Private sale, pre-sale, and crowdsale — these terms are repeatedly heard of whenever the topic of ICOs is explored. But what does each of them mean? And how do they differ from one another, if in any way at all? These are some of the questions that this article will address.
To begin, it must be stated that each of these are concepts that are commonly understood differently. While some founders opt for a private sale and crowdsale, another may opt for acrowdsale alone. Furthermore, some founders use the terms ‘pre-sale’ and ‘private sale’ interchangeably. This article delves into these terms and attempts to explain them as they are most-commonly understood and used.
The Three Types Of ICO Rounds
The three types of ICO rounds are run in succession, in the order of:
- Private sale
- Pre-sale
- Crowdsale
Private Sale Round
The private sale is the first step of an ICO. It takes place once the founders have compiled all the required documentation and details, including the White Paper, which is incredibly essential.
This stage begins with the search for investors whose preferences may be met by the ICO and the product behind it. The investors approached in this round are not individuals; instead a private sale is generally made accessible to large investors, such as investment groups or funds, existing cryptocurrency or venture capital investors looking for diversification, or groups of individual investors who may have come together of their own accord.
The pitch of a private sale is done in person. The founding and top management teams approach these investors and share all details required. This allows founders to make a stronger case, while allowing potential investors to clarify all concerns and questions that they may have.
The main purposes of such investor meetings are to make the pitch as strong and effective as possible, and to confirmedly obtain large investments. Another advantage that founders receive is the possibility of support from investors, in terms of networking and experience sharing. Investors, on the other hand, are likely to participate in private sale rounds due to the access it provides to the founding and management teams, and because it allows them to participate in the ICO in exchange for a greater discount or bonus.
Founders generally have a limit on the amount of investment they want to raise from a private sale round. The round, hence, often comes to a close when this amount is reached. Occasionally, founders may choose to extend this limit so as to reduce the fund amount to be raised from a crowdsale. On the other hand, private rounds do not always reach the desired investment target. In such a case, founders need to plan their pre-sale or crowdsale rounds, and their targets, accordingly.
Pre-Sale Round
The pre-sale round follows that of the private sale. The most common participants in a pre-sale round are the friends and families of founders, investment funds or groups with smaller funds that those in the private sale round, and larger investors that may have missed the private sale round.
The pre-sale round offers investors discounts and bonuses that are less than that received in the private sale round, but greater than the crowdsale one. The amount of discount and bonus that an investor gets is generally dependent on how early into the round they invest and the investment amount.
While pre-sale rounds are primarily advertised through word-of-mouth, they are also often promoted on the company website and social media. Massive spend on marketing is not too common for pre-sale rounds.
Often times, founders may reach the entire amount to be raised through an ICO by the end of the pre-sale. Hence, this is an optimum round for those who believe in the project but want to avoid the risk of early investing in the private sale round.
Crowdsale Round
The crowdsale round is the most common one, and is often used synonymously with the term ‘ICO’. In a crowdsale round, the ICO is open to small and large investors, and groups and individuals. The only pre-requisite for investors to participate is to be registered online and have a valid Know Your Customer, or KYC, process completed. This pre-requisite, however, holds true for participants of the private sale and pre-sale rounds too. Crowdsale rounds are often heavily advertised, and may be more so in the event of a startup not achieving its private sale and pre-sale targets.
There is no lower investment limit in a crowdsale round, except for the minimum token value. These ICO rounds offer investors the least amount of risk as compared to the previous two rounds, but also offer fewer discounts and bonuses. Ease of access is one of the primary advantages that potential investors receive, and the amount of bonus and discount they get is determined by their contribution value and time of investment.
From a founder’s perspective, crowdsale rounds have the benefit of larger investor base and reach. This enables effective fundraising as long as the accompanying literature and details are clear and transparent.
Choosing The Right ICO Rounds
Choosing the right ICO rounds — as a founder or investor — is not a standardised process. Some founders may choose to do only one round, or a combination of any two rounds. Furthermore, if a founder chooses to run all three rounds, or a subset thereof, there is no set method by which he or she will determine how much percentage of the total target needs to be raised per round.
All these factors are subjective and determined not only by the funding targets set, but also by investor response received. Hence, it is not uncommon to see some startups choosing to opt out of a crowdsale or pre-sale round after having initially planned them.
What is important is for founders to understand whether an ICO is the right option for their startup at all. Undertaking an ICO simply because it may be a trending method of fundraising does not mean that it will be successful. Founders need to analyse whether an ICO or traditional fundraising is more suited to their purpose and preferences. Should they choose to opt for the former, they then need to carefully plan their ICO, and this planning needs to begin much before the ICO actually takes place.
Two very important elements of this planning process are the determination of the token sale model and the preparation of the White Paper.
Investors, on the other hand, have a host of ICOs to choose from, given the popularity of the fundraising method. Hence, it is their onus to determine which ICO meets their requirements and preferences, and also to ensure that there are no red flags in the pitch of the chosen ICO.
This article was originally published on Oddup.com and can be accessed here. For more such interesting articles on ICOs, blockchain, and investment, visit Oddup by clicking here.
