Will the Market Adopt the New Fundraising Tools?
The most difficult task for any budding as well as an established entrepreneur is fundraising. They need a really good network, negotiation skills, and there is also the luck factor. Besides, they have to go through business meetings, presentations to clinch an offer of funding. It’s a difficult process and also time-consuming.
But now, this concept of funding is slowly changing because of a new buzzword, ICO (Initial Coin Offering). So, what is ICO and how is it going to be a game changer? Is it good or bad?
The current fundraising scenario
People think that fundraising is an easy task because of the potential of the company which raised it. The real scenario, however, is quite different. Just talk to any experienced entrepreneur, and he/she will tell you that fundraising has the least of the fun… and is also the least glamorous activity. It is stressful, uncertain and depressing too.
As they say, “If you aren’t ready to be rejected at least 50 times when you are raising funds, you shouldn’t even try!”. But you might see a change in such thinking due to ICO.
However, even business giants like Facebook, Flipkart, Paytm and Ola faced, and are facing a similar situation. And what do they do when they can’t raise funds? Yes, they sell the firm. When you attract an investor, they ask for a certain amount of the company’s shares. And when you raise funds in multiple rounds, you don’t have your own stocks in your company at the end.
The only possible way, then, to raise funds is going to primary markets, i.e., IPO which isn’t an easy task for most. Therefore, only a few companies like Facebook Inc. went for IPO whereas others like Instagram and WhatsApp sold their companies. Facebook bought both after 3 rounds of fundraising.
Fundraising isn’t an easy task. It may take multiple meetings before someone accepts your proposal because the competition is fierce. You need to convince them why they should invest in your company when there are many others? And somewhere amidst those meetings, ideas become obsolete. Whatever is discovered today becomes outdated tomorrow.
There are a large number of startups which closed due to lack of funds. But, thanks to ICO, a probable solution to the cumbersome startup financing process.
How can ICO help?
Assume that you are a CEO of a start-up which makes an app XYZ. The app has got the traction among customers and also a considerable market share over the past few months. Now, you want to recruit more workforce and stimulate your growth. You feel the need to raise funds and thus, explore your options.
The available options are VC (Venture Capitals), IPO (Initial Public Offerings) or Angel financing. Then, there are also crowdfunding campaigns like Kick Starter which is also difficult to manage. The other emerging popular fundraising way now is to offer ICOs (Initial Coin Offerings).
The ICOs also are tough but not like the others. Even a new startup can avail funds through ICOs, provided it proves its credibility to the world. It is done by explaining everything on a white paper.
The white paper is something like a pitch deck in the form of a web page. It has all the details like working of your business model, token allocation, technical information and also, the team members’ details.
This one paper should give a broad and clear picture of your vision, and crystal clear information for the investor to take an informed decision. Unlike IPOs, in ICOs a token or a coin is issued instead of securities. The greatest and the most significant advantage with ICO is that the owner’s stake is not diluted. How? The reason is that anyone who is willing to put money can invest only in a particular project and not in the company. At the same time, the investors monitor every movement and take the decisions. In the case of IPOs, by the way, the company’s CEO will make the decisions.
ICOs and Bitcoins
The present trend of Investors is that they start expecting high returns in a short span of time. And probably, it’s the reason behind Bitcoin popularity and its global reach in such a short time. If you invested $1 in Bitcoin in early 2015, it would have fetched you around $7420 now.
Investors are thrilled to see 8% returns on their investments, and a 7420% return is a huge one in such a short span of time. And in an ICO, a percentage of a cryptocurrency is on offer to the investors in exchange for Bitcoin.
During 2016–17 many venture capital companies found it difficult to fund start-ups, and this ICO method arranged the payment of rent with coins. The ICOs have raised nearly $327 million through fundraising which is very high when compared to the usual venture capital.
But anything which comes fast is not good.
The downside of ICOs
People like Sam Alton (President of Y Combinator) and Vitalik Buterin (Founder of Ethereum) feel that ICO is a bubble right now. If there is a top, then there definitely will be a bottom, and in the long run, there will be zero returns. The negative effect starts when the public starts investing money. And if it does not fetch the expected returns, it will be difficult for the good projects to get funds.
Moreover, there is no regulator. Because of the absence of a regulator, frauds are possible. Also, if many projects look alike or do not reach the expected level, it is of no use.
Many central banks and regulators are studying the digital currencies. But except for the USA, no other country has raised concerns. Even USA has mentioned that ICO will be considered as security and nothing more.
When we look at things happening in the world, questions like if ICO will be another dotcom bubble also arises. This scepticism creeps because of a global financial crisis that came with every ‘economic bubble’ including the bitcoin.
So, the important principle in investment is to wait patiently if you want to reap good benefits. Similarly, we have to wait for another ten years or so to see how the world is going to use the block chain to support ICOs, digital currencies and everything that comes with them.
It is going to be the game changer of the world economy.
