Why Most ICO Projects Will Fail — Hint: It is not why you think.
After spending the past 5 weeks on the road as part of our own token generation journey — with stops in London, Zurich, Munich, Barcelona, Santa Monica, and most recently San Francisco — there is one thing that has become clear to me. Most ICO projects will fail.
Now, to clarify this statement, I am emphasizing the ‘project’ part of this declaration more so than the ‘ICO’ adjective that precedes it. I also need to say something strongly: I believe tokenization and direct contributions via a TGE or ICO are the most disruptive thing that has happened to startups since I launched my first company back in 1997.
And while I emphasize that the ‘projects’ will fail, a recent analysis in HackerNoon by Eric Risley of Architect Partners LLC shows that many ICOs themselves have been failing to achieve their objectives
“From July 1 through September 25th 2017, 51 ICOs launched with high hopes, yet failed to meet their own objectives. These represented an astounding 59% failure rate for all ICOs during that time period.” (Source: Most ICOs Fail: Tale of Two Worlds)
This follows suit with the number of KickStarter-like efforts that also fail to hit their targets, where only 55% hit their funding goals (Source: Predicting the Success of Kickstart Campaigns) . Where I disagree with Eric’s analysis is that receiving a few million dollars in contributions is more than many of these projects would have ever received had they tried raising funds over the past 20 years through Friends & Family, Angel, Seed, or Venture financing. While the projects don’t hit their publicly-stated targets, the contributions received will enable many projects to “poke the box” to at least attempt part of their venture.
If you look at the reports of startup success — and the reports of depression, exhaustion, failed marriages, below minimum wage work for many an entrepreneur — it is a miracle that anyone would heed the calling and start down this crazy, start-up path to begin with. But we do.
“According to the Small Business Administration, about 600,000 new businesses are started in the U.S. each year, and the number of startups funded by VCs was about 300. This means that the probability of an average new business getting VC is about 0.0005 (300/600,000), and it also means that 99.95 percent of entrepreneurs will not get VC at startup.” (Source: Why 99.95% Of Entrepreneurs Should Stop Wasting Time Seeking Venture Capital)
And for those few who do receive venture funding, 75% of venture-backed startups will fail. When surveyed, most founders citing ‘lack of funds’ as one of the big reasons why they quit or their venture didn’t survive the inevitable dip. But I believe lack of funds is more of a symptom rather than a cause. For most, survival is simply a failure to achieve product market fit.
Achieving product-market fit is that elusive holy grail that all product managers seek: finding something that a user wants, giving them that thing, then finding out how to make money from the thing you just gave them.
There is one surefire strategy to find that fit, and that is, having to pivot in either small or big increments. Pivoting is part of entrepreneurship. You create an idea, you test it with the market, if they like it, you do more of it… pivoting or tweaking elements slightly to fill in the gaps. If they don’t like what you have created, you pivot until you find the one thing that is needed. It is simple, really.
The thing that heightens one’s ability to pivot more so than anything else is a dwindling bank account. Nothing motivates an entrepreneur faster than realizing that the current business model or product line will not sustain cash flow requirements.
The above table came out within a CBInsights Blockchain Trends Research Report (October 2017). While it was looking at certain ventures and their ability to adapt and change (and these were not ICOs), it is very notable that the ‘Event’ described for most, was the pivot.
And this right here belies the problem most ICO projects will face, including those that have been ‘successful’ with significant financial contributions. Many projects will have too much capital, a lack of product management experience, and will lack the humbling experience of building and scaling companies. Many in the space will not have put in the work, or as Jason Calcainis stated last week at BlockCon and then again this week at LaunchScale, “Do the F*&@!NG Work!” [that may have been paraphrased], In other words, these projects will not have had to pivot.
Most ICOs are promises to contributors of a future utility intrinsic to the product or technology. However, receiving this support does not mean you have achieved product-market fit. It is kind of like using install count or page views rather than DAUs, MAUs, or customer churn in your metrics. The former are great indications that there may be market demand for your offering, the latter are metrics that show you have met the demand and are giving the user something that matches their needs.
I remember when I first launched an Internet golf reservations website nearly a decade ago, the very first thing I did was create a one-page website with nothing but a ‘ground under repair’ logo. To this page, I bought a few dollars in paid search advertising using one of those free, AdWords $50 coupon cards that Google sprinkles around like candy. I wanted to see if people were searching for the concepts I had envisioned before going out and building/buying a full golf reservations platform. A basic advertisement for “Golf in Whistler BC” led me to some early metrics that gave me a price that it would cost to attract a customer while also telling me that consumers were searching (and clicking) on the offering that I had.
This really is what an ICO utility token sale is today. As the startup you are saying, “We are going to create this thing that does this thing and you as a user could use these tokens within this thing. Does this sound like a good idea? And if you think so, why don’t you pre-buy the token for use within the network?”
But this should not be mistaken by any entrepreneur for product market fit. The rapid receipt of too much capital via the ICO contribution process — especially for a utility token — is a false flag of customer acceptance.
If you think you have product market fit, you are not going to pivot to find the fit you need to build a sustainable product offering. Another good example is our YO! content sharing and messaging application. With over 1 million installs, it showed that people had a desire and a demand, especially in emerging markets, for a solution that promised off-grid connectivity to people nearby. However, this product line never achieved product-market fit. In doing customer interviews and watching user behavior, we learned a few things that were important to them and we pivoted (and continue to do so to this day). While this learning has been brought forward into our RightMesh platform and protocol, I do think we pivoted too slowly with YO! in hindsight.
With this power of hindsight, I do think the cause of our slow pivoting may have been an unintended consequence of the altruistic financial support we received along the way. Up here in Canada, we get great support from the government to push the limits of what is possible through creative tax incentives called SRED (Scientific Research & Experimental Development). This is a great program that allows recovery of a significant percentage of the technical salaries for your team, and in theory, it really helps Canadian entrepreneurs take the R&D risks they may not otherwise try. The unintended outcome of this, however, is that projects that would die or pivot in 12 months in other jurisdictions like down in Silicon Valley, may hang on for one, two, or three years in Canada. A startup that fails, frees up the entrepreneur and the technical talent to try a new project. This too is a form of pivoting.
I believe the parallels to a well-capitalized ICO project are clear. Too much money, may not be a good thing.
I have been in awe at a lot of the technical talent I have seen on my recent TGE road trip and in the crypto/blockchain space in general. But most engineers are not product people, and many don’t like talking to users. There are exceptions to every rule, of course.
I did have an interesting conversation in Santa Monica last week with another company that was going through their own TGE/ICO process. We started comparing notes as we both had a similar target in mind with regards to what we hoped to raise for our respective ventures. I had asked him how big his current team was. He replied that it was five people (some of whom were going to “quit their jobs and do this full-time post contribution being received.”) I asked him how he had hoped to spend the money contributed, and he quickly replied, “Oh, that’s simple. Hire a bunch more engineers of course. It shouldn’t be hard.”
And this, in my opinion, is why many ICO projects will fail. The overarching rule of entrepreneurship is this: you learn as much from your failures as you do from your success. Every entrepreneur needs to learn how and when to pivot.
Starting a business is hard. Making it grow and scale is harder still. Building it to last is damn near impossible.
At the start of this post, I stated my fundamental belief in the power and potential of ICOs, and the democratization of capital contribution in general. It is now an unstoppable force that will transform early-, mid-, and late-stage financing. In the future, ‘going public’ is not going to mean what it does today. All companies will already be public, involving contributions from everyone from anywhere on the planet. Equitable, global participation is what it will be.
Yes, there will be failures and flameouts along the way (probably some of which will be spectacular bonfires of cash and dreams going up in smoke). However, if the entrepreneur realizes the ICO is not an exit, it is not the finish line, it is not the endgame, and it most assuredly is not an indication of product-market fit, then there will be a lot more success along the way.
In other words, do the work.