Lessons Learned From Speaking to Over 100 ICO Companies

For the new folks on the block, here is a short definition of ICOs.

“Initial Coin Offerings (ICOs) is an unregulated means of crowdfunding via use of cryptocurrency. The term is often confused with ‘token sale’ or crowdsale, which refers to a method of selling participation in an economy, giving investors access to the features of a particular project starting at a later date.” (Wikipedia)

Let’s begin by being straightforward:

1. Most ICOs have no idea what they are doing.
2. Most ICOs just want to raise money before the hype peaks and starts dropping off.
3. Most teams aren’t capable of delivering their promises since they lack the technical background that is necessary to succeed.

Don’t get me wrong — there are some promising ones, but you need to know how to filter through them.

Why should you care?

Whether you are an investor, market participant, contributor, or in any other role that is expecting to benefit from new token creation, you should be extremely careful when it comes to putting your money or time into any of these ICOs.

I usually like to compare the ICO era of 2017 to the bubble years of 1995–1999. Many VC’s invested large amounts of money into startups that were just an idea without a product, users, or market validation. In terms of the parallel mid-late 90’s timeline, we are currently in the early stages. In the late 90’s, VC’s and Angel Investors alone accounted for about 50 billion dollars in investment, compared to approximately 1.8 billion dollars invested in ICOs as of August 2017. The difference is that back then, only a few high-profile investors and VC’s had access to invest in “the next Amazon.” Now, anyone in the world can invest in an ICO. And when any of us are able to invest in the next big companies from our bedroom, I think it’s safe to assume that at least 4–5 times as much money will be invested before we will experience a bubble like the Dotcom one.

One point to consider is that most of us are not experienced VC managers, and lack experience and knowledge in making high risk investments. A VC tends to invest in multiple startups knowing that most will fail but as long as a few succeed it will cover the loss of the rest. So, if we expect the success rate of ICO’s in the mid-long run to be similar to traditional startups, we should expect less than 10% of the coins today to be worth something in a few years.

What should you do to protect yourself?

As with any investment, you must do your due diligence before responsibly investing in ICOs. No one will do it for you, and if they do, they might have hidden interests that conflict with yours.

Below you can find the parameters and questions that we consider when making our investments:

1. Why would this project succeed over others? What is its unique value proposition in relation to other ICOs that are similar?

2. Who is the team? What’s their background? Any proven track record in delivering on their promises in the past? Who comprises their advisory team? Do they have the background and resources to help the team succeed? Assuming all advisors receive a percentage of token sale, what is their real incentive to help?

3. What in-house resources and knowledge do they have? Do they have the in-house knowledge to execute on their project? If they don’t, that’s a red flag. It is extremely hard to find experienced developers who understand the entire abstraction levels of creating a Blockchain solution, and if the team doesn’t have it in-house, they will be less likely to deliver regardless of the amount of money that they have. Do they have a competitive, compelling story to attract the best talent out there?

4. Is there a community backing them? How many participants do they have on their communication channels? Fake or real ones? How active is it? Does the community help the team answer questions? How do the founders interact with the community? Is the community mainly speculators or developers?

5. Who wrote the white-paper? Did the company pay someone to do it? Is it technical in nature, or is it mostly comprised of of definitions and explanations of what Blockchain and Ethereum are?

6. What are the Terms and Conditions? Is it capped or uncapped? How is the distribution divided between all participants? Are they following the same model of previous ICOs or making their own? I tend to prefer capped and reasonable amounts raised, since no start-up really needs 150 million dollars in such early stages. Would you work another day in your life with so much money in your bank account? Some do, most do not.

How are the funds being raised?

It is important to perform a technical audit and ensure that the smart contract used to raise the fund is secure. If you don’t have the expertise, check with the community. Most times ICO’s will just copy a contract from previous successful ICO’s, and that should do the work. If they’re redesigning a contract, ask yourself why they are trying to reinvent the wheel.

These main focal points of team, community, terms, idea, and technical background are the leading parameters we use to make our decisions. Although this is not the entire list of considerations we take into account while doing our due diligence, they are the beginning steps to protect yourself from scams and unskilled teams.

Be aware that although your due diligence may warn you against investing in an ICO, it might still make good profits for unrelated reasons like pump and dumps, insider trading, or other fundamental causes that cannot be predicted.

Take-aways:

1. Do your due diligence, either alone or in groups. You can find interested individuals online or in meet-ups.
2. Don’t put all your eggs in one basket. Diversify.
3. Don’t expect to become a millionaire overnight and withdraw profits as quickly as possible. We will experience a bubble burst at some point so invest wisely.

If you are interested in educating yourself further about best practices, how to perform complete due diligence, and fundamental and technical analysis, feel free to check out our free introductory course followed by our advanced one which will be posted shortly.