Should you hold a token sale?
A token sale is a great way to raise funds, but it’s not a walk in the park. Is it the right decision for your project?
A token sale can be a highly effective way to secure investment, grow awareness of your project and gather a loyal band of early adopters for your product or service. However, conducting a token sale is not easy and it’s not right for every company. It’s important to be prepared and understand the implications.
In this post, we’ll walk through the rationale behind token sales, the advantages and disadvantages of raising money in this way, and a few questions that may be useful to ask yourself before you start.
Why do companies hold token sales?
The concept of a Token Sale (commonly referred to as an initial coin offering or ICO) first emerged a couple years ago. Token sales quickly became popular as a way for young companies to raise substantial amounts of funding without sacrificing ownership and influence to majority shareholders.
Any project which uses blockchain as a core technology, and has a fundamental need to use a cryptocurrency or token as part of its business model, can sell its tokens via a token sale or initial coin offering.
The people who will be interested in buying the token fall into three broad camps:
- Traders who speculate on the future value of the token;
- Early adopters who want to use your product once it’s live; and
- People who want to see your project succeed because they identify with its goals.
The benefits of holding a token sale
The most obvious benefit to holding a token sale is the opportunity to raise funds for your project without giving away a large chunk of equity and sacrificing control of the company. Token sales often secure larger amounts of investment than other, more traditional, methods of fundraising and, crucially, there are few conditions attached to the money.
Holding a token sale also provides your project with a golden opportunity to grow a large, and usually enthusiastic, audience. A token sale community is likely to be committed to spreading the word about your project and amplifying your news and updates; they want you to succeed because they benefit if your token appreciates in value.
You are likely to find early adopters for your product or service among this community. Whether you launch the token sale with only an idea, with a prototype, or with a fully functioning product in the market, all of your post-token sale endeavours will have the benefit of a large pool of keen beta testers.
Tied to all of these advantages is the opportunity for your project to gain visibility and stand out from competitors. Token sales are still new and exciting enough to warrant press attention, particularly if not many others in your field are doing the same.
The challenges of holding a token sale
Holding a token sale is a fantastic way to raise money, but it comes with its own unique set of challenges; it’s not necessarily “easy money”.
Most companies conducting token sales are relatively young and many struggle with the realities of becoming a “public company” at an immature stage. The team’s every move will be under scrutiny from token buyers at every stage. Many conduct thorough due diligence before buying tokens and apply pressure to prop up the token value once it’s in circulation.
Most teams quickly discover that launching a token sale is akin to inviting the entire internet to give an opinion on every detail of your project. It’s common to receive unsolicited advice on marketing, business strategy etc from members of the community. The challenge is to take constructive feedback on board while remaining focused on your objectives.
The crypto market is volatile, and to conduct a token sale you must accept this volatility and make peace with uncertainty. It is difficult to predict market conditions very far in advance. It is sometimes necessary to adapt to changing market conditions, by adjusting the date of your token sale, for example.
Imperfect banking solutions are another unavoidable characteristic of operating in an immature space such as crypto. It can be a challenge to liquidate the Ethereum and/or Bitcoin raised in a token sale, for example. There have also been reported instances of banks closing the accounts of companies who are involved in cryptocurrencies.
Questions to ask before you start
Before you make the final call on whether a token sale is the right form of fundraising for your project, it’s worth asking yourself (and your team) following questions:
- Is blockchain and cryptocurrency a core part of your tech stack and/or business model?
- Are you ready to be a “public” company?
- Are you comfortable with handling the volatility of the crypto market?
- Do you feel confident enough in your strategy to defend it if necessary?
Consider your product or service
All too often we see companies making forced changes to their products and services, in an effort to become “compatible” with a token sale. This often creates unexpected barriers of entry, changes the business model in unexpected ways, or simply creates new issues that must be dealt with before it is presented to an audience of hundreds of thousands of people who will scrutinize and second guess your choices.
There are various proven strategies and approaches to incorporating a token into a product or service, so be sure to reach out to people with the relevant experience, and take the time to research how a token fits in as a whole. This is probably one of the things that will makes the whole process of a token sale easier: research, thoughtfulness and good product/service strategy.
In conclusion
A token sale is a great way to raise funds, but it must be approached properly. In order to maximize your chances of success, it is important to make sure you’re as prepared as possible for the challenges you’re likely to encounter along the way.
If you’re ready to board the rollercoaster, look out for our next post: “How to build strong foundations for your token sale”.
