Fundraising via an ICO — advising a new digital currency business
This article was originally posted by Adam Lyness, one of our advisors, you can find the original article below:
https://www.linkedin.com/pulse/fundraising-via-ico-advising-new-digital-currency-business-lyness/
I’ve been having some fun lately (in a personal capacity) helping a Singapore based team called MEGAX out with an ICO. ICO stands for ‘Initial Coin Offering’ and is a very hot area right now, with the amount of start-up funding raised through ICOs now surpassing early stage VC funding — over $1.5 Billion to date. It’s a road we may go down in future with our own venture so building experience as an advisor is time well spent.
ICO fund-raising sits somewhere in-between a Kickstarter campaign and a conventional IPO selling shares in a company (depending somewhat on the rules in the country of operation). Typically, Blockchain based technology is used to issue and sell ‘tokens’ for a tech start-up, with the start-up usually leveraging Blockchain tech to do something novel. The tokens provide a benefit to the buyer, which could be anything from a revenue share in the company to a means of buying whatever product or service the start-up is creating.
The Ethereum Blockchain network is particularly well suited to running these types of campaigns, using ‘smart contracts’ for fund raising — transparent contracts where everyone knows the rules, and which are cryptographically enforced. For instance if a campaign doesn’t meet its minimum raise funds are automatically returned to investors. The fact that Ethereum-based campaigns have to use Ethereum’s associated digital currency (Ether) has seen the price of Ether rise from $1USD to $300 since January 2016 — not a bad return!
The ICO has become an attractive way of fundraising; Blockchain makes the process very efficient, and this combined with a lack of regulation (when compared with IPOs) can make cost of raising capital very low — in some cases a Website and a ‘white paper’ describing the concept has raised $20M+. Tokens are usually limited in numbers and after completion of an ICO become publically tradable on digital currency exchanges (like Cryptopia); if a service becomes popular token demand will increase relative to supply and the price will rise, thus providing a return to the early adopters (investors). The very open-ness and decentralised nature of the whole process does create some problems as speculation and hype can create a lot of volatility. Having said that, there are some genuinely good ICO business models, backed by solid teams.
MEGAX is (I believe) one such solid team, with a token sale active now if you want to see a live example. MEGAX is a digital currency and blockchain platform targeted at millennials. The team has done their market validation and is building a multi-faceted solution around a spendable token (code MGX). They’re leveraging an established retail network, a payments platform, and have the experience to make it work together at scale.
The challenge, till now, with cryptocurrencies in the retail space has not been a lack of consumer enthusiasm for the technology, but rather a simple lack of places to spend. To get widespread adoption, you’ll need a critical mass of outlets and the know-how to sell the concept to consumers. MEGAX has solved the first problem by having retailers and brands on board from day one. The team will also integrate the token into large scale events which they already manage, plus a large online mall. This means token holders actually get to spend in a meaningful number of places, plus access exclusive MGX only sales and offers.
On the consumer side MEGAX is starting with a demographic that they know and understand, and with whom they have a proven track record — millennials in Singapore (already a shopping Mecca so probably a good place to start). For me, this is exciting because at Cryptopia, one of our core goals is to see widespread adoption of cryptocurrencies for everyday transactions and I think the MEGAX team has a good chance of cracking this (Plus, I’m looking forward to assisting the team as they develop their payments technology.)
This approach breaks the mould of conventional retail schemes, offering novelty, scarcity and exclusivity. Crypto is cool and is opening up the FinTech space to innovation. Millennials like disruption, and they like the discovery that comes with being an early adopter. If we assume an initial $10M of tokens in circulation, and the platform takes off some simple supply and demand economics will see the token value rise. This doubles the appeal for early adopters — not only do they get bragging rights for discovering MGX first, they get financially rewarded as their tokens appreciate.
From a functional perspective taking conventional, centralised infrastructure out of transactions enables powerful features to be built much more quickly into the payment and retail ecosystem — for instance, loyalty awards can be earned and redeemed in the blockchain as digital assets using smart contracts. This ability to evolve and innovate just though code will help the platform to evade competition and stay in tune with its users.
MEGAX has set themselves a challenging programme. The technology needs to work seamlessly and instantly, because clunky is not cool. This is where having retail and payments experts with a proven track record is essential, and I like the way the team are building on an existing ecosystem they’re already created in the retail space. Working with the MEGAX team, I strongly believe they’re the right people to get the job done and I look forward to some exciting developments. For me, it’s certainly an interesting journey of learning and hopefully will help us towards a few more ICOs coming out of New Zealand.
