Why ICOs fail

ICONOMI ICO fundamentals — 2 of 4

Over the past couple of months we have seen many ICOs being announced and launched. Some of these like 1st blood, Golem, SingularDTV and others have been very successful in raising the funds they needed. Others have found it very difficult to attract the investors and funding they required.

The unbridled success of certain projects has led some to believe that raising funds through an ICO is easy. Unfortunately, they are wrong: ICOs are not a way to get easy money. Attracting other people’s money to support your project is tough — and it should be tough!

But isn’t an ICO only a whitepaper and a nice website? What are the success factors that differentiate good ICOs from bad ones?

In a previous blog post in our “ICONOMI ICO fundamentals” series, The Ideal ICO, we wrote about traditional venture capital and open crowdfunding and shared our view of the 10 key points of the ideal ICO. To reiterate, the ideal ICO has:

  1. A team with proven ability to execute
  2. Business viability check
  3. Technology check
  4. Efficient use of funds and business-based thresholds for minimum and maximum raise
  5. A defined legal framework
  6. Scam protection
  7. A transparent ICO process
  8. Escrow
  9. Controlled release of funds
  10. Delayed founder liquidity

This is fairly similar to the criteria of startup characteristics, operational transparency, crypto-sale resiliency and business model relationships that were recently proposed by William Mougayar.

Our criteria boil down to the following key requirements for success: team, market, and business. The rest are safety, security and credibility criteria that add additional assurance to the investors — but only if you get the fundamentals right.

Another thing to note is the importance of timing. It is much harder to quantify, but good timing can be the difference between barely making the ICO threshold or reaching the cap.

We have analysed many of the recent and presently struggling ICOs against our criteria and tried to pinpoint the cause of their problems. This is not an exhaustive list, but with these examples we hope to illustrate with clarity how important it is to get these fundamentals right.

Inchain

Link: Bitcointalk
Raised: 57.972 BTC, 10,712.452 ETH

Inchain, a decentralised insurance platform, just announced that they failed to meet the minimum funding target and will cancel the ICO.

Main drawbacks:
Team — Unproven team and no other proof of ability to execute
Business viability — Limited/unknown market and unclear business plan
Technology check — No proof of concept and no other technology verification
Crowdsale mechanics — Badly structured ICO in terms of investor protection

ARK

Link: https://ark.io/
Raised: 6034853 LSK, 132 BTC (at time of writing)

ARK, a service to bridge blockchains and develop services on blockchain, quickly raised a lot of LSK tokens but has only attracted minimal BTC funds. However, the initial level of interest quickly died out and in the last few days the number of new participants has really died off.

Main drawbacks:
Team — Unclear team and governance structure
Business viability — No clear market (the 1 % fallacy of a world payment system), no business focus
Technology check — Technology not ready and no proof of concept available
Crowdsale mechanics — Extreme bonuses for early participants (especially 120% LSK) and poor performance against the safety, security and credibility criteria

Kibo Lottery

Link: https://kiboplatform.net/
Raised: 290 000 ETH

Kibo Lottery presented a well designed website and whitepaper, but quickly got a lot of bad PR. At the beginning they got some traction, but as the project was analysed and more and more information about the project was uncovered, interest faded and a negative story took hold instead.

Main drawbacks:
Team — Reports of team members being involved in previous scams
Technology check — There were questions of whether the team understood the implications of the random number generation method chosen

Decent

Link: https://decent.ch/
Funds raised: 5,641.22 BTC (of which 4,138 in first two days alone)

Decent, a decentralised content distribution platform, started off brilliantly and quickly raised $2 million. After some technical issues they finished their crowdsale at $4 million raised. While they reached the threshold, they probably should have raised more given the project team, reputation and fantastic timing (ICONOMI raised $10M in the same period) .

Main drawbacks:
Crowdsale mechanics — The bonus structure, which promised a 50% bonus the first day up to the minimum funding threshold, together with a declining exchange rate created a huge incentive for first day participation, but a very low incentive for later participation (indicated by the fact that around half of all funds raised in the first day of the 8 week ICO period).
Technology check — An IT project operating with blockchain technologies absolutely must get the core ICO technical platform to work flawlessly, otherwise there can be trust issues around the technical capabilities.

Arcade City

Link: https://arcade.city/
Raised: 613,311.64 USD
(at time of writing)

Arcade City, a tokenised rideshare application, experienced a huge public PR backlash even before their ICO started. It seems that a new team was added to the original founding team and started preparing the ICO. However, due to their inexperience with communication and PR they did not realise the enormous backlash they would receive due to their previous project leader, who later resigned. This underscores one of the key points above: the team is the most important element in any project. In this case a combination of existing bad will and lack of experience in PR and communication quickly led to a massive online outburst.

Conclusion

The above are just a few examples, but we believe that we have highlighted the fundamental causes of the challenges faced by these particular ICOs. But what does that mean for other ICO projects and the ICO ecosystem? We’ll discuss that in the next blog post in our “ICO fundamentals” series.

Previous posts in the series:
ICO fundamentals 1/4: The Ideal ICO