What does the landscape of launch platforms look like today?
At the moment the options for startups / SME’s looking to raise funds are not ideal. They can be complex, take a lot of time and can require a lot of capital from the founders. We believe that Initial Coin Offerings (ICOs) often end up issuing in most cases worthless utility tokens (there are of course a few exceptions) and that there are a lot of drawbacks (lack of regulatory compliance / governance) to this type of (in most cases shady) fundraising.
Although cryptocurrency has a great deal of potential, ICOs have shown that sometimes the lack of regulatory compliance and procedures have allowed the darker side to flourish. There have been a number of high profile hacks and scams that have undermined the credibility of this type of fundraising. Also, in the “old world” many accelerators fail within 18 months of launching, often due to lack of cash flow as they rely on future exits as their primary financial source.
A Breakdown of The Launch Platform Landscape: October 2018.
Types of Launches
So, let’s take a look at the different types of launches that are often used by traditional non-blockchain startups and cryptocurrency companies.
“Old World” Launch Platforms (Non-Blockchain)
Typically, a launch that is not on the blockchain will involve old world capital raising, with angel investors. Here are some examples of old-world capital style fundraising:
- Investiere: Offering private and institutional investors direct and professional access to startup investments, Investiere offers business angels access to competitive venture capital deals.
- Area 21 Invest: This platform allows you to invest directly into startups, real estate, SMEs and special projects.
- AngelList: This U.S. website is designed to connect startups, angel investors and job-seekers who are looking to work at startups.
- Propelx: This is an investment marketplace that enables investors to access visionary science and technology.
- InvestorList.co: This site is simply a searchable crowdsourced database of over a thousand investors.
- Gust: Gust is another platform that connects startups with investors all around the world.
- CrowdFunding: Platforms such as Kickstarter and IndieGoGo allow startups to crowdfund when gathering together capital for a launch.
Then in (approx.) 2017 a new way of raising money in an easy fashion was introduced. An initial coin offering (ICO) is a type of funding using cryptocurrencies. ICOs and token sales became popular in 2017 (learn more).
“ICO” Launch Platforms (Blockchain powered)
Typically, most blockchain powered launch platforms work on an Initial Coin Offering (ICO) model. This is the cryptocurrency equivalent of an IPO (Initial Public Offering), which is how companies would traditionally raise capital.
What’s the difference between an ICO and an IPO?
Simply put, an IPO is the first sale of stock issued by a company to the public. Prior to this, the company is considered private and is made up of a small number of shareholders, primarily early investors such as the founders and their friends and family — as well as professional investors such as venture capitalists or business angels. The company then “goes public” and allows anyone to buy shares. This raises money for the company and helps it to grow and expand.
Although an ICO and an IPO are both a process where companies raise capital, the difference is that during an IPO the company is selling their stocks to the public, whereas during an ICO investors are given crypto-coins (in most cases utility tokens) in return for their investment.
During the ICO, interested investors buy into the offering, either with a fiat currency or with preexisting digital tokens such as ether. In exchange, the investors receive a cryptocurrency token that is specific to the ICO. The general idea (in 2017) is that the investor believes the token will perform exceptionally well and that they will get a good return on their investment.
Here are some examples of Blockchain ICO style fundraising:
- Coinlist.co: This website is considered the trusted platform for running compliant sales of tokens.
- Bitcoin Suisse: This platform facilitates ICO launches and also offers various services around the launch of ICOs — such as advisory from ICO experts to ensure that it is structured and planned in the best possible way.
- Altcoinomy: Another platform that facilitates ICO’s and advising projects.
- Republic/Crypto: This is a legal token distribution platform that allows users to participate in democratized blockchain investing.
- Binance Labs Incubation Program: Binance, the world’s largest cryptocurrency exchange, has announced an incubator program that is focused on nurturing early-stage blockchain startups.
- IndieGoGo ICO: IndieGoGo has leveraged their fundraising and promotion experience to make blockchain investments that are accessible to all.
The Issues With Current Fundraising Models
There are quite a few issues with the current style of fundraising. Some of the main complaints are that it is complex, annoying and takes a lot of time. Also, it eventually wastes a lot of capital from the founders.
Here are a few of the other disadvantages:
- The current fundraising process can last up to 3–9 months, which is incredibly time consuming and keeps the team away from the business.
- There are a lot of administrative costs and hurdles associated with capital increase.
- It’s very difficult to raise financing rounds of CHF 2–10 million (in Switzerland).
- Many private investors underestimate the importance of support.
- A start-up investment is usually illiquid (meaning it’s hard to sell a smaller stake on the secondary market).
- Trading is only possible via private secondary sales, or the appropriate platforms.
- When you offer something in an early sale, it is often associated with a discount.
- Often, the current shareholders agreements make early sales of shares difficult.
- Although there are a number of requirements a company has to fulfill before listing shares via an IPO (such as minimum earnings threshold and a good track record) there are no global / solid regulations ICOs have to meet. Some ICOs have no track record and only have a white paper to back up their project.
- Uncontrolled ICO’s of poorly managed start-ups complicate the general market of raising funds.
- The current models also increase the risk of defaults.
Why did IndieGoGo cancel their first ICO?
When crowdfunding giant IndieGoGo launched it’s first initial coin offering, it was for the Fan-Controlled Football League. They had raised more than $5 million in December 2017 to fund the development of an independent football league that would crowdsource team management and give fans control over many aspects of the game including logo design, staff choices and even calling the plays.
It surpassed its $5 million funding target, but it then quietly cancelled the ICO and refunded all of the investors — due to regulatory concerns. It’s a sign that mainstream adoption of cryptocurrency in North America has still not arrived and that there are still many obstacles faced by ICOs.
ICOs are now positively changing, now real value is being offered
Despite being an excellent option for fundraising in some cases, ICOs (which issued utility tokens) have also raised a number of problems. They have proven that while cryptocurrency has a great deal of potential, there is also a downside when it comes to the lack of regulations and procedures.
The common issue is that many ICOs are poorly designed, or they become too close in structure to a pyramid scene. There is the risk that a group of individuals are hyping up interest in a specific coin in order to push the price up, so that they can sell and make a quick profit.
ICOs, where utility tokens are being issued, are quickly becoming a thing of the past, especially since there are already better methods.
Introducing STO — Security Token Offering
During a STO the company is offering something of value in return for the investment made by the investor. This means that in principle the process stays the same. The investment is (usually) made with a cryptocurrency (i.e. Ether) and in return (once the crowd-sale is successful) the investor receives tokens which are asset-backed.
Asset backed means that there is something of real value involved. This is usually shares of a company (including dividend payouts). Therefore these tokens are classified as security tokens — hence the name Security Token Offering.
The company issuing such security tokens has to have a solid legal framework in place. This solid legal framework combines the best of the “old world” and the blockchain world — therefore ensuring investor protection. You can read more about Security Token Offerings here.
A general benefit for the whole “ICO” eco-system is that the company conducting a STO will have to be much more transparent and open about their business in general (how does the company plan to make money, milestones / goals) and about how the raised funds will be spend (in order to achieve the milestones and goals). All this information and more will most likely be find back in the company’s prospectus (a legal binding document outlining the security token offering in detail).
Why are the existing centralized “ICO” launch platforms not conducting STOs?
As you’ve read above, when dealing with securities you have to be compliant with many laws and regulations. The above mentioned platforms are not allowed to deal with, or issue, securities as they don’t possess a security dealer license or bank license. Without such a license these centralized platforms are not allowed to facilitate any kind of service for a company who wants to conduct an STO. The fact that some of them are a member of an SRO (self-regulating organisation) does not change anything about it.
Luckily, there are a few companies working on receiving such licenses from the financial regulator in their respective country. Therefore it won’t be long until there will be a truly regulated launch platform ready to serve STOs. Any project wishing to conduct an STO before a launch platform is ready can only do so by managing the entire offering process by themselves (self issue / “Selbstemission”).
How can the governance problem be tackled?
The beauty of conducting a STO is the fact that the underlying technology is Blockchain. One of the key pillars of Blockchain is the fact that it is a decentralized system. Now, you might think the word “decentralized” is just a “marketing” thing. But, if you take a closer look at it, in the case of certain Blockchains, it is not. True decentralization means you can use a product or service that is built on top of that “trust-less” system (as explained in detail in our previous blog post).
For example the Ethereum Blockchain currently has around 12’000 nodes — this means that it is the most decentralized public Blockchain. Blockchain without decentralized proof, whether based on PoW (proof of work) or PoS (proof of stake) is nothing less than a centrally controlled, private, non-tamper-resistant database. Such databases already exist for long time before the introduction of Bitcoin.
By issuing securities (i.e. company shares) through a Security Token Offering you are, besides raising funds for your company, automatically going to manage your shareholder register on the Blockchain (within a smart contract). The beauty of it, is that it is completely automated and each transaction is registered. The company shareholder register (smart contract) is therefore always up-to-date (for technical experts, this would the the tokenholders section within a smart contract).
Further benefits are that the company can easily distribute dividends amongst your shareholders. By sending the dividends to the company smart contract, this will enable any shareholder to claim their dividend (proportional to the amount of tokens they are holding).
Also, you can attach a DAO smart contract to your company smart contract and easily hold a virtual General Meeting of Shareholders. The shareholders can raise questions and vote on specific topics and the weight of their vote will be determined by their amount of tokens.
With these possibilities in mind, it’s very important to ensure that an STO is technically based on a truly decentralized Blockchain. Otherwise, if the STO is based on a Blockchain that is controlled by a single centralized party or group (which is the case with a permissioned blockchain), all these benefits are only benefits on paper.
Another important aspect to keep in mind is ensuring that onboarding (AML / KYC) is rock solid, so that at any time you can identify your investors and therefore give them solid protection.
You might be thinking, “Hmm… that’s an interesting theory but how does it work in practice?” In a soon to be released update, we will go into detail about how all of this can be achieved in a practical and functional way.
We are building a decentralized exchange & launch platform solution in the heart of Crypto Valley (Zug) as we speak! Are you curious? Want to learn more about it? Contact us today!