Over the last eighteen months, the team at Astronaut Capital and Picolo Research have interviewed well over 200 new ICO’s that were, at some point in time, seeking prospective funding from asset managers or support from research houses.
Unfortunately, even if we were to hire another 10 analysts, we would still only be scraping the tip of the iceberg in terms of the sheer volume of new token sales that are pitched to us on a daily basis.
In light of this, we have to take a very unique approach to introductory calls with management teams.
Looking for Red Flags
Our intention during a call with founders is not to uncover what is great about a new ICO. Our intention is to simply, and efficiently, bring to surface any ‘red flags’ that would stop us from spending time on the subsequent phases of research and due diligence.
Think of it as a more lengthy filtration system.
Everything great about an upcoming ICO is already published. Everything which isn’t so great, however, is not.
We already have the whitepaper/pitch/IM/SAFT that should in most cases be enough collateral for research, however, what parts of the story are we missing that could potentially have a negative impact on the price in the future?
Despite how transparent token sales claim to be, calls with the management teams allow you to ‘read between the lines’ and uncover anything that doesn’t quite smell right.
Today, for the benefit of the DYOR (do your own research) community, I’m going to share with you the top 8 questions you should be asking the founders of new ICO’s.
“How did you get into this? What were you doing before hand?”
This is simply a way to weed out any entrepreneurs that are being advantageous in a rapidly growing funding environment.
If management were flipping burgers six months ago, you can probably count this as a red flag.
Alternatively, if they come from a similar vertical and you can validate their industry experience, carry on.
Note: Try to cross reference with their social media profile etc.
“Why does your business model/venture need to be decentralized?”
This may sound like an obvious question that each founder can answer confidently, however, you would be shockingly surprised as to the lack of understanding of some teams.
In most cases, decentralization is a slower, less scalable, and more expensive way to develop a business, so why is it their preference over a centralized database?
Ask the question.
Note: Look for a confident answer here that you can then bounce of others to see if they agree.
“What is the use of the token? i.e, as a consumer, developer etc. , how, when, and why will I use it?”
In this new decentralized frenzy, some people go to extreme lengths, (using their wildest imagination) to make a token ‘use-case’ relevant.
Put yourself into the shoes of the tokens ‘target market’ for a moment and have a think if it sounds reasonable.
Note: If they can’t explain the use of the token in under 15 seconds, this is a red flag. When something can’t be explained easily, do you think it can be adopted easily by the target market?
“Do you have any competitors that are centralized, and if so, what is stopping them from doing the same thing?”
This one usually catches most off-guard. It is best to do some prior research to come up with some examples of competition (decentralized or not) so you can directly ask “what makes you better than XYZ that are already established and have x% marketshare.”
There are many times in which using the blockchain makes complete commercial sense, and if it does, what is stopping XYZ from doing the same thing? Ensure you find out their unique value proposition (UVP) and why they believe they are going to rise to the top.
Note: If the founders are truly passionate and experts in their field, there will be no hesitation or fumbling in their reply.
“Your fully diluted market capitalization is $150m. Do you think you can be a $1.5b company to acheive investors a 10x return?”
This is one that sometimes the team themselves don’t even think about.
At first glance, many ICO’s may be raising between $20 — $30million, which by the standards of this market is acceptable in many investors eyes. However, you need to go another level deeper to understand what the market cap would be upon listing.
If the team is raising $30m but it only issuing 20% of the total supply to the crowd, the total market cap upon finalization of the ICO (with no profit to anyone) would be $150m.
Ask the team why they think they can be a $1billion dollar company and gauge how confident they are in their response.
“Why is your soft-cap $5 million but your hard-cap is $35 million? Are you saying that you can develop the product for $5 million, but you would take 7 times the amount if you can get it?”
The above is just a recent example, however, this is an extremely common occurrence.
Watch out for a hasty response on this one as founders can get quite defensive in thinking that you are trying to poke holes in their story (which you are).
I rarely hear a good response to this question, however some satisfactory responses for the use of extra capital could be:
- expansion into other geographic areas
- expansion into other verticals
- scaling of xyz
- certain marketing strategies
Note: You can’t be blamed for asking this one if they have openly communicated the soft/hard caps to the market. It’s a logical question.
“Is there a lockup period and when is the TGE (Token Generation Event)”
Predominantly for private sales, this question is an important one for factoring in liquidity as an investor. After all, you probably don’t want to be locked into a token for years to come.
Lockup Period: This is the minimum amount of time you need to hold the token (3,6,9 months etc). This should be communicated quite clearly if it isn’t already in the documentation.
Token Generation Event: The TGE is when the tokens are issued to you. Keep in mind that the lockup period usually only starts when the TGE takes place.
One habit that many ICO’s have gotten into is delaying the TGE significantly, sometimes for as long as the lockup period.
Note: Ensure that you have firm answers to the structure of these two aspects. If there is any hesitation on dates, particularly the TGE, keep pushing.
“How much (USD) are you raising in private sale vs the public sale, and what is the rationale behind it?”
This is a bit of a flow on from a previous article we published on the heavy use of private sales vs public distribution.
Many new ICO’s are getting into the habit of raising the majority of funding from private sources, despite it not being in their best interest for market engagement and customer acquistion.
If they are steering this way, ask them if they have thought about the effect if this and why they believe it is a good thing for the venture.
Note: In many cases, they may simply say “we will see how the first private sale does before making a decision.” Not a great response.
Not a pass/fail test
The above questions and answers should not formulate a pass/fail for investment purposes.
What it should do is give you either the ‘green light’ to proceed to your next stage of analysis and due diligence, or alternatively a ‘red light’, which would suggest you move on to the next on the list and start from scratch.
As a side note, never completely discount a management interview based on their right/wrong answers. We are in a young and turbulent market where not everyone has answers to everything. Even the experts get it wrong every now and then.
This is simply a guide to help you on your own path of due diligence and analysis if you are a DYOR fan.