of protection. Startup teams should not only be well-versed in blockchain architecture but also need to prepare their offerings with valuable data in order to take this route.
Complete your due diligence the same way you would with a casual startup equity investment. But rather than have your legal team investigate, look at what’s available regarding the ICO's white paper, website details, founding team etc. Providing assurance to your investors is most important here. While having in-depth technical knowledge isn’t mandatory for the current crowdfunding model, ICO makes it inevitable. It’s still very new. And with predictions of hybrid blockchains in 2018, you never know if this will turn out to be a failure in the long run or not.
