Why ICO will kill your project (and what to do about it)

tl;rd: raising too much is easy, and it will kill your project; the ability to do ICO doesn’t change the risky nature of startup nurtuing, just do it wisely.

Recent rise in cryptocurrencies price created another wave of ICO’s collecting millions of dollars in days or even minutes.

Everyone feels like it’s 1997–1999 is back again (2005–2007 if you’re young enough, or 2013 if you’re focused on crypto only). “Raise alot, spend fast, grow big” is all over the place again.

Yet, it’s stupid not to use experience the industry gained for last 20+ years in building internet project just on the premise that “this time it’s different”. I’ve being through dotcom, I’ve heard that already. It did blow.

So, why ICO is bad for your project:

  1. SEC will go after you.
    It doesn’t matter that it didn’t do it. Yet. 
    Bureoucracy mills grind slowly, but hit hard. Untill you’ve successfully defended yourself in court, silence means nothing. And even after this event it’s questionable. Good luck suing the US federal agency :)
    Be assured, there will be a court case: the United States doesn’t allow you to solicit funds publicly without registering it in SEC. And, since it’s crypto, there’s no way to make sure you won’t touch funds of any US resident (or hurt his feelings by not touching them)
  2. Raising too much money will kill your project. First, getting a lump sum will ease a pressure to deliver a working project from your shoulders. Second, it will put a pressure to spend to deliver. 
    Either one is bad, having two of them is almost always a death sentence for an inexperienced enterpreneur. (An experienced one will have easy time raising round through the regular means: angels and VC’s)
  3. It will dilute you out of your project. And do it too early in your project lifecycle. 
    Of course, that would strongly depend on the governance system for your project and your ultimate goals. If one is looking just for “get rich quick”, then raising millions while keeping sub-10% of the project would be fine.
    On the other hand, if you’re looking forward to deliver something breaking the rules (why otherwise you’re doing it in crypto, yeah?), investors will find ways to get you out of the project, while chasing the ROI.

What you’d better not do instead:

  1. Don’t raise funds from usual sources.
    Reason is simple: if you would be able, you’d do it already. The reason you might be looking for the ICO is either you aren’t well connected to get a regular round, or your project is not ready for a regular round, or your project is toxic for regular investment community (say, SilkRoad ;) )
  2. Don’t do a project just on your own.
    Investment is just another tool to make your project real and useful to people. Limiting your toolset is stupid.
    Sooner or later you’ll be out of your own resources (money, curiosity, time) and you’d better have your project to be able to evolve without eating you.
  3. Don’t give up. There’s always a way to do a project. Your task is to discover it.

What you’d better do, beside regular advice (in my opinion, of course):

  1. Start project on your own resources.
    That would prove to your future investors that you’re serious and to you that you’re able to do it.
  2. Solve a real problem.
    Nothing is worse seeing a capable team to waste it’s time and resources, building a solution in search of problem. Fancy tech is not an excuse.
  3. Raise gradually while you’re derisking your product
    Your product is not the source code. Your product is a social interaction around your code: people exchanging information, money, and doing things, while seeking for profit or amusement.
    What are you doing is a startup — an organization formed to search for a repeatable and scalable business model. Startup has many moving parts, any of it can fail, and your job is to make sure and prove that you can build it running. Less risk — more ability to scale — more funds could be used with less dilution.
  4. Make fundraising a necessary part of your project. Say, mining.
    Cryptocurrencies provides unique capabilities to finance your startup, keeping your shares liquid, and getting a constant feedback from the market. You can’t do it in fiat because of regulations, first of all, because of the Securities Act of 1933 which limits both the ability to invest in early companies just to wealthy individuals and corporatinos, and the ability to have a liquidity of your shares.
    In crypto, regulators have no technical means to prohibit you both, so the “only” task is to don’t give them causes to go for you. Appcoin Law: ICOs the Right Way gives you nice ideas how to approach this.