ICO/STO — The New Way
ICO/STO — What’s Next?
Introduction
Initial Coin Offering (ICO) is the process of crowdfunding, using cryptocurrencies. The first ICO was in mid 2013, held by Mastercoin. Ethereum is a form of token generation event that happened in 2014 when 3,700 BTC have been raised within the first 12 hours.
However, the real ICO hype exploded in 2017. By the end of 2017, the total capital raised is considered to be about $6 billion, about 40 times more than the capital raised in 2016.
By the beginning of 2018, the cooling down started to be observed. About 40% of the ICOs failed by February 2018.
The process of crowdfunding irreversibly changed. New expectations for the project have been set and individual investors chasing rich rewards stepped out. Institutional investors stepped in and changed the Public crowd sale events to Private.
2017 turned out to be a very important year. Regardless of the disappointments from the scam projects and failures, the noise accompanying the ICO campaigns brought awareness all over the world. More and more people got introduced to the underlying technology. Individuals and companies started pivoting with DLT in various business domains.
2017 — the year of the dreams
It was not hard to jump on the bandwagon of dreams in 2016 and 2017, especially in the first half. There were projects with simple few pages Whitepaper and a good design that raised enough to be happy … but not their investors. As the time progressed and especially after the middle of 2017, the competition for individual investor’s money grew. Hence, the efforts invested in an ICO.
Whitepapers became more informative and nicely designed. And the investors took the time to read it and all other content available out there. The advisors’ role has been introduced broadly and, in a sense, became a profession. Community and management teams worked around the clock to build up projects’ communities. Initially Slack was used for community management and communication; as of last fall everyone moved to Telegram due to security leaks. A lot of phishing emails have been sent to project supporters. Most of them have been projects’ contributors and a lot of them sent their tokens to scammers. The equivalent of hundreds of thousands in $USD have been stolen.
The marketing departments kept generating content — ads, articles, interviews. And the interest was there. Billions have been invested. And all that worked, the culmination of the Initial Coin Offering Era was in January 2018 when Filecoin raised $257 million ($200 within the first hour).
And then, the market started going down…
What is Next?
ICOs are not dead. There are new expectations though. And they affect every aspect of the process: Idea definition, blockchain feasibility, token generation event (utility vs. security), legal/regulatory framework, team composition, etc. We, at NewCryptoBlock, believe that no one will be successful again in an ICO, unless project owners step in their own shoes seriously, being responsible and respectful to their investors.
Ideation phase is as important as it has always been in the VC world. In late 2016 and especially in early 2017, we observed millions invested in decent project ideas but no backed up properly or in shallow ideas wrapped up in great sugar-coated cover.
This will not be the case anymore. Describing the idea and what problems they want to solve is not enough. Teams need to back their vision with a professional study on the targeted markets and to show a deep understanding of the competitors’ landscape.
This will help them build a comprehensive business plan. The plan has to answer the question: Can this business work under the real-world conditions?
By analyzing the business plan, investors are trying to find out how much financial and operational risk the business represents.
Two of the most important parameters (most of the cases) are Customer Acquisition Cost (CAC) and Life Time Customer Value (LTV). The sooner LTV becomes bigger than CAC, the better for the business — meaning that the cost for on-boarding a client is less that the income per user. The ratio LTV:CAC is a barometer, determining how good the business is.
E.g. if the ratio is 2:1, business is good. In case the ratio is 3:1 or even 4:1, the business is exceptional. However, 5:1 means that you are missing opportunities by underinvesting in marketing.
Product
Product/MVP was great to have in 2017. Today this is a must. Just like when you go pitching in front of VCs. No one will be invited to pitch his/her idea only. If that happens, the business model should be really unique, and the team should have a previous very successful exit. Showing small traction and allowing the investors to have a first-hand impression on your vision.
Why Blockchain?
Distributed Ledger Technology implementation is another key factor. Improvement or even replacement of an existing business model by introducing a blockchain implementation needs to be described in detail. You need to have a clear and precise answer on the one of the first questions everyone will ask “Why Blockchain?”. The legitimate answer will go beyond the general cliché “Transparent user interactions”, “Immutable transactions”, etc. All platforms/products use smart contracts systems. What the projects missed explaining is how they intend to do that, and which particular integration has already been implemented in the available product (POC, MVP, Alpha, etc…).
In many cases in 2017 the developers made the effort to come with some solutions and proper Blockchain implementations; now at the end of 2018 it is important that technical teams dig deeper and provide answers to very important drawbacks of the Blockchains.
E.g. in case that your application uses Ethereum blockchain, provide your vision on how the scalability issues will be solved. There are already proper implementations of state channels or side-chains design patterns like Plasma, or networks like Loom, also known as second layer networks. Regardless of the solution, investors will challenge it in one way or another. So, the more detailed the description is, and the more knowledgeable your tech team has about the DLT that will be used in the product, the bigger the chances of success.
Team
Talking about teams, it is very, very important that it is properly set. It has always been. But we have seen projects comprised of only tech people, or projects having a good team consistency, but not having an expert into the domain they want to dig into. Solely, this fact will turn down the investors. Broader up your team expertise, bring on board expertise in business and tech, legal and marketing. Do not overstaff in community management … not anymore. Marketing can take this over. Proper content out there is much more important today than growing a bounty and airdrop community. This type of community is not your investor and will never be again.
Investors
Projects’ success (I believe in more than 90% of the projects) depends on the Institutional Investors funds, VCs or wealthy individuals. Crowd-funding process is a complementary/secondary and contributions will be up to 20%, given that 80% have already been raised through the private rounds. And be ready to give equity to the bigger investors, this is what they expect.
How to get an access to these investors and Funds? Make sure that your advisors are well connected, go and meet local early equity VCs go to conferences. Be careful though. Going on a roadshow and visiting conferences, will not get you introduced to the big fish. Conferences will help you bring awareness to the product you are building. You will polish your presenting skills and luckily you will be meeting the right people who will be willing to present your project to the right people.
Most likely, you will be asked to pay huge money for promises only (Most common scenario: “I will organize an event with 50 people who are interested in investing in your project. Before that you need to pay $$$.”). As with any opportunity, make sure that you involve your advisors and mentors as they are equally interested in your success as yourself.
Regulatory Framework
There are a few known crypto-friendly territories. Switzerland and Estonia have been the first to open their economies towards crypto markets — for various reasons (Switzerland for decades known as a global center for wealth management, and Estonia as one on the most innovative governments with no ICO regulations). Soon after Malta proclaimed its ambition to be the “Blockchain Island”. And that was not a surprise as Malta has been known for years as the Gambling Island. Last year regulators in Gibraltar decided to opt for a light touch approach and as of 1st of January 2018 they introduced the so called DLT license. Belarus’s president Lukashenko signed the Decree No8 to create conditions for the digital economy in the country. The French Minister of Finance, announced that France will establish a legal framework that allows French institutions to use initial coin offerings as means of raising capital. It is also known that the EU parliament is working on establishing a global EU legal framework in regards to the development of the digital economy on the European markets.
All that comes to say, that choosing the right destination to register a company is very important. Legal advisors are the ones to lead that process. However, the founders should be involved in the process and be aware of the implications on the options offered.
ICO vs. STO
The excitement in 2017 about ICOs did not last too long. Almost all ICOs defined their tokens as utility, as such, their investors did not have any rights, whatsoever. A lot of founders disappeared with the investments. Others, were not able to deliver as teams. As a result, hundreds of millions of dollars have been dumped.
The alternative to the utility token is the security token. Defining a token as a security, though, is a very resourceful process. Founders have not had the time nor the funds. That is why they consciously define the tokens as utilities — simply said, an internal project currency used only in the platforms. But the idea for security was there at the beginning of 2017.
And this is how STO has been introduced. The token generation event is similar to the ICO token generation. However, the token is backed by tangible assets like debt, equity or revenue shares.
At the current moment, the end of 2018, there are too many different opinions as to where the market will head to. Some are saying that ICOs will be still there. Others are positive that the token generation events should be regulated, and tokens will be issued as securities only. There are others who have in their project development roadmaps a timeline for transferring utility tokens to security.
Founders need to make decisions, deal with uncertainty. ICO or STO? And the decision, in huge extend, will depend on the points discussed above.
Conclusions
ICO/STO is a challenging and eventually very rewarding process. Being successful requires sacrifice and devotion. Here is a shortlist of the activities you need to be engaged with:
- Idea — conceptualize it. Share it with people you trust and get valuable feedback before even one line of code is written. Be clear at this stage why Blockchain is needed and what the token will be.
- Raise Funds for ICO/STO.
- Build up a core team who unconditionally believes in the value of the product. You will be lucky to find someone who will fund the MVP or alpha of the product.
- Start building the product -at least the first version (POC/MVP)
- In parallel with the product, the Whitepaper, website and other marketing material needs to be prepared.
- Then, the pitching process starts!
NewCryptoBlock have deployed successfully a few projects and have worked with each client throughout the whole process. Once you decide to kick off your project, it requires a lot of energy, focus and experience to discern among the many possible directions. NewCryptoBlock will set up your project using its own proprietary technical and marketing solution, and allow you to focus on the business.
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NewCryptoBlock consists of specialists with various extensive backgrounds, who are united by their passion for innovations, professional development and building high-quality software products. Blockchain technologies have the capacity of bringing to life revolutionary ideas that can change to better the world compared to the way we know it now.
