“Despite a bear market that has seen the price of Ethereum drop by over 80% since the start of the year, most projects that raised money via an ICO remain unaffected” (TechCrunch).
“A lot of blockchain projects are putting their ICOs on hold now due to the weak market sentiment. All of the projects we are advising and are involved with are postponing their ICOs until the market turns around to ensure successful fundraising. I personally foresee that more blockchain start-ups will launch their own ICOs” (Mark Tan).
The Rise and Fall of the ICO
What’s the deal with ICOs? Are they scams that have burned bright and fallen hard?
After all, they raised between $4BN and $5.6BN in 2017 with 435 successful projects. The average ICO raise was $12.7MN, far more than the average seed round for any other startup raise ($1.14MN).
I don’t think so.
At the beginning of 2017, virtually no one had heard of an ICO, or a blockchain, for that matter. By December, 2017, the idea was mainstream and bitcoin prices were soaring. There was an influx of new minds into the space. There was also an influx of speculators prospecting for riches and opportunities. Those who thought ahead of their time on blockchain topics and had ideas for uses that would move the industry forward succeeded, and they went on to produce great products.
They did so at higher rates than traditional startups, where just 3% of newcomers ever make it to Series A funding rounds.
But Cryptofinance CEO Jeff Brzezek has predicted that just 5% of ICO companies will survive 5 years and only one in a hundred will be profitable for investors. These may include ICOs that are already the brainchild creations of successful founders who self-fund a product ahead of the raise. After all, only 10% of ICOs have a beta-stage prototype, and these are more highly valued by investors. The desire for funded ideas past the white paper makes the ICO landscape look more and more like traditional startup funding, where “traction” is the norm and innovative ideas are a dime a dozen.
And that’s a shame.
But it’s also a new beginning, and a gateway to an ICO world where both the best of crowdfunding and the best of venture capital can coexist.
Regulation
Crowdfunding was revolutionary, even in nascent phases where customers could “pay ahead” for a jacket and fund a new clothing company’s first production run. It allowed anyone to invest, whereas previously, only those with personal relationships and tons of cash got into the boardrooms of desirable new companies.
Crowdfunding also allowed companies to be discovered by new fans, growing communities from the very beginning.
It allowed a global fundraise, without borders.
It allowed a truly democratic fundraise, where participants were average Joes from all around the world.
Isn’t this the paradigm for how we want to support good business ideas? Heck yes.
Further, by purchasing a product ahead of time, crowdfunding allowed users to participate in funding the company without having a founding team give up any business management control or lose any equity.
This led to government crackdown — greedy companies in the ICO space took the money they raised and produced no product. They had. No accountability to investors. Investors were seen as customers, rather than holding a stake in the companies they helped create.
Regulation is still getting worked out. Right now this is happening quite heavily. Without better guidance, we don’t know if cryptos will be growing or will be shut down. This “intermission” means we will see which ICOs will come back into a regulated market to raise money. Investors will also be assured that compliant businesses are in the market, which has been previously saturated with companies that take investor money and end up producing nothing.
Many predict a future where the best of crowdfunding and the best of regulation combine — creating a new investment vehicle that is both accessible to all, but follows regulatory guidelines and protects investors.
Ethereum Losses
People who bought Ethereum have lost 80% of their value in the last year, dampening ICOs which relied heavily on the protocol for so-called utility tokens.
Coupled with the regulation, the utility token landscape, which made up 90% of ICOs in 2017, disappeared.
Ethereum, which hosted thousands of tokens on its ERC-20 protocol, saw more and more of its protocol tokens called out by regulators as securities. By mid-2018, some were saying:
“The ERC20 idea is a dead end. You will find exchanges starting to ban such coins soon. Law is law, and long-term, these ideas are death” (Craig Wright).
Ultimately, the question, “Is Ethereum dead?” began gaining traction and may be more focused than asking if ICOs themselves have gone the way of the Pteranodon. ERC-20 is a protocol geared toward a lot of companies calling themselves utility tokens and geared toward the creation of tokens using smart contracts — but not for proprietary blockchain functions. Instead, building a product and ecosystem that exists for more than just fundraising (and securitizing fundraising).
The Future of Securities
Today, LinkedIn is all abuzz with equity deals replacing token sales and smart investors wanting to own a piece of a company and the right to dictate how it is run before they invest. It’s a return to “private” investment.
While a lot of the regulation is positive, however, the shrinking of funding from innovative, unfunded ideas threatens us all. Innovation is the cornerstone of a developed economy and speaks to the types of technologies we can bring to market globally. However, in the U.S., many of these companies don’t have the upfront cash to develop their ideas, and end up left without funding options in the absence of the ICO. “Crowdfunding,” for all its flaws (including the cost) is still the best entry point to market for unfunded startups with big ideas.
The ICO brings this ecosystem to the tech world and deserves to exist.
And it will exist as long as speculative investing exists and as long as there is money to be made off ideas alone from people without capital, even to market a sale or build a product. There will always be investors with a high tolerance for risk who want to support teams and ideas that don’t have “traction” (which often means dollars) behind them. The ICO isn’t dead: it’s just hibernating. Be ready for a rebirth in the spring in a new, improved format.
