An ICO is not an exit: Build a real business
What to consider before launching an ICO for your startup thinking it is an easy exit — news alert: it’s not.
Disclosure: I am a co founder of Epic.Ai, a company investing and building artificial intelligence and blockchain technology. My portfolio is heavily in crypto so I’m financially incentivized not to spread FUD/FOMO about token economics.
I hear people saying “VC is dead for early stage and seed rounds, let’s just launch an ICO” all the time now. There is so much misconception around what an ICO (initial coin offering) is. Although certainly appealing from the outside when thinking about investor/business liquidity — the grass isn’t always greener on the other side.
The Case for an ICO/ITO
While ICOs’ represent a foundation for change, there is much to consider. The numbers are in and yes there are countless stories of ICO’s raising tens and even hundreds of millions to finance an idea in it’s earliest stage. The temptation is real namely for the promise of easy money raising. It’s tempting for startups struggling to raise capital not to overlook such market growth. Founders ignore the hoopla until their friends and associates share details of their successes and re-career as blockchain experts / ICO consultants…. and then it happens… founders catch a case of the “everyone’s doing it.”
Simply “blockchain-ifying” an idea doesn’t make it valid for the blockchain.
I know… I know… You’re the smartest person in the room, you’re going to do it differently and research first
Throughout your research you validate the numbers. According to data from CoinSchedule, CB Insights and Goldman Sachs, by mid-year of 2017 ICO fundraising surpassed early stage angel and seed investments for technology
companies. By this point you’ve justified why your company hasn’t been able to close the funds needed to grow with logic to the tune of “Oh… all the early stage money is going into crypto. That’s why we can’t close seed.”
During this research period you’ve navigated directories listing ICO details, visited a variety of sites where you see FOMO count downs close to or surpassing their goal. Out of curiosity you likely copied block addresses after learning of block explorers and how you can browse the balance of these ICO’s and the volume at which participants invested. Along the way you recognize patterns on what these sites present, how they speak to the problem they are solving and frankly what you believe they lack.
At first glance it seems so simple. Write a whitepaper, assemble a team of advisors, map out a timeline, produce a smart contract, stand up a countdown site and you’re off. Oh and let’s not forget the fun part — whiteboard how the pie will be split up once the millions come in.
Now that you’ve tuned in to the industry you are on a daily emotional roller coaster
LinkedIn, FlipBoard, News sites like CoinTelegraph, The Merkle among other sources make your sentiment towards the industry as volatile as the exchanges the market itself trades on. So-called experts weigh in confusing you more with best practice rhetoric as the space is changing so fast. You hear things like: “You need to do an air drop”, “Lets get an opinion letter”, “Utility vs Asset vs Security”, “We need super whales”, “ERC-20”, “Bounty programs”, “Pre-sale roadshows”, “Let’s decentralize it”, “Reg-A tokens”, “The token symbol needs to be 3 characters to work in wallets”… oh and my personal favorite… “we need to make a custom gas mechanism”.
As you take meetings to identify people who can help the ICO operate successfully you meet a myriad of Advisors. At this point you’re more familiar with the industry and you’ve developed a better sense for how little many of these expert advisors know. You’ve become keen on differentiating blockchain enthusiast from crypto-traders. Calculating risk, experience and potentially who is selling wolf tickets (as my wife calls it) you become careful in who you decide to work with. It’s such a moment of relief as you let go un-aligned team members and break free of self imposed obstacles for a solid direction to march on with.
You map out the for profit implementation business case supporting the open source token utility. You network (and often pay) to find exchanges willing to add your asset as a trade pair — all the while you slowly execute your go-to-market strategy.
The Fear, Uncertainty and Doubt
Amid looming SEC regulation, negative stigma created by runners (people who raise the money, take it and run) and Google, Facebook & Twitterbanning advertising of cryptocurrencies create constant FUD. Prior founders have inflated expectations and taken much of what the market can bear. These constant conversations of reassurance to keep the team and investors focused seem ever ending. To top it off your telegram inbox is constantly getting PM’s showing you yet-another-competitor to what your ground breaking idea is.
The number of ICO’s is growing much faster than the volume of new money in the market. Around early spring 2017 there were about 5 offerings each week. That number has increased to over 20 a week which over the course of 3 months is ~300 new companies. The average each plans to raise is $15 million (target of about $4.5 billion total) which seems a bit unrealistic to achieve amplifies the negatives of your ability to reach your funding goals.
You’re committed — spending 80% of your waking hours grinding to advance the project. By this point the expenses are mounting and new invoices are piling up everyday. Many founders are unaware of the up front cost to market their ICO effort. Average budgets are $270-$500k give or take the size of your existing network. Depending on your advisors suggestions this budget can increase based on the the need to have a MVP (minimal viable product) or prototype.
Practicality of Tokens and the missing product value.
Not every business case can work as a new token/coin. In fact I can count between my hands alone ICO’s that have a functional platform with millions of users finding value and utilizing the product’s created by these ICOs. Building products is an art that shouldn’t be overlooked. It’s about solving a problem that exists and aligning a product to a market in such a way to solve that issue.
Most people never consider the fact that their own business case cannibalizes the long tail success of their token and that in itself is why they should never have launched an ICO in the first place.
PLEASE: Stop Inventing problems that don’t exist
Investor Relations: The graduation from the few to the many
At this point if you’re still in you’ve likely raised some if not all of your ICO. Regardless if it was pre-pre-sale (WTH?), pre-sale or crowd you’re founding team are now crypto-whales. The temptation to spend those dollars is high even with the responsibility to realize the business promise.
Along the ride investor relations became a thing. Rather than pressure from one investor you have pressures from hundreds if not thousands of investors. Some get cold feet and have investors-remorse looking for refunds, others expect their investment will turn them into a millionaire tomorrow. Kelsey Cole share’s her experience:
An ICO is still a business and raising dollars still requires you to be accountable to deliver the business case of your initial coin offering. Like any business there is operational overhead that shouldn’t be overlooked simply for the belief of fast money. I am not against ICO’s, I believe its a groundbreaking approach to realizing capital for a new idea while potentially mitigating risk for those investors participating in them. I don’t believe in the residuals… scams, pump and dumps, pyramid schemes, runners and classic disappearing acts.
Ultimately before jumping into the tumultuous waters of launching an ICO make sure you’re not looking at a false reality for it as an exit. Take the time to do research, ensure product-market-fit and commit to the promises you make to the world.
What do you guys think…?
Ryan Hickman is co-founder of Epic.AI — building an investing in artificial intelligence and blockchain technology.