Crowdsale Diligence — the honest view of a strategy consultant

In my former work as a strategy consultant at Bain and Deloitte, I spent a lot of time involved with transactions, specifically doing commercial due diligence. I worked on over 50 transactions that completed, across a range of sectors and geographies, plus many more that either failed to complete (sometimes because of what we revealed in our work) or didn’t proceed for a variety of reasons.

So it was natural that before I joined HelloGold the first thing I did was ask Robin (our CEO) for a copy of the business plan, even though I’d worked with him before and had discussed the concept over a number of years. Then I promptly did my own DD exercise on the plan he gave me, including sending a lot of questions back to Robin. The key ones were:

1. Do the target markets like to buy gold? Answer — yes. Risking a crass generalisation, Asians love to buy gold especially in India and China (check out WGC’s gold demand trends reports for further details).
2. Are there competitors/alternatives, and how is HelloGold better than those? Answer — Of course there are alternatives. However, there weren’t any that are as accessible/convenient, as cheap and understood by the target market.
3. How risky is this? (particularly compared to alternative opportunities) It’s a startup. There are no guarantees. However the biggest risks I identified were customers not being aware of and trusting in the product. Both of which were mitigated by the B2B2C partner model and the customer base HelloGold can access via the real world partners such as AEON. I figured I’d never find another startup that was so de-risked, but had such potential given scalability.
4. Did I trust Robin/the team? I had worked with Robin before. I knew he is smart, well connected and had the right experience in the requisite areas for running the business. This was backed up with the partnerships and other affiliations HelloGold had (then and more now).

How I became involved in the HelloGold ICO

Having joined, I managed the delivery of the beta version of the app in November (now available in App and Play stores) and helped build the team from 5 to 16 people. Since January I’ve been managing our crowdsale process as a way to fundraise to accelerate our regional expansion. One of the first things I did was look at other ICO projects and review the whitepapers that people were using as, effectively, investment memorandums. Despite being somebody who understands businesses and the investment process, I didn’t understand many of the business models that were/are being supported. Largely because many aren’t business plans, just technology that may or may not have a use case. Still the funds poured in as money was made on the “pop” by speculators.

“It’s all just a little bit of history repeating ….”

My university studies were in history, so I tend to look back at events and try and understand them to apply the lessons to the current circumstances. The infamous Dutch tulip mania may be one of the first times a bubble has been measured and any time since when somebody has said “it’s a no lose investment” the warning bells should be ringing. In the end, demand/supply dynamics will apply.

The most relevant period to the one we are in now is the 1920s and 1930s when US stocks were mostly unregulated. A lot of (what would now be called) non accredited investors got burnt, especially when the bubble bursting led to the great depression . So the US government stepped in and regulated to protect “the little guy” from either the “big guy” or just outright fraudsters (those last two categories not being mutually exclusive). Now a raft of legislation exists in both the US, and most countries around the world, to ensure that information is accurate and protections are in place to ensure what is being sold is fair and can be relied upon, normally by being checked by an independent diligence provider who has a reputation at stake (and therefore something to lose if they get it wrong). That’s why the requirements to run an IPO are so rigorous and there is an array of experienced professional service providers who support the industry. With both of these comes a high cost overhead.

This isn’t the case in the crypto space. Without regulation, the “1920/30s” of the US equities market is back. Clearly this has advantages, e.g. lower costs to raise funds for untested startups/unproven concepts, access to pools of funds normally not easily accessible or willing to invest through traditional mechanisms. There are also downsides, e.g. untested business plans/teams, genuine scammers utilising the unprotected mechanics of fundraising (Slack bots anyone?) and little tried and tested support infrastructure with zero recourse if something goes wrong due to lack of experience/ anonymity/privacy. In the same way the US government was forced to step in nearly a century ago, I expect something similar now when enough private investors get caught out. When that will be, what form it will take or how it will occur, I don’t know. When it happens, the repercussions will be large and probably not just limited to financial penalties.

What this all means for ICO due diligence

Now that the crypto markets are becoming more volatile and the upward trend is not guaranteed (newsflash — it never was), ICOs need to be put under scrutiny to ensure that the idea is sound and the team can deliver. At the end of the day, and in the absence of proper regulation/oversight, we (the community) need to make sure that an ICO has a strong chance to create value in the long term and deliver on what it promises. This means doing your own diligence and asking the right questions, as I asked before I joined HelloGold.

1. Be Buffett. Look for underlying value (aka the “Buffett test”). What is the market for this product/service? Who will pay for it? How much? What are the alternatives? (not just direct competition but substitutes)? Where will the revenue come from? What costs are there associated with this business? How scalable is it? If you are investing for pure spec, recognise it as such, and the risks that come with that. As mentioned above, I did a lot of this work before joining HelloGold. Feel free to reach out to me and I’ll be happy to share my analysis and current situation.
2. Read the documents. Read the documents, materials, Slack channels (see also 4 below for material not published by the company). Ask questions about what you read to clarify anything that you think is unclear. Any legitimate operation should be able and willing to answer legitimate questions/concerns/clarifications.
3. DD the DD providers. For “Due Diligence/Audit Review” providers — check the source and experience of the people providing the review. Do they have the expertise? What have they reviewed before? Check to see if they are being paid to do the review by the team being reviewed. In the real world, this would be called vendor DD and would be clearly labelled as such so the reader understands the nature of the work and potential bias. If you are going to rely on someone else, you need to do DD on the DD provider.
4. Check the crowd. For the informal crowdsourced DD (e.g. via reddit) do the same. Check the people who make the comments. Do they know what they are talking about? Are the sources referenced and valid? Check the date/time and if there are any updates? How has the company responded? Are they creating FUD or involved in pump/dump activity. The usual warning signs re: new accounts with no traceability apply.
5. Test the team. ICOs (as with any investment) have risk inherent in them and you do need to trust the people you are giving money to. Who are they? How much are they actually involved with the project? No identification of the team is a warning sign. Lack of experience in those identified is another. Check to ensure that they have all the experience required to run a business not just the technical capability.

In a nutshell…do your own homework and ask us (or me) anything

In traditional investing, higher risk = higher reward. Whilst this no longer seems to be quite so linear in the ICO market, you should do your homework, not blindly rely on other people to make the judgement, so that you fully understand the risk that you are taking and that the reward is justified. (Note that reward may not be purely financial.)

There are some great businesses in development right now, which will be disruptive to the way things work and/or add real value to people’s lives. (Maybe one of them will solve the ICO DD problem.) It’s a matter of asking the right questions and doing the right checks so you can pick the right ones.