The psychology behind ICO funding

ICONOMI ICO fundamentals — 3 of 4

I have spent the last few decades researching consumer behaviour for clients ranging from political parties and large retailers to banks and telecoms companies. In the last year I’ve been fascinated by the new economy and crowdfunded investment concept. I’ve analysed dozens of ICO projects, worked intensively on successful ICONOMI ICO… and here’s what I’ve found.

Rationality and the economics of interest

The first two posts in our series covered the “rational” part of the equation; the ICO projects that wish to succeed should address all the areas we detailed. But that in itself is not enough: it is the “irrational” part that can bring your ICO to the cap in a few minutes or make it lose momentum and leave it under the threshold because you were not able to regain it.

To address the “irrational” part, we need to talk about crowd mentality and group psychology (suggested reading: a very good paper on the investor psychology).

If a team has built up a lot of hype about a project, it will create a sense of FOMO — fear of missing out. From this point, the project can continue on one of two trajectories. A quality project combined with a lot of initial interest and a high, yet reasonable cap on the fundraise will quickly drive the crowd to fill the ICO. In a nutshell — everybody loves a winner!

However, if the initial interest, project quality, and funding limits are not matched to the available “supply” of investor interest, the most probable result is an early spike in interest followed by a stall in fundraising. Once the potential investors see that, the crowd mentality kicks in and creates an additional barrier for new investments.

That means that it is crucial to match funding goals to the realistic estimates of the project potential. If you are not certain, it is better to set lower goals.

Key learnings in the case of Golem

So how do you demonstrate that you are a great team with a great business plan in a 10 page white paper? And how can this be translated to a successful ICO? The answer to both questions is — with great communication. Let’s look at one specific case — Golem.

Different segments: do not forget professionals

As with any offering, ICOs are aimed at different “customer” segments. An analysis in June about TheDAO identified three investor segments: involved, investors and miners. While they are very similar in terms of technology, they fundamentally differ in their value systems.

Based on what we’ve seen in our ICO observations, we should add another segment: the professionals. They understand ICO content very well, and range from those understanding the technical aspects to those involved in the topic within the old economy. This new segment is closer to the old economy, which means that they will be hard to reach using “traditional” crypto-community communication channels. However, their opinion is crucial to proving the worth and relevance of the project.

This is exactly what Golem did. Besides the first three segments they were focusing on professionals and they were taking their advice very seriously. This opened up the possibility of getting visibility in other media channels not typically accessible to crypto-based projects, such as cloud-focused media etc.

Communication: vision & community feedback

Over the last year the Golem project team have continuously showcased their vision and built upon their product. They’ve had an active blog and have over time developed a complete vision of how their platform should operate and what problems need to be solved. In retrospect it’s obvious that the collapse of TheDAO in June 2016 had an adverse effect on their plans. When it was time to reannounce their ICO, they did this in a very smart way: they launched a draft of the whitepaper and asked for feedback, using the whitepaper itself as a key part of the communication plan to drive engagement. The community feedback helped them iterate the whitepaper into a very appealing format that highlighted the main success criteria (team, market, business plan), while appealing to a large part of the community.

Another Golem specific is the use of communication channels — they chose a pretty limited set of channels and focused on these. These included their blog, Reddit, Twitter and their own Slack, neglecting bitcointalk.com and other cryptocurrency forums.

Consistent look & feel aligned to the brand

Do not underestimate the importance of a professional look and feel. You are asking investors for millions — that means that your offering should match your expectations. Work with a designer and develop a nice design, logo, and a good user experience for your site. Do not forget about the language! Fluency in English is crucial, as Evan Van Ness pointed out in his great Ethereum newsletter.

Golem is an excellent example of a good ICO project look & feel — techy but still serious, professional and not too playful, and — what is most important — consistent through all touchpoints.

Funding can be high, but needs to be explained

Golem set a relatively high goal with the funding they were aiming for. However, they provided a clear explanation of how the funds would be efficiently used in several different funding scenarios. This is very important for ICOs: traditional start-up investors can control the use of funds after the investment, however there is no such control in ICOs, which means that investors have to trust that the project will spend their funds wisely.

Bonuses often give the wrong incentives to investors. Big bonuses, especially those which are time-based, fuel speculation, and not due diligence and long term investing. At the moment we think that for projects that have a minimum funding threshold a small bonus (10–15 %) can be motivating in order to get the project over the minimum funding threshold.

Golem did not use any ICO specific strategies like bonuses or bounties. That only proves that they are not needed if the project itself is good enough and has a comprehensive communication strategy. In the case of Golem, this was creating an interest over a long time, engaging with potential investors, and creating a high demand. While the investment cap was relatively high, it was still set lower than the what they could maximally have raised, creating a shortage of supply and an additional draw to the ICO launch itself.

Timing is (almost) everything

Timing the ICO is very important, and it’s more art than science. Launching an ICO in the present climate can be challenging: bitcoin is riding high, and many people are buying and holding; ethereum has had its problems over the last few months and as a result investor sentiment (not technology sentiment) is low. Great timing requires you to be very sensitive to external sentiment or to work with someone who is.

Golem wisely decided that launching the ICO around TheDAO flop was not advisable. They waited for the right time while working on the project. The worse the ICO climate becomes, the more work ICO teams must do — which explains why Golem was able to launch successfully even at a time when the ICO climate has arguably cooled down.

Key lessons learned

A successful ICO does not happen by chance. The success is created by the team behind the ICO and the content — however, it could happen that the irrational factors are the decisive ones.

1. You are addressing different segments, not all of them investors. Do not forget about the professionals.
2. Communication is crucial. Articulate your vision and deliver it carefully. Remember to incorporate community feedback — especially if your ICO is doing something different or new.
3. Don’t forget the branding. Create a consistent look & feel that’s aligned to the brand.
4. Funding can be high, but needs to be explained and matched to demand.
5. Timing is (almost) everything. If the project is not properly prepared, it IS everything.

This is the third post in our series of ICONOMI ICO fundamentals. The previous posts talked about an ideal ICO and pointed out some issues with recent ICOs and can be found here:

• ICO fundamentals 1/4: The Ideal ICO by Zenel Batagelj
• ICO fundamentals 2/4: Why ICOs fail by Daniel Zakrisson