How the Filecoin ICO raised $257m
With the market still down around 60%, I wanted reminisce to the days where we weren’t experiencing weekly 10% — 20% losses*, in an effort to distract myself , I began to look deeper into the top projects of 2017. One of the most curious ones was the Filecoin ICO in September ’17, the biggest ICO in history.
This post isn’t supposed to provide actionable insight on how to grow your own groundbreaking ICO, but rather an analysis of the factors that led to Filecoin being the biggest ICO in the short history of this industry.
*Apr ’18: It begins.
The Filecoin protocol is a project run out of Protocol Labs (YC S14). Filecoin is a Decentralised Storage Network (DSN) that is powered by cryptocurrency. Miners are able to earn Filecoin by providing their unused hard drive space to the networks, whilst users spend Filecoin to store their files encrypted into this decentralised network of storage. The core goal is to challenge the current , centralised model of large scale file storage. They’re competing with some big companies like Amazon S3, Dropbox and Google Drive.
In September 2017, they raised $52m in a private presale and $205.8m in a public ICO, totalling to a mind boggling $257m, a sum that represents that largest ICO figure to date, beating out Tezos at a much more conservative value of only $232m.
Big Backers & Incentivizing Early Participation
With investors such as Sequoia Capital, Andreessen Horowitz and Union Square Ventures (We’re playing a game of who’s who in American VC) backing the private presale, and coupled with the general crypto hype in September, the timing was perfect for a blockbuster ICO. The name value of the investors themselves drew thousands of investors, who were confident that just by looking at the supporters, the project would definitely be succesful.
Filecoin also fully incentivized early participation during the ICO. Although, most token offerings set a standard price/coin, Filecoin set the initial coins at $1, increasing with each subsequent investments, which drove investors to want to get in early. Within hours, the crowdsale raised 190m, causing the price to reach $4.58. Potential investors were forced to jump in as early as they could, which built the hype of the token offering by driving up the prices, which ultimately drove more investors.
Whenever you’re backing a project that really hasn’t even started, early stage investments are reliant on 3 key factors:
- Capable Team
- Revolutionary Technology
- Huge, addressable market.
You want to have a reliable team with a proven track record, utilising fantastic technology, trying to tackle a huge, bloody problem — Filecoin ticks all those boxes.
Juan Benet’s team leads a ground breaking team focusing on R&D and deployment of groundbreaking internet projects. The most exciting part of the ICO at the time was the team creating it, their core team boasts impressive experience across distributed systems, quantum research, cryptography and financial technology, and are incredibly well respected in p2p technology.
One of their crowning achievements was the IPFS Protocol, or the InterPlanetary File System, which had the core goal of decentralising the web. It enables the creation of completely decentralised applications, using content addressing and digital signature. The core goal is to make our web faster, safer and more open.
If that sounds familiar, this protocol was used shortly after the Trump election to secure US climate data from the US Government — how’s that for a use case?
The next stage of the Protocol Labs vision was Filecoin, focusing on a massive problem: file storage.
With the incredibly profitable rise of cryptocurrency mining, the world had one of the largest networks of computing power, and so the goal of Filecoin was to take advantage of this massive number of unused storage, to create the world’s largest, decentralised marketplace for online storage.
Decentralising file storage makes a lot of sense. Filecoin attempts to unlock the potential of unused hard drive capacity by connecting file storage on a network of distributed computers. Although most enterprises wouldn’t rely on a decentralised model, instead relying on more traditional cloud storage methods, there is a huge number of cloud storage users, that this technology would be absolutely revolutionary. It’s a market that was ripe for disruption.
Being SEC Compliant
Token sales globally happen as a direct sale of the token, an online asset, for investment. However, under SEC Regulation, any securities distribution participated by American citizens are only open to ‘Accredited Investors’, individuals who have a yearly income of over 200k, or net worth over 1m. Usually, many token sales bar US investors from participating to avoid this, which, of course, is incredibly disappointing for regular, retail investors, but being viewed as a legitimate project is an incredibly important decision.
To help in that process Protocol Labs and Angellist created a platform called Coinlist, which allowed them them to streamline the accreditation process for investors, and insure that the ICO was within the bounds of security laws and KYC/AML regulation.
During their ICO, Filecoin created a whole new investment instrument called the SAFT, the Simple Agreement for Future Tokens (SAFT). As the Filecoin network was still in development, Filecoin tried to comply with SEC regulation by creating this legal agreement that investors would be delivered tokens after Network Launch. Essentially, this allowed investors to effectively claim on tokens once the network went live.
Being an SEC Compliant coin offering would have been a massive headache for the Filecoin team — but in a market full of cheap scams, providing extra investor confidence is absolutely paramount to a successful project. It also shows that the team believes in their project, and has the maturity to do this process the right way.
Filecoin and Protocol Labs are a project run by a team with big goals — to rearchitect the web, and for IPFS, Filecoin and the other protocols to become the fundamental building blocks of a better internet.
Overall, Filecoin did a lot of things right — building investor confidence in an early market is incredibly difficult, but Filecoin really turned the dial, and really represented an industry that had begun to grow up.
The truth is, like many people, I wonder why these companies need to raise figures like $257m. These are the types of figures that companies with a massive product, big clients and proven global influence would need to become change makers — but a product that was largely a concept, for $257m?
Now, that’s interesting.
I don’t doubt their ability to get the job done, but this type of figure? Most people would say that it’s them taking the chance to secure their future, that it’s the type of money that will help them develop, hire and expand at an astronomical pace.
But the truth is that they’re buying growth, is this not just an easy way out?
The conventional startup belief is that in order to build the best product/service, you test until you find what your customers want, that’s how enduring companies are built — on a constant cycle of testing, failing, more testing and more failing. And that’s because it’s in their financial interest to build the best product, to beat competition, to create the best service.
But raising amounts as large as Filecoin, and countless other projects, I don’t see any outcome but entrepreneurial hubris.
But convention has always been wrong, tradition will always be challenged.
Maybe this is one of those cases.
Only time will tell.