Doing Effective Due Diligence on ICOs
In a nutshell, due diligence for ICOs is similar to how a venture capitalist evaluates his/her deal flows in order to find out which business will provide the fastest and most reliable ROI.
Cartel focuses on doing a thorough analysis on the company’s team, idea, advisors, marketing, token economics and the presale discount before considering their viability of being listed as a Cartel ICO.
The team at Cartel has evaluated over 90 ICOs, while investing in just under 18 ICOs. With trial and error, we have realized that our robust system allows us to see the ICO at a glance and be able to rate it amongst other projects to evaluate our opportunities.
Note: specifically to Cartel’s Due Diligence Admins, we rate each subcategory out of 5.
When digging into a whitepaper, we would look at the general idea of the project. A diligent investor will read the whitepaper and in regards to the idea, will consider these questions:
Is there a need for this ICO?
Does this ICO solve an immediate or novel problem?
Is the token a necessary part of the ICO?
Is anyone else tackling this problem?
What is the timeline for launch and revenue for this ICO?
Do they have a prototype yet?
Need for the Project
Do you feel like this ICO can potentially cause disruption to traditional verticals? Is this the right time for this ICO? Is this ICO solving a problem that doesn’t need to be solved?
We can look at the dotcom bubble and the extreme example of pets.com. Their premise that “you can buy online and cut out the middleman” and then proceeding to raise a 82M valuation upon IPO, it seems like history is repeating itself in the Blockchain space.
When you are able to create categories (schemas) of where each coin belongs you will start seeing similar trends.
EG: I have personally seen a lot of projects in supply chain management projects, and after a while you are able to read a whitepaper and identify that its also supply chain management, (vechain, waltoncoin, etc) and comparing apples to apples would be easier than if you were comparing other types of icos.
Rate 0 if there is no potential disruption for this project, 5 if it actually solves a problem within its specific vertical.
Need for a Token
Keep that in mind as we move onto the value of the token in the project. A rule of thumb is to imagine what would happen if you would take the token out of the project and if it still functions as a business.
If the business can run perfectly fine without a token, rate it a 0. If the token is essential to the business… then we will rate it a 5.
Anything in between will be up to the concept in the ICO. So keep this score in mind as you rate the rest of the project.
A project is as useful if it has a chance of crossing the chasm. If it MIGHT cross the chasm, you can invest in it and follow along until stronger competitors come around. On another note, if you see that adoption is hard to do, then it might not work overall.
Imagine if an ICO is trying to create a payment processor called SlowCoin, and users would have to use their laptops to login, connect to Metamask, and load up the SlowCoins to pay for the transaction in the store using QR codes and wait 3 minutes until the transaction approves before the sale goes through.
Although that is an extreme example, we can see adoption will be too difficult to achieve and that we are better off using SlowCoin’s indirect competitors, such as cash or credit.
Using judgement you can give the project a range from 0 to 5 depending on how easy or hard it would be for users to adopt this technology.
Are there prominent companies that are in this space on and offchain currently? Is the project trying to tackle a problem that other big companies can easily develop a similar solution for in a smaller amount of time?
Be mindful here as to direct and indirect competitors. An ICO that might say they are “a better version of Bitcoin” might not be the best bet to figure out WHO they are better than, but in what ways they are better than their competitors.
When evaluating competing companies offchain and onchain, you must also consider the initial core competencies of the company. If Nintendo states that they are going to do supply chain management on the blockchain in a similar way to the ICO we are evaluating, we can use our judgement to see that Nintendo’s core competency for creating video games may not be a threat to the supply chain management ICO for the time being (unless its the unlikely case that Nintendo completely pivots from making video games to supply chain management, then we will have to give the ICO a 0 for this section). Comparing companies onchain will be easier to do as it will be comparing apples to apples. EG: Wagerr vs Bethereum vs Decent.Bet.
Is their timeline for the project realistic? Understandably, all Blockchain companies will have varying scope and achievements in order to properly launch their ICO — whether it’d be a dApp, mainnet, MVP, platform, etc…
We can break this down into several different ways, and as we do more due diligence we can start to see trends in the different competing projects in terms of a realistic timeline for certain deliverable.
Until you have had a couple complete ICO due diligence reports under your belt, we can work with simple logic and deductive reasoning. If a betting ICO such as Bethereum is having their dApp prototype released late next year, all while competitors are already testing their mainnet we can definitely see some red flags in terms of their timeline and how they will fare in the competitive landscape post ICO.
You can give a rough estimate and give it a 0–5 depending on the clarity of their timeline goals, proximity of release date, and the already achieved milestones.
If they have a prototype already, then you can grade them higher.
The idea is only as important as the carefully assembled team that makes the cogs move. With that being said we have a greater consideration onto the founding team as opposed to their idea. Common questions for a diligent investor will not be limited to:
The degree of experience for the founding members
How relevant is their previous experience to this project?
Are they backed by prominent businesses or VCs?
We look at various metrics such as experience and previous work history and its relevance to their respective projects, this check applies to the CEO, CTO, CMO, and each of their founding members to get a better idea for their skills.
We look at their employee count and see if they have enough of a work force to achieve their goals, which will vary from the scope of how big the project will be.
We look at the overall transparency of each member as well. We will run a reverse google image search on their profile pictures and also try to find out if they have personal social media accounts prior to reaching out so we can weed out the scams before getting too deep into due diligence.
There will be unaccountable factors that you will not be able to answer until you actually meet the team, such as team synergy, overall teamwork, and productivity but you can leave that up to Cartel to find out.
Lastly, we see if the ICO is business backed or VC backed. They get a 0–5 on each of these fields depending on the business that backs it or the reputation of the VC firm. There will be more of an incentive for the ICO to work harder if they have accountable bodies within their organizational structure that require the project to generate an ROI.
Advisory positions usually entitle the advisor to some tokens or fiat incentives in order to sit on the board. The role of an advisor is to provide insight, industry experience, and even technical support on a part time basis to help the ICO achieve their goals quicker and while saving on having the team research viable routes when encountered with a problem. Common questions for a diligent investor will run along the lines of:
Is this advisor providing productive value?
Is this advisor relevant in the space that the project is working on?
Is this advisor focused on this project?
Having advisors are great because they can provide the ICO with a wealth of knowledge that can save the time and capital to tackle potential problems.
Alternatively, the advisors can also pose a threat to the investability for a project if they are just participating as an advisory role as a personality — or they are just in it for the free advisory token compensations to shill the project in exchange.
We look at each advisor, and similarly to the team diligence, we look at their experience, relevance and the transparency of the advisor. If they are ‘advising’ 50 projects of completely different verticals, or the project that they are advising for is completely irrelevant to the advisors work experience, we would give them a lower score overall.
This portion of the whitepaper is a key deciding factor for the investability of an ICO. Imagining token economics will require a bit of abstract thinking and a common understanding of supply and demand. Common questions for a diligent investor will run along the lines of :
Will there be a finite supply of the token?
How big of a discount is everyone else getting?
What percentage of total tokens will the team own?
How will the tokens price increase in the future?
We can use this information to paint a picture of how the token will perform when it lands on an exchange, future outlooks and potential benefits of backing a project early as opposed to buying it later on.
When evaluating token economics you consider a variety of situational factors such as the percentage offered to the public vs the team, maximum discount rate, token burn, and potential token buybacks.
We also look at quantitative factors such as the token sale hardcap, initial token sale price, and token supply to see how the token will perform.
If we put this information together we would first look at the realistic hard cap for the ICO in the dollar amount required for this project to generate revenue. At this time and age, most investors are trained to identify projects with a hard cap of 30 million USD or less as an ideal project. Gone were the days of 60–80 million. If anyone is looking for anything more than $30M (at this time of writing at Q2 2018) then we would attempt to classify the ICO as being greedy.
The soft cap is typically the cap for the entire crowd sale and essentially what is required for the team to create an MVP of the solution. The soft cap should represent how much it would cost for the ICO to create a barebones version of their idea.
Lastly, we look at the discount that the ICO is offering to us, and the discounts that they have offered to everyone else. If we have the biggest discount, we can assure that it would be a safer investment because it will not dump under our price upon release on an exchange.
Note: Depending on the stage of the deal from the private presale to the public sale, the scoring for the projected social media scores will change. This is because logically less people would have heard of the ICO in its private presale as opposed to the public sale.
Run the site through the following websites to gauge their social and hype score:
Questions a common diligent investor will consider when evaluating these social platforms:
Are the followers constant amongst all channels?
Is there a negative / positive sentiment across these channels?
Which one of these channels do they control?
Do they have an active bounty program?
Checking the discussions on their Bitcointalk or Reddit will enable you to see if other people have heard of this ICO. If there are negative comments be sure to see the rationale behind their comments. When evaluating how many people are actively contributing to their social media channels, you must also be wary of the bounty programs that the ICO has offered. A bounty program is usually when you post about the ICO (in a shilled, positive manner) across your own social media for free tokens. As a diligent investor, you must be able to identify shilled comments from honest comments.
If you can properly evaluate the idea, team, advisors, token metrics, and their social media it can give you a fundamental analysis of the ICO, we will look at a more technical due diligence by looking at the ICOs Github for more technical projects in the next section. This will be good to grade 60% of all current ICOs for now.
Join the conversation at Basescore for a transparent overview of different ICOs.