Impact ICO Basics: 10 things to look before investing in impact ICOs
Many in Silicon Valley aspire to build products and companies that have the potential to create positive change on a large scale. Often, however, these companies can be difficult to find because they have smaller recruiting budgets, and their mission statements can get lost in the noise of startups claiming to be “changing the world”. The emergence of ICOs (Initial Coin Offerings) have given mission-driven, for-profit, impact startups building tech to solve social & environmental problems a legitimate funding mechanism. So what is an ICO? ICOs are pretty similar to IPOs (Initial Public Offerings), but with 3 major differences. Firstly, ICOs are decentralized with no central authority, secondly, ICOs lack the tedious red tape that most IPOs are bogged down by and finally, they are unregulated while IPOs have always under been heavy regulation. The distinct differences between ICOs and IPOs contribute to emphasizing the fact that ICOs carry significant risk. Given the risk involved with engaging in ICOs, what are some things to consider prior to investing in an ICO?
1) Evaluating the Whitepaper
Most typical investors actually don’t read through the whitepaper, even though it contains all the necessary information about the upcoming project and the ICO. Don’t hesitate to read it, or at least the majority of it. Note the strong and negative aspects and add in some of your own research. In the end, the whitepaper is the silver platter to potential investors. After reading it you should be able to answer a simple question — what kind of value does this project bring to our world? You’ll also learn what you’re investing in.
2) Founders, partners and developers with relevant experience in cryptocurrency /blockchain technology and associated markets
This may be the most important part as a good team is the backbone of a successful ICO. Start by examining their website, and looking at the team. Google them; find out more about them. Check their LinkedIn profile or Twitter accounts. Are they well-documented with a large network of relevant connections? Avoid like the plague any ICO that offers little to no information on the team. It’s a sure sign that they are unqualified.
3) Documented success with past projects
Successful past projects are good indicators of potential future success, but since this is such a new field it’s not necessary for those projects to be cryptocurrency-related as it is such a new field. Many of the core team members of successful ICOs have a range of backgrounds including engineers, programmers, and marketers. Again, their social profiles and online presence should give you an indication that they have a solid professional reputation with some verifiable “wins.”
4) Stage of the project and VC investments
Evaluate the stage of the project. Does it only have a whitepaper? A beta version? Is there a launched product with limited functionality? Prefer projects which have “some lines” of working code, however, many ICOs have proven they can become success stories without any code written. VCs (venture capital) tend to invest and support projects from early stages. Look for this information usually on the main page of the project’s website. It’s likely to be considerable if a well-known crypto VC is involved, like Blockchain Capital or Fenbushi (belongs to Vitalik Buterin — founder of Ethereum).
5) What do they need the token for? Is the blockchain necessary?
ICOs mean the creation of a new dedicated token for the project. One of the most important questions each project needs to answer is what is the token for? Why isn’t Bitcoin or Ethereum enough to serve as the project’s token? Yes, many projects just make up a scammy story. Hey, an ICO can’t be an ICO without a dedicated token. The same question needs to be asked regarding the use of the blockchain technology behind the project.
6) Escrow, and Refunds
Another mandatory aspect worth looking into, when considering an ICO investment, is identifying the escrow services handler for the crowdfunding. Genuine development teams normally will enlist individuals with a solid reputation within the cryptocurrency community to act as faithful holders of the raised funds. With their reputation on the line, these individuals are less likely to run away with the collected funds. Also, in case of non-achievement of funding for the project, there should be a condition in place to refund the contributed money back to the respective investors. This acts as a fail safe in a case where a project ends up under funded.
7) Credible developer or not?
Credibility of developers is determined by whether the team is public or anonymous. When a development team is public, there are known faces in the organization, and a specific individual that could be held accountable in a scenario concerning possible squandering or robbing of funds. Of course, there are ICOs that are held by anonymous developers, with some of them having a credible background, and some who are new to the scene. As a prudent ICO investor, you should not invest in ICOs of anonymous developers with zero recognition within the community. Lastly, there are no guarantees that your investment will turn out as per your expectations. Do your best to evaluate risks of any contribution you make, and don’t go for more than you can afford to lose.
8) Token distribution — when and how
Greed can be defined by a high token distribution to the team members, let’s say, more than 50% of the tokens is suspicious. A good project will link its token distribution to the roadmap. Because each phase or milestone of the project requires a certain amount of funding. Watch for the token distribution stage. Some projects just release their tokens hours after the ICO has ended. Some projects need to develop a beta version before sending out the tokens. If you lookat the percentage gain of Etherium (one year between ICO and token distribution, around 500% gain), Augur (1+ years, 1500%) and Decent (8 month, 350%), sometimes this break creates a very positive hype around the project.
9) Identifying an Impact ICO
Impact ICOs should support projects that have solutions that are technology-driven or at least tech-enabled, have similar hiring needs to a typical silicon valley startup, and
are focused on fulfilling basic needs of people who are typically underserved.
10) Emphasizing Impact
Although impact investing aims to be profitable and sustainable, it’s important not to forget the reason behind it: When defining social impact we need to see what motivates the entrepreneurs. It isn’t just about doing something social. We have to see that something else moves them — that there is a clear intention of wanting to change society.
As the overall volume of Impact ICOs continue to multiply and more data becomes readily available to investors, firms like Prohaus Ratings that offer investors access to in depth analysis, and key insights pertaining to various Impact ICOs will become a necessary tool when navigating the ICO landscape.
