Why You Should Use an ICO to Raise Capital
Keep your equity and do a cap raise using an ICO
A massive slap to my face was when I was in a board meeting with external investors on one of my first startups and I realized that at that moment I was no longer in control of my startups fate.
While searching for preventative solutions I came across Initial Coin Offerings (ICOs) and quickly learned that this can become a the achilles tendon to hacking loss of control within your own company.
ICOs are an open, unregulated space that open up possibilities for innovation in everything from funding to ownership. It is a new investment mechanism where the value gets distributed and exchanged with a lot of flexibility. It could establish the pillars for the beginning of a new economy while providing more freedom for founders.
SIDE NOTE: This article is to explain a potential solutions for FinTech base start ups. This platform is to be used by legitimate business with intent for serious applications and real-life solutions. If you do not have the team nor the recourses necessary to start and sustain a legitimate token/coin please do not waste investors time/money by riding the ICO train. Your efforts delegitimize serious practitioners. THANK YOU!
What exactly is an ICO?
Similar to shares of a company issued during an IPO (Initial Public Offering) an Initial Coin Offering (ICO) enables funding of projects through the sale of tokens or cryptocoins.
If you are familiar with platforms such-as Kickstarter and ICO sets up a minimum capital goal for the fundraise to take place as well as a time period to reach that goal. There Investors and Supporters of the project can purchase the token/coin with either fiat currency (USD, EUR, GBP, etc) or cryptocurrencies (Bitcoin, Ethereum, Litecoin).
If the funds requirements are met within the specified timeframe, the money raised is used to fund the project and the company can distribute tokens to investors that can be traded on the public cryptocurrency exchanges, like Poloniex or Coinbase.
Crowdsales have proven to be a successfully efficient way to produce cap raises as demonstrated by indiegogo, kickstarter, seed invest and many others. The unique benefit to ICOs vs other platforms like Kickstarter is that you can buy the equivalent of equity in a company and as the token’s parent company increases in valuations that piece of the pie that you own begins to appreciate. Ethereum is the epitome of coin appreciation. Having raised just over $18MM USD in its original 2014 ICO, Ethereum (ETH) coin holders noticed an actualize increase in value from less then $4 per coin to just over $224 per coin, as of writing.
Teams commonly set aside 5%-10% of the total tokens for development as a safety cushion to sell during the post-launch as a means to continue engineering the project.
Since ICOs are becoming an increasingly popular solution to seed raising as well as cap raising in general (some times with malicious intent) there have developed a number of B2B entities that have one particular focus: to take the idea to a successfully funded coin.
As weird as it can sound, you don’t need a blockchain to issue or enable the trading of your coins. Many people just set-up a website, put their Bitcoin or Ethereum addresses and start to collect funds.
— Pavel Kravchenko, an expert cryptographer
- Argon Group, a strategic investment banking and financial advisory services firm was in charge for the ICO of Blockchain Capital. They take care of the compliance and the KYC (Know Your Customer) for collecting funds.
- Tokenmarket.net seems to have a packaged offering for ICOs, they are new on the market but seem to have a good understanding of the challenges while providing solutions for KYC and marketing your token.
- Otonomos.com is also setting up a special offering for ICOs. They can provide a non-profit vehicle similar to what Etherum created in Switzerland but this time in Singapore.
- Vanbex Group, based in Vancouver is another option. They have a long experience in ICOs and provide a full service from the KYC integration, token development, campaign marketing and strategy, technical audit and documentation, legal guidance up to investor relations. They made for example the ICOs for FirstBlood and Factom.
- Transform Group, is a public relations and advisory practice. The Firm has represented several blockchain companies, organizations and projects in the sectors since 2013, including 30+ token crowdsales. Client success stories have included Aeternity, Augur, Bancor, Bittrex, Counterparty, Dash, Ethereum, Factom, Gem, GoCoin, Golem Network, Gnosis, Gyft, Humaniq, KnCMiner, Kraken, Humaniq, MaidSafe, Ripple, ShapeShift, Storj, Syscoin, and Tether.
They will often provide the KYC for collecting the funds of the original coin offering but won’t be able to do the KYC once the coins are exchanged on a public exchange.
- Ethereum.org is most probably the most popular and most reliable solution to date once you need to have your coins traded. Made to create smart contract, ethereum has a whole solution to organize a crowed sale to sell tokens in a blockchain organization.
- Lightning Network is another option to consider in the future for the trading of your tokens.
If you don’t want your transactions costs to be dependent on a public blockchain then you will have to implement your own blockchain.
How much is your coin worth?
Great thing about alt-coins is that you set quantity of coins (tokens) you wish to issue and this is what will determine the initial price of your coins.
Then, once they begin trading on an exchange, the price will obey the laws of supply and demand on the free market. Like any other traded stock it will change according to relevant project information, trust in the team, and reactions of the project’s original and incoming investors. Here having a solid business plan that meets predetermined milestones (or relatively close to those desired outcomes) and an effecting IR campaign can aid in increasing a coins overall valuations; consequently increasing the price per coin.
How much does it really cost, though?
Apart from the legal fees linked to the registration of your business and the legal and financial advices linked to your ICO, the cost of operating an ICO on Ethereum (for example) is trivial.
It involves setting up the characteristics of your token (Ecr20) by creating a smart contract and then paying the registration fees into the blockchain each time a transaction happens.
Most of the costs will be linked to the marketing of your ICO to investors. Expect to spend at least $50k to a $100k on brand marketing, online marketing, PR, and communication. Most serious projects have some sort of pre-ICO funding to finance the marketing costs linked to the launch of an ICO.
Where should we market our ICO?
Most ICOs should be marketed to achieve your fundraising goal in the shortest amount of time.
Do NOT Reinvent the Wheel
There are multiple services that offer ICO specific marketing and utilize the already current cyrpto market. 21.co can help you reach out to digital currency investors and will charge $10 per reply.
Some VC firms only invest in coins like Fenbushi Capital from China or for example the famous Tyler Howard Winklevoss, creating fewer compliance issues and fewer time constraints to invest. On the pre-sale, they can benefit from important discounts and — in addition — when they are traded, tokens provide almost immediate liquidity.
Who already launched an ICO?
According to the research firm Smith and Crown, ICOs raised $27.6 million in the first two weeks of May alone.
The BAT ICO launched by Brave, a web browser founded by Mozilla co-founder Brendan Eich
It completed an initial coin offering (ICO) on May 31st 2017 that generated about $35 million and was sold out within blocks under 30 seconds. Most of the sale happened through the sale of tokens using Ethereum for payments.
Storj Labs, a Peer-to-Peer Cloud Storage Network, launches STORJ
They raised money through an ICO on May 19th. The ICO hit the $20 million mark just 6 hours after the books opened.
Blockchain Capital is an investment fund
They invest in entrepreneurs driving innovation based on Blockchain technology. They closed $10 million in 6 hours on May 10th.
What you need to know prior to launching your own ICO?
It is still an unregulated space and you must be very cautious to make sure your KYC (Know Your Customer) is done properly. Once the regulators like the SEC realize that an ICO enables any company to trade their stock freely, it is mostly possible that traditional stock exchanges will be adopting the same techniques for any company and then start regulating the space.
At the end, good governance remains probably the best security for investors to ensure the profitability and the growing value of the marketed tokens.
Currently, most teams outside US choose to block the participation for US residents to avoid regulatory issues.
Current ICOs only sell app coins, utility tokens or comparable instruments that have in-game currency value. Any profit is a speculative value. That’s a way to get around the Howey test.
— Mikko Ohtamaa CTO of Tokenmarket
Dividend paying ICOs are coming though, but they will be securities which will be regulated. Polybius, a regulated bank for the digital generation, just launched an ICO with tokens that include the right to receive 20% of profits.
Travis Scher, an associate with Digital Currency Group mentions in his post on ICOs:
And in my diligence, I’ve repeatedly encountered four issues that make investing in new tokens — at least for now — very unappealing compared to traditional VC investing:
1) regulatory uncertainty,
2) high valuations/over-capitalization,
3) lack of controls, and
4) lack of business use cases.
I believe all these points are valid. What matters the most in my point of view as a founder is the freedom that ICOs can provide and its flexibility as a tool. Like any innovation it will require a lot of iterations before ICOs can prove to be the new way for funding startups and projects.
In the meantime it is freeing up creativity and more interesting initiatives
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