ICO Roundup 2017: Why Token Sale Gains Traction and How Ukraine Catches Up
As a phenomenon, ICO (Initial Coin Offering) appeared several years ago, but it only went mainstream in 2017. This is my translation and adaptation of the article originally published in AIN.UA (in Russian).
When it comes to the crypto world, ICO resembles IPO: it features tokens instead of stock and virtual money such as Bitcoin and Ether instead of fiat money. However, the entry barrier in ICO is much lower than that in IPO, and this applies to both investors and fundraisers. Still, why do people want to participate in ICO regardless of high risks associated with it? Easy money is the answer! Investors (aka contributors or backers) hope startups they invest in will skyrocket very fast, their tokens will increase in value and they’ll obtain sufficient returns. Why do startups choose to conduct an ICO? Because they see their peers raising multi-million funds from scratch without even leaving their homes. “If they can do it, why should we spend days and months chasing after venture capitalists all over the Silicon Valley?” — that’s the typical thinking that lures many startups into an ICO trap.
“Everyone is inspired by success stories about projects raising hundreds of millions of dollars in just one day. Remember an Israeli blockchain smartphone project that has recently raised $118 million in ICO? It’s just one of many such examples. Every startup founder believes they’ll have the same destiny and win the game at the end of the day. Nevertheless, “as the estimates show, there’s only 1% of people who understand the tooling and peculiarities as far as ICO and cryptocurrencies are concerned,” said CEO of Startup.Network Alexander Soroka.
All this ICO hype has caused a lot of scam projects to pop up and join the game. Ukrainian-born US entrepreneur Maksim Zaslavskiy was charged by the SEC earlier this year for selling unregistered and fake tokens during ICO. According to the SEC’s complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club), both founded by Zaslavskiy, have been told they can expect sizeable returns from the companies’ operations when neither has any real operations.
Zaslavskiy allegedly touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate.” Alleged misstatements to REcoin investors included that the company had a “team of lawyers, professionals, brokers, and accountants” that would invest REcoin’s ICO proceeds into real estate when in fact none had been hired or even consulted. Zaslavskiy and REcoin allegedly misrepresented they had raised between $2 million and $4 million from investors when the actual amount is approximately $300,000.
Another notorious startup Tezos raised $232 million in token sales, but was never developed and brought to life due to an internal conflict between Tezos founders and a not-for-profit fund in Switzerland that conducted the token sale on their behalf.
These and other fuckup stories have affected the volatility of many ICO tokens and resulted in significant price drops during 2017.
Ukrainian ICO market: current state and future expectations
Ernst & Young has recently published their global ICO report featuring Ukraine among other countries. According to the report, all Ukraine-based ICO projects accounted for $30 million in funds raised, which puts Ukraine 16th in the global ranking, between Australia and Spain.
Top 5 countries by ICO fundraising in 2017 are: United States (over $1 billion), Russia ($310 million), Singapour ($260 million), China ($256 million, despite its ban on ICO) and Hong Kong ($196 million).
It’s interesting to note that one ICO project — DMarket — accounts for the lion’s share of the total funds raised by fellow ICO projects from Ukraine during 2017. DMarket, the world’s first blockchain cross-game marketplace for trading virtual in-game items and turning them into real assets, has gathered over $19 million in 2 ICO phases in August and November-December 2017. Attracted funds will be used to build the DMarket platform, hire expensive and rare blockchain architects and developers, consult with notable law firms and legal advisors as well as generate word of mouth to promote the product within gaming communities all over the world.
“We have a well-outlined Use of Funds policy covering the period 2017 to 2020, and this information is publicly available on our website, so anyone can go and check it there,” said Volodymyr Panchenko, CEO and Founder of DMarket.
As Denis Dovgopoliy, a famous Ukrainian investor and CEO of GrowthUp Group, puts it, “Probably less than 100 people in Ukraine know how to conduct an ICO the right way, and just a few understand at all what it is. Despite all hype around it, this fundraising method is still a gimmick and is considered to be a perilous way of capital raising, actually much riskier than traditional VC. Speaking about ICO in Ukraine, it’s comparable to Tesla: many have heard of it, a few want to buy it, even fewer have ever driven it and very few actually own it.”
Although Ukraine’s official result seems to be insignificant and unimpressive, many experts believe the actual unofficial result will be a far cry from this one. Because Ukraine doesn’t regulate cryptocurrencies, at least not yet, many national projects conduct ICO under a different jurisdiction and, thus, can’t be identified as the national ones.
One more reason is that many Ukrainian startups want to stay closer to their investors and, therefore, focus on Switzerland, USA, and Asia when planning their token sales.
Will ICO replace traditional VC?
According to KPMG, in 2016 the global VC volume amounted to $127.4 billion, with ICO accounting for only about $4 billion. As such, ICO is still lagging far behind traditional VC in terms of capital attracted.
“Although I believe ICO will fill a niche as an effective way to raise funds, I don’t believe it’ll ever dominate and outperform traditional venture investments. It’s getting more and more difficult to raise money through ICO despite the hype. I suggest we wait for another 12 to 24 months before making any conclusions,” says Denis Dovgopoliy.
Other experts believe that ICO will never be able to replace VC funding due to the following reason: ICO is an easy way to raise funds from enthusiasts and to bring tokenized projects to life, while VC is critical for funding later stages of product development such as MVP, beta release, etc.
ICO will likely replace angel investing, as the latter is riskier, more time consuming and it lacks mentorship. Yet, in some cases venture funds participate directly in ICO or pre-ICO, which proves the fact that all these types of fundraising supplement each other.
Is the ICO rush over?
It’s becoming more difficult to raise funds via ICO. The most recent results aren’t impressive at all. Let’s take a look at Rentberry, a Ukrainian ICO project that had intended to raise $100 million and become the largest Ukrainian ICO ever. However, it’s only set a $3 million soft cap so far and doesn’t expose its toke sale results. Given Rentberry offers very generous bounties to contributors, its ICO is probably not as successful as it was supposed to be.
Again, according to experts, ICOs raise fewer funds today because investors are becoming better educated, scrupulous and meticulous. ICO fever is over now and people do a lot of analysis and think twice before participating in token sale. It’s a good sign of the ICO and crypto markets maturity.
“Now is time for serious people and serious projects,” says Denis Dovgopoliy. “Backstreet guys won’t be able to raise big money in ICO any more”.
How much does it cost to conduct an ICO?
You can’t just twist up your fingers and do an ICO, as it’s expensive and unaffordable for many startups. ICO can be conventionally divided into 4 elements: technology, legal, marketing and economic. And you need to involve respective consultants and advisors to cover each aspect properly.
According to DMarket CEO Volodymyr Panchenko, “the main ICO expenses include marketing and PR, participation in trade shows, conferences and other promo events, and legal advisors. It’s next to impossible to build a progressive brand without generating enough buzz and hype around it and establishing long-term relationships with the top tier media resources.”
Marketing expenses vary from project to project; however, successful ICO projects admit spending something between $500K and $1 million or even more. While this figure can scare some startups, it seems reasonable for many established brands that normally spend up to 20% of their entire budget on marketing and PR. There’s one rule of thumb as far as ICO cost expectations go: if you want to attract $10 million with an ICO, be ready to spend 5% of this amount ($500K) on marketing.
On the other hand, many crypto and ICO related media resources are overestimated and don’t provide the right value for the money spent. For instance, some resources offer startups media/advertising packages that cost up to $100000 (or its equivalent in tokens/cryptocurrency) despite the fact they have low readership efficiency and a very high noise level. They’re hardly reliable just because they publish so much paid and sponsored content; therefore, many investors skip reading them when making decisions about which ICO to support. And each media campaign in such an ineffective resource adds up a lot to your bottom line.
According to Volodymyr Panchenko, it’s critical not to skimp on your legal resources.
“My advise for any ICO project — do everything transparently and within the legal framework. Legal errors will cost you a fortune and cause many headaches as you won’t be able to legally use your funds and, therefore, deliver your product to the end user according to your roadmap. At DMarket, we implemented KYC (know your customer) and AML (anti money laundering) procedures as required by the US legislation, and consulted with the leading law firms and advisors to make sure we act in accordance with the security and other legal standards and regulations.”
Today, ICO is perceived differently: some refer to it as a speculative tool to make quick money, others believe it’s a highly effective yet risky type of investment, while the third think it’s a scam.
Is it a good idea to invest in ICO? Probably not if you aren’t a professional investor, as a lot of research and analytical work should be done before making a decision.
However, ICO can be a silver bullet for a startup (well, as long as it has money to launch an ICO campaign). As Volodymyr Panchenko from DMarket puts it, “ICO allowed us to raise funds quickly and start building our product instead of waiting long months for feedback and selling equity. We better spend this time on business development.”