Raising money from VCs vs. doing a token sale — A quick guide to best practices
Token sales, or how many people mistakenly call them, ICOs (which is quite a challenging term from a financial perspective), have seen an extreme upsurge in the past 2 years. In 2017 alone over 100 million USD have been raised through this route directly to the public. In this article I would like to elaborate the up- and downsides of doing a token sale compared to traditional VC funding and will lay out a few best practices for a successful token sale.
Knowing that our own company TenX (www.tenx.tech) will do an initial token sale end of June 2017, I started analyzing dozens of token sales from mid 2016 until now. My goal was to understand what makes some token sales successful and what not. Also, I wanted to understand the up- and downsides compared to traditional VC funding to judge whether we should go for a token sale in February 2017 or raise a traditional seed round from investors.
Eventually, we decided to raise a 1 million USD round from Angels and VCs. These were the considerations behind that decision:
- VCs particularly constitute of “smart money”, at least most of the time. Not only do they contribute capital but also knowledge, connections and expertise.
- If you have good VCs onboard, just like we do with Fenbushi (www.fenbushi.vc), which is the venture fund of Bo Shen and Vitalik Buterin, it builds a lot of credibility. Given the amount of research they do before making an investment decision, is a strong signal to the market.
- At that stage we did not “need” more than 1 million USD and this allowed us to give up as little equity as possible to achieve exactly that goal.
As a next funding round, we discussed doing a Series A vs. a token sale in Q3 of 2017. Eventually, we decided to go for a token sale at the end of June.
Here were the reasons that went into that decision:
- Especially when looking for a funding goal of 20–25 million. It can be a lot easier raising this kind of money from several smaller investors rather than from a few larger ones. That is particularly true, if the company is still early stage.
- Rather than some specific connections and expertise that we get from our VCs already, at this stage it is very important to have a few thousand “true fans”, just like Kevin Kelly describes in his very famous marketing article (http://kk.org/thetechnium/1000-true-fans/). There is no better fan than someone who has a vested interest in your success. So, having a few thousand token holders, makes a lot of sense from our perspective at this stage.
- A successful token sale brings a lot of publicity and free marketing with it. Both things any company is looking for.
Of course we at TenX are not the only ones having such thoughts and this explains the upsurge of token sales in the past months and years as you can see in the following graph done by Smith & Crown:
When I started analyzing ICOs around a year ago, I created 5 points that I analyze any token sale with. Each of these 5 points have a maximum of 5 points to reach, so in theory an ICO could get 25 points as a maximum. I want to share these 5 points with you, not only to analyze other ICOs but also to give you an idea of the thinking that went into our own token sale when we created it:
- Idea / competitors
- Execution / development stage
- ICO structure / legal
- Marketing / Communication
Personally I have not yet seen an ICO with 25 points as this would almost contradict itself on why actually doing an ICO. Had I to analyze our own token sale, I would give it 23 of 25 points, which is the highest I have ever given a token sale. This is not because it is our own sale but rather because I have learned from all the others so I know what to look out for especially to make a token sale successful.
Let me elaborate:
1.IDEA/COMPETITION (TenX: 4 out of 5 points)
Here I ask questions such as:
- Is there a clear problem that the company tries to solve?
- Is the idea unique?
- Is there competition that is already ahead of them?
- Is the vision clear?
- How big is the potential market?
The reason I give ourselves “only” 4 out of 5 points here is that other companies are also trying to solve the problem we are working on: Making Blockchain assets spendable instantly. Now obviously we have a very good strategy and a clear vision on how to be better, but I always want to be fair and honest and this means, that we as TenX have to prove that we are. Only time will tell. I would give it 5 points if NO-ONE else would be working in the same sector — this is very rare, but I always strive for excellence. I cannot remember ever having give 5 out of 5 points here because it is very rare for that to happen.
2.EXECUTION/DEVELOPMENT-STAGE (TenX 4 out of 5 points)
Here I ask questions such as:
- How far along in the development is the company?
- Do they have a minimum viable product or prototype?
- Do they have customers?
- Has some validation been done from the outside?
- Is there a roadmap that seems credible?
- Does the execution actually seem possible
The reason I give ourselves “only” 4 of 5 points here is that while we do have customers and a working product, we still have features we want to add, such like being totally decentralized. To all fairness, I have to add here, that I also have not seen a company being 5 out of 5 because such a company would probably not want a token sale after all.
3.TEAM (TenX 5 out of 5 points)
Here I ask questions such as:
- Do these guys have what it takes to succeed as entrepreneurs?
- Do they have a successful track record?
- Can you actually find out who the team is?
- What is their experience/background?
- How good is the tech side?
- Who are their advisors/mentors?
Here I can clearly give ourselves 5 out of 5 points. With our CEO Toby and CTO Michael plus the rest of our tech team I am confident to say we have some of the best tech people in the industry. Legal and Finances are covered as well. Paul is one of the best designers out there. Warren, who takes care of the product is excellent and Bettina rocks HR. I, Julian, take care of marketing, communication, speaking and investor relations. I firmly believe that any company would be very well off, having us on their team — our past successes confirm that. This point is clearly one of the most important point when analyzing an ICO. The team makes or breaks it.
4.ICO STRUCTURE / LEGAL (TenX 5 out of 5 points)
- How is the ICO structured legally? (that is why you should call it token sale, NOT an ICO!)
- What is the country the company is in? Are there any legal restrictions etc.?
- Is there an escrow used or can the team just run away with the money?
- Is it clear what the money is used for?
- Is there a clear whitepaper?
- What does the token represent? Is there clear value in the token?
TenX has definitely 5 out of 5 points here. We are working with a legal firm to structure our token sale in the best and safest way possible. This starts with a whitepaper, proper terminology and legal structures. We also use an escrow and lay out the use of money. We guarantee maximum security for our token holders with maximum rewards.
5.MARKETING/COMMUNICATION (TenX 5 out of 5 points)
- Is the team reachable?
- Are they on the regular social media channels?
- Do they reply / send out infos?
At the end it helps you nothing, if you have a great product but no one knows about it. People don’t go to McDonald’s because they have the best burgers (ok, their fries are good) but because McDonald’s has done an excellent job in getting in front of the customers. We had TenX are doing the same: regular newsletters, YouTube videos, Facebook Posts, Slack channel, community management, WeChat, and so on. All this in English, German and Chinese.
Looking at all that you will realize that what you want is 5 out 5 in team, token structure and marketing. Idea and execution are important, but they are more long term and many things can change. When I examined dozens of other ICOs, this became very clear to me and that is why we structured our own token sale the way we did.
I hope this article gives you an idea on what went into our own structure at TenX but furthermore how you can now make up your own mind about any other token sale that is out there.
PS.: Should you have any questions, please post in the comments below. If you like the article, I would be very glad if you shared it with others, so we can make the world #cryptofit and get valid info in front of many readers.
Dr. Julian Hosp is the co-founder and CVO of TenX.
TenX (www.tenx.tech) is a Singapore based financial service that makes any Blockchain asset spendable instantly by offering a debit card payment system to its users on the frontend and by connecting any Blockchain at the backend.