Metrics Series Part 2: Utility Tokens Aren’t Dead — The Old Structures Are
Introduction: ICO or IEO?
In the last few weeks we saw a shift in sentiment from “ICOs are dead” to “Only IEOs work nowadays!”.
Currently, only a small amount of projects dare to execute an old school ICO. We now see older projects that started raising money privately a while ago now making a reappearance with the help of IEOs, even if it means unilaterally changing lock-up and bonus terms on earlier investors.
So…. IEOs are profitable, right? In our last article, we explained that many of these IEO projects are unilaterally violating SAFT terms with prior investors and artificially reducing the circulating supply to a minimum in order to fit the IEO model. Add some shenanigans that happen behind the scenes on the exchange itself and you have a perfect recipe for a profitable token sale.
Considering the current market conditions, these drastic changes are often a necessity for these projects if they don’t want their token to immediately dump. They also appeal to investors interested in quick flips, but its questionable whether the IEO returns will be sustainable in the medium to long term, not to mention that they are nearly impossible for the average person to participate in.
Raising Too Much: How the Past Haunts These Projects
If you think about profitable investments during a bear market, the primary category are those projects with solid fundamentals combined with a low valuation. That’s exactly what all these projects on IEO platforms are creating by artificially reducing the circulating supply to a minimum.
Take a look at some recent higher quality IEO projects, such as MultiVac, TOP Network, Blockcloud, among others. All had previously raised around $15m with a fully diluted market cap much higher than this. The quality of these projects is solid, however, investors probably would not be interested unless the circulating supply was drastically reduced. This is what IEOs artificially do for a short period of time.
IEOs allow you to grab (or attempt to grab) a token with a low float of around 2% of all tokens. Suddenly, the fully diluted market cap doesn’t matter because it can make you solid money in the short term. As a result, an artificially low supply creates an attractive investment in the short term.
For the older projects that already started raising money several months back, this might be one of the best options in this market. But the fact that they raised so many millions in the past leads to inflexibility, and often necessitates changing terms on prior investors — not a great situation for those stakeholders or the project itself, which is opening itself up to legal and/or reputation risk.
Our Solution: A Low Raise + Innovative Metrics
We like to talk about how we want to optimize for the short and the long term. You will hear this a lot because it’s the basis of our overall strategy.
But actions speak louder than words. So in order to stay fully flexible, we only raised a very small seed round. Because of our extremely low burn rate, this money allowed us to build and launch a fiat gateway in West Africa (Kudi Exchange), and make significant progress on our non-custodial wallet — UniFyre Wallet.
A low raise also provides the benefit of flexibility. Due to the low raise at the start of Ferrum, we can easily adjust to the current market conditions. Because of this, it is our opinion that small cap ICOs will be very successful in the months to come.
But what is the best way to raise a very small amount yet not sacrifice on the long term viability of the project? A good solution is to simply sell a lower percentage of tokens during the sale and increase your company holdings. With a proper token distribution structure and actual progress, a project will be able to survive for several years, even if it raises less than $2m.
Factor in a low cash burn rate, smart capital management, and innovative metrics , a project should be able to survive for years on a low raise. Also keep in mind that all the locked company tokens can appreciate in value as well.
How to Thrive on a Low Raise: Deliver on Promises and Provide Value
The biggest concerns for investors when they hear about a low raise is whether a project can secure a good exchange and maintain proper liquidity.
First of all, please keep in mind that with a capital structure that keeps some additional tokens in reserve, the project itself has a significant interest in a successful exchange listing and successful post-listing execution, so the incentives of all stakeholders are aligned.
Secondly, if a project only raises a relatively small amount, investors should not reasonably expect a top tier exchange right at TGE. It’s to be expected that the project would not spend an outsize percentage of their capital on a listing alone.
What a lot of cryptocurrency investors seem to forget is that a listing on a top tier exchange can also be earned over time. If a project make solid progress, deliver on its promises, provide value to stakeholders, and attract significant interest, then the exchange will also have an interest in listing your token because it will lead to new exchange customers and more trading volume.
In sum, by thinking long term and doing things the right way, a small cap project can still get into a major exchange. In the near-term, there are a plethora of high-quality tier-two exchanges where low cap projects can thrive.
Conclusion: Create the Gem
It is our belief that low token sales with a very low hard cap and solid fundamentals will shine in this market. Of course this strategy presents its share of challenges, and some may say that choosing this route makes it harder for a project to succeed. We disagree. We believe that a lower raise presents a better opportunity for all involved — whether its our community members, investors, or the project itself.
Moreover, being aware of these challenges means that we will find a solution before they become a problem. We don’t want to give up on transparency, honesty and our promises. And we never will.
In sum, we at Ferrum Network currently are in the process of creating the gem investors are looking for. You won’t be disappointed.
Very truly yours,
The Ferrum Network Team
Bitcoin Talk: http://bitcointalk.ferrum.network