Hack your Funding with an Initial Coin Offering
ICOs may change the way startups raise money
One of the most important lessons I learned as a founder is how challenging it is to maintain control of your company and vision — especially in an environment where meeting short-term goals is often more valued than realizing long-term success.
From everything I’ve learned in the last few months, Initial Coin Offerings (ICOs) can help you achieve that goal.
ICOs are an open, unregulated space that open up possibilities for innovation in everything from funding to ownership. It is a new investment mechanism where the value gets distributed and exchanged with a lot of flexibility. It could establish the pillars for the beginning of a new economy while providing more freedom for founders.
So, what is an ICO?
An Initial Coin Offering (ICO) enables funding of projects through the sale of tokens or cryptocoins, which are similar to shares of a company, though usually without equity being exchanged.
Investors and supporters of the project can purchase them through an Initial Public Offering (IPO) transaction with fiat (say, USD or Euro) or cryptocurrencies (like Ethereum). An ICO usually sets a minimum goal for the fundraise and a period of time to reach that goal — not unlike a Kickstarter.
If the funds requirements are met within the specified timeframe, the money raised is used to fund the project and the company can distribute tokens to investors that can be traded on the public cryptocurrency exchanges, like Poloniex or Gemini.
Many people in the blockchain community think that ICOs are a long-awaited solution for non-profit foundations to raise capital, especially if they want to build open-source software. Such is the case of Ethereum ICO, a decentralized application platform based on blockchain technology. Ethereum raised $18 million in its original 2014 crowdsale, the largest-ever at the time, and the holders of Ethereum (ETH for short) have realized major appreciation of their holdings as the coin has increased in value from less than $4 to over $250 at time of this writing.
Often, the team making the ICO sets a date for the token sale. Then, in most cases, a portion — say 5 to 10% of the total tokens — are set aside for the development team to sell as a mean to continue engineering the project.
The structure can change according to the type of project that the ICO is supporting and the purpose of the vehicle used for the ICO.
How to set up and create your own ICO?
Several services are offering the necessary back-end infrastructure to create your ICO and then manage the future transactions that may happen freely on the different exchanges.
At the beginning spending time on the legal aspects of your ICO, the white paper and the financial details is the most important. If you are collecting money from US investors you will have to make sure they are accredited investors.
As weird as it can sound, you don’t need a blockchain to issue or enable the trading of your coins. Many people just set-up a website, put their Bitcoin or Ethereum addresses and start to collect funds.
— Pavel Kravchenko, an expert cryptographer
Among the services that I interviewed or I am able to list today:
- Argon Group, a strategic investment banking and financial advisory services firm was in charge for the ICO of Blockchain Capital. They take care of the compliance and the KYC (Know Your Customer) for collecting funds.
- Tokenmarket.net seems to have a packaged offering for ICOs, they are new on the market but seem to have a good understanding of the challenges while providing solutions for KYC and marketing your token.
- Otonomos.com is also setting up a special offering for ICOs. They can provide a non-profit vehicle similar to what Etherum created in Switzerland but this time in Singapore.
- Vanbex Group, based in Vancouver is another option. They have a long experience in ICOs and provide a full service from the KYC integration, token development, campaign marketing and strategy, technical audit and documentation, legal guidance up to investor relations. They made for example the ICOs for FirstBlood and Factom.
- Transform Group, is a public relations and advisory practice. The Firm has represented several blockchain companies, organizations and projects in the sectors since 2013, including 30+ token crowdsales. Client success stories have included Aeternity, Augur, Bancor, Bittrex, Counterparty, Dash, Ethereum, Factom, Gem, GoCoin, Golem Network, Gnosis, Gyft, Humaniq, KnCMiner, Kraken, Humaniq, MaidSafe, Ripple, ShapeShift, Storj, Syscoin, and Tether.
Often organizations control coins in a cold storage meaning that you have a login and password to see and control the balance but it is actually not a coin in a blockchain. In that case the trading mostly happens on centralized exchanges so the coins are not moved at all.
They will often provide the KYC for collecting the funds of the original coin offering but won’t be able to do the KYC once the coins are exchanged on a public exchange.
- Ethereum.org is most probably the most popular and most reliable solution to date once you need to have your coins traded. Made to create smart contract, ethereum has a whole solution to organize a crowed sale to sell tokens in a blockchain organization.
- Lightning Network is another option to consider in the future for the trading of your tokens, but it is not available currently. While transaction can happen on this top layer the settlement can then be recorded on the Bitcoin blockchain.
If you don’t want your transactions costs to be dependent on a public blockchain then you will have to implement your own blockchain.
What determines the price of your coins?
You can decide the amount you are looking to raise and the number of coins or tokens that will be emitted. This is what will determine the initial price of your coins.
Then, once they begin trading on cryptocurrency exchanges, the price will obey the laws of supply and demand on the free market. Like any other traded stock it will change according to relevant project information, trust in the team, and reactions of the project’s original and incoming investors.
What are the costs linked to operating your own ICO?
Apart from the legal fees linked to the registration of your business and the legal and financial advices linked to your ICO, the cost of operating an ICO on Ethereum (for example) is trivial.
It involves setting up the characteristics of your token (Ecr20) by creating a smart contract and then paying the registration fees into the blockchain each time a transaction happens.
Most of the costs will be linked to the marketing of your ICO to investors. Expect to spend at least $50k to a $100k on brand marketing, online marketing, PR, and communication. Most serious projects have some sort of pre-ICO funding to finance the marketing costs linked to the launch of an ICO.
Where can you market your ICO?
Most ICOs should be marketed to achieve your fundraising goal in the shortest amount of time.
21.co can help you reach out to digital currency investors and will charge $10 per reply.
Partnerships with existing exchanges is also a way to have your ICO being announced and marketed to the crypto currencies and blockchain communities.
Some VC firms only invest in coins like Fenbushi Capital from China or for example the famous Tyler Howard Winklevoss, creating fewer compliance issues and fewer time constraints to invest. On the pre-sale, they can benefit from important discounts and — in addition — when they are traded, tokens provide almost immediate liquidity.
Who already launched an ICO?
According to the research firm Smith and Crown, ICOs raised $27.6 million in the first two weeks of May alone.
The BAT ICO launched by Brave, a web browser founded by Mozilla co-founder Brendan Eich
It completed an initial coin offering (ICO) on May 31st 2017 that generated about $35 million and was sold out within blocks under 30 seconds. Most of the sale happened through the sale of tokens using Ethereum for payments.
Storj Labs, a Peer-to-Peer Cloud Storage Network, launches STORJ
They raised money through an ICO on May 19th. The ICO hit the $20 million mark just 6 hours after the books opened.
Blockchain Capital is an investment fund
They invest in entrepreneurs driving innovation based on Blockchain technology. They closed $10 million in 6 hours on May 10th.
Gnosis, a platform for the next generation of prediction market applications
Gnosis held its ICO at the end of April and sold 5% of the project’s tokens for a combined $12m. The tokens sold in 15 minutes valuing the whole company at approximately $300 million.
It was considered a failed ICO as the tokens were supposed to be sold using a Dutch auction meaning that the price would be reduced until a buyer is found but the FOMO won showing how irrational the market currently is.
To stay aware of new coming ICOs there is even a new chat bot from Chatfuel called Cryptobot, available on Facebook Messenger.
What you need to know prior to launching your own ICO?
It is still an unregulated space and you must be very cautious to make sure your KYC (Know Your Customer) is done properly. Once the regulators like the SEC realize that an ICO enables any company to trade their stock freely, it is mostly possible that traditional stock exchanges will be adopting the same techniques for any company and then start regulating the space.
At the end, good governance remains probably the best security for investors to ensure the profitability and the growing value of the marketed tokens.
Currently, most teams outside US choose to block the participation for US residents to avoid regulatory issues.
Current ICOs only sell app coins, utility tokens or comparable instruments that have in-game currency value. Any profit is a speculative value. That’s a way to get around the Howey test.
— Mikko Ohtamaa CTO of Tokenmarket
Dividend paying ICOs are coming though, but they will be securities which will be regulated. Polybius, a regulated bank for the digital generation, just launched an ICO with tokens that include the right to receive 20% of profits.
And in my diligence, I’ve repeatedly encountered four issues that make investing in new tokens — at least for now — very unappealing compared to traditional VC investing:
1) regulatory uncertainty,
2) high valuations/over-capitalization,
3) lack of controls, and
4) lack of business use cases.
I believe all these points are valid. What matters the most in my point of view as a founder is the freedom that ICOs can provide and its flexibility as a tool. Like any innovation it will require a lot of iterations before ICOs can prove to be the new way for funding startups and projects.
In the meantime it is freeing up creativity and more interesting initiatives will be started using ICOs.
To learn more about the regulation around ICOs and understand the difference between coins, utility tokens and tokenized securities, click here.