Why too many ICOs failed and what Investors can do better
Cryptocurrencies were all over the media in the last two years. You couldn’t avoid the news without reading about Bitcoins up and downs, crazy ICOs raising billions of dollars or fraudsters who ran away with the money they raised with their ICO. These times have changed — dramatically. To many, it seemed like a very easy and quick way to raise funding. Most don’t realize, that in reality, it is not only quite expensive but also very difficult and time-consuming to run a Token Sale. And it’s not getting easier.
According to TechCrunch’s report, over 1000 ICOs failed in 2018 alone. Security Token on the other hand, are becoming more popular and succesfull in the space of fundraising. The good and the bad of ICO’s have been evaluated and turned into a safer fundraising procedure than the ICO.
You can call the Security Token, if you like, an ICO 2.0. Safer, better and more sustainable from an investors perspective. But why did ICOs fail so drastically? Let’s outline some of the major issues, why ICOs failed.
Communicate more with your clients
One major issue is the lack of communication between the ICO holder and their clients & investors. When it comes to raising funds, companies tend to promise everything under the sun. But very shortly after, once they realize they are not meeting their expected milestones for their funding, they become less communicative, they become more worried about where and how they gonna get more funds and forget the most important aspect of it, communication. You can (should) never be to busy to properly communicate!
Even with people who ask the silliest questions, those people are interested in your company, listen and help them. Once the fundraising finished, the issuing company tends to not answer to comments, chats or E-Mails. Poor investor relations is a huge red flag and brought down companies even with a successful ICO.
Silly Budget expectations
As mentioned before, most companies don’t realize how expensive it is actually to run an ICO. Hence, they create budgets which are not realistic at all and fail halfway during the ICO as they run out of capital. Some spend every single dime they have into the product and expect the product to sell itself. It turned out — products are very hard to sell.
Some companies spend ridiculous amounts of money into marketing without having even a product. This money should have been invested in research and development.
Buying Twitter “followers” became accessible through hundreds of websites for a couple of dollars. 5K Telegram members don’t help if they are mainly bots. The inflated bounty campaigns to promote the fundraising doesn’t help either as the concern is more about raising money than promoting the product. Both scenarios are meant to lead to failure.
On the other hand, you can have the best product in the world if you don’t have the money to promote it. Then nobody will know about it or it won’t scale quickly enough, to create enough cash flow to run your business. Therefore spending all your money into marketing without even having a MVP is the wrong way to do it.
You will oversell and won’t be able to deliver what you promised. You will receive bad press and eventually go bankrupt as well. Therefore finding the right balance between marketing money and product money is key launching successful product..
Don’t forget the Fiat
With all the Hype and News about Cryptocurrencies, it is easy to forget, that most things are still being paid in Fiat currencies like EUR, CHF or USD. If an ICO raises millions in ETH or BTC, that might look like a lot on paper — but in reality, it might not be. Often these sums are locked for a period and during that time suddenly lost an enormous amount of money.
Instead of a few million on paper, some companies ended up with less than a million when reality set in. In the end, employees, taxes, hardware, and suppliers most likely have to be paid with conventional currencies. Therefore purely crypto-based fundraising turned out to be very problematic for many aspiring start-ups.
Lack of resources
ICOs were meant to raise funds for early-stage promising companies and ideas. However, it was misused after it gained popularity. An ICO supposed to resemble an IPO but in reality, it wasn’t. A Security Token Sale is, in fact, the one you should compare to traditional IPOs. It shares many similarities in the process and when it comes to market and preparation for it.
We at edeXa for example, trust in our legal counsel who’s specialized in crypto and security tokens. He’s got multiple publications and is covered by various national media outlets in the Swiss and German area and he worked significantly into shaping the much talked about Blockchain Act in Liechtenstein.
Customers are more than kings
Another essential issue is lack of customers. Even if you have the best product in the world, if you can’t market it right, you won’t have the critical mass to make your product work. Some companies might have had great ideas and prototypes — but still couldn’t turn them into a profit.
The Problem: Find the right market. Getting access to customers and convincing them of your product is hard — really hard.
To grow a large customer base will take years and years. Our advantage at edeXa is our parent company, io market. Through io-market, we’ve been delivering tailor-made supply chain solutions to thousands of customers for 20 years. This gives us two huge advantages: We have a large customer base for our new product and we actually understand what our customers need, as we have been with them for so long.
Planning is caring
The most important aspect of any fundraising is planning! If you plan it wrong, you will fail sooner or later. A fancy website and a well-written whitepaper aren’t enough to be successful with your ICO (anymore).
Most companies who intend to raise funds via an ICO underestimate the amount of preparation and planning which is required to reach your funding goal or in general: run a successful business. It takes planning and practice.
If you want to successfully raise funds for your company, there’s a better way than ICOs. Security Token Offering (STO) is the magic word. STOs are actually way closer to IPOs as ICOs. An STO is a very powerful alternative to private equity, Venture Capital or ICOs. However, an STO is not for every company. You should have already a working business model and not only an idea. In simple terms, a ‘security token’ is a financial instrument representing a real asset — most often conventional Stocks. But stocks are just one example, it could as well be art or infrastructure. STOs are often regulated by certain market authorities such as the SEC in the USA or in Liechtenstein the FMA. This creates more trust, security and transparency for investors.
About Us — edeXa AG
We at edeXa.io are currently running a Security Token Offering and have been headquartered with our parent company io-market there for almost 20 years now.
edeXa is a young start-up with experienced employees and an international footprint. edeXa AG is a spin-off of the successful io-market AG from Liechtenstein. The young company is focused on radically rethinking existing supply chain processes and delivering new solutions based on the blockchain.