ICO 2.0 — what is the ideal ICO?
ICONOMI ICO Fundamentals — 1 of 4
Fred Ersham was right with his predictions about the potential of app coins as September and October were truly the months of the ICOs. Among the successful ones were Firstblood, Antshares, SingularDTV, Blockpay and of course ICONOMI — to say nothing of dozens of less successful ICOs ranging from scams to wildly optimistic, but poorly presented ideas.
Ether.camp’s announcement of the 50 million USD ICO perhaps marks the age of peak ICO. While ICOs are an amazing method of funding great blockchain projects, this euphoria cannot last as it can lead to problems with projects failing and investors getting severely burnt.
This has caused several very cogent critiques of the current ICO model, resulting in certain projects moving towards greater transparency — for example, Gnosis promising to release code in advance and Golem openly discussing their business plan and whitepapers before ICO. Recent success of Golem’s ICO proves that transparency is the only right direction.
The ICO critics
Nick Tomaino commented that “the crypto market has set the bar shockingly low for entrepreneurs to raise money and this is dangerous for everyone involved” and set some guidelines for the ICO best practices — among them, a strong technical reason for the new protocol and token; clear and transparent communication between the team and the community; a beta version of the proposed platform to prove the ability to execute; a cap on funds; and a relatively high equity percentage for the team, but with delayed liquidity. He also remarked that “raising $5M on an idea is not wise”, with Erik Voorhees agreeing and calling the latest proof of #frictionlessfinance “incredibly speculative and risky”.
Daniel Zakrisson demonstrated the required level of due diligence ICOs should be subjected to in his analysis of the Kibo, Singularity, Golem, ether.camp and Inchain. ICOs where he evaluated the projects based on their teams, market potential, business plans, competition, valuation, legality and security.
Travis Scher analysed ICOs from investor’s perspective and found four issues that make investing in new tokens very unappealing compared to traditional VC investing: regulatory uncertainty, high valuations/over-capitalization, lack of controls, and lack of business use cases.
Other interesting viewpoints include ICOrating’s report on KIBO, Smith and Crown’s research of ongoing ICOs, a plea for more transparency for the investors on Reddit’s ICOcrypto subreddit, and scam of the week by Bitcoinerrorlog.
The ideal ICO
Combining the viewpoints above gives us the following elements for an “ideal” ICO:
- Scam protection
- Technology check
- Proof of ability to execute
- Business viability check
- Efficient use of funds and business-based thresholds for minimum and maximum raise
- A defined legal framework
- A transparent ICO process
- Controlled release of funds
- Delayed founder liquidity
The role of ICONOMI
Some might accuse ICONOMI of benefiting from these same lax rules when we raised over 10 million USD for our fund management platform — however, we believe that we have included the answers to most if not all of the challenges listed above and believe that this was the key to our successful raise.
But we face an immediate challenge: we have reserved a large part of that investment for the ICONOMI performance fund that will invest in ICOs. In evaluating potential investments we realised that we couldn’t agree more with the ICO criticism. As we have committed to creating a fund that will invest in ICOs but still offer protection to investors, we are forced to find a solution.
Brave new world
DAOs as an organisational form and ICO as a way of raising funds in an almost unregulated form are actually a part of the investment spectrum, with the classic startup and VC model representing the other end. William Mougayar, author of the definitive work on this topic “The Business Blockchain”, recently structured the key differences between both based on the return horizon, ownership model, entry phases, exit method, business model, legal structure, LP mix, fund currency and market approach. In recent blog-post same author points out:
I see the two models as diametrically opposed: one is a closed market, dominated by command-and-control practices, led by a few rich people on Sand Hill Road. The other is a widely open global market where anyone can play, and where the gains and risks are more evenly distributed.
What we need is a combination of the best of both worlds:
- Decentralisation elements: smart contracts, global fundraising, instant liquidity, simple issuing of dividends, simple voting, focus on vision and entrepreneurship and not on bureaucracy and formalities,
- VC elements: structure, coaching, evaluation, commitment, supporting functions (non-tech), milestones, investor protection.
ICO 2.0 — the ideal ICO?
At ICONOMI, we believe that we need to find a way that will enable entrepreneurs to focus on business and development, while providing a level of evaluation and investor protection. Right now, the world of ICOs is a beautiful chaos — but if we want to move the blockchain community towards the mass market and encourage new investment from more traditional investors, it’s time to grow up — at least a bit :)
We, the ICO investor community, should define basic standards and build best practices. This will help more projects to succeed, investors to profit and the ecosystem as a whole to improve.
Our team is working hard on addressing these challenges, but we would love to hear your thoughts, too!
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