ICOs: The next Tech bubble?
What We Can Learn From the Mistakes of the Past
It’s 1999 and the internet boom is peaking. Over a third of American households now have internet, and everyone is trying to get into the new internet phenomenon. One of the hottest startups at the time ‘Webvan’ is poised to revolutionize the grocery industry. They will offer door to door delivery of groceries and online ordering — bringing the grocery market to the web. They have world class experts and next generation technology. Investors are fighting to be part of their meteoric rise. What could go wrong?
In a few short months after it’s launch, Webvan raised over 375 million dollars in an IPO. 2 years later — after reaching an 8.5 billion dollar valuation — Webvan was bankrupt and forced to liquidate its assets. Welcome to the dot com boom and IPO mania.
“The craze of the dotcom bubble and the flood of capital that came with it led to many back-of-the-napkin business models” becoming publically traded companies almost overnight” — Andrew Beattie, Investopedia
There are other famous examples: Pets.com which raised 82.5 million in an IPO before its shares fell to nothing. Etoys.com declared bankruptcy 2 years after IPOing for 166.4 million.
Today we see a similar pattern occurring — just replace ‘internet’ with ‘blockchain’ and ‘IPO’ with ‘ICO’. At the Best of ICOs we’re wondering — are we seeing the beginning of a new dotcom craze? And if so — what lessons can we take from the past to prevent a similar combustion.
“I think this is just the beginning, I think this will be the biggest bubble in the human history.” — Says ICOindex Cofounder, Ondrej Pilny
The Blockchain + X Business Model
The formula for the internet boom of the 90s was simple. Take a traditional brick and mortar business, add the revolutionary promise of the internet and wait for investors to beat a path to your door.
Today we see this formula occurring with blockchain. Snip is a news service social network that uses blockchain. Hirematch is a employment marketplace with blockchain. Cobinhood very blatantly mirrors the popular stock trading startup ‘Robinhood’ but for cryptocurrency.
There is nothing inherently wrong with this approach. New technology should be used to disrupt old technology wherever it is beneficial. But the amount of money being provided to companies whose only claim to fame is adding blockchain to an existing business model is staggering.
Business plans of the 90s have been replaced with white papers — twenty to fifty page documents that outline the goals of the project and the mechanics of the token being sold, and while this might seem like more of a time investment and entry barrier compared to the dotcom companies, it is very easy to pump out white papers that seem technical but are just vague jargon without saying much about the innovative benefits of the actual product.
How to find a successful and legitimate project
Fortunately, in this age, we can investigate and ask questions regarding things that the white papers left out. We can look at the team’s previous history, the validity of their proposal, and take a leap of faith on their ability to perform based on other indicators. As an example of how crazy the lack of information during the dotcom bubble era was: ‘No independent market research preceded the launch of Pets.com’
There is no secret formula for success. If this was the case, venture capital wouldn’t have “venture” in the name. 60% of startups fail today (80% during the dotcom bubble). However, there are certain things to look for when investing in a company.
Venture Capitalist, Fred Wilson, from AVC writes:
A legitimate project has these characteristics:
- A relationship to the amount of money being raised and the complexity of the project.
- A very clear use case that requires the decentralization approach brought by blockchain technology.
- A reasonable valuation based on the size of the opportunity being pursued.
- A credible team.
- The technology has been built, at least to a point where it is demonstrable.
When analyzing an ICO, one of the most important questions is not whether the idea is cool or it “makes sense”. You have to look at the chances of that specific idea being successful by that specific team. It is critical to analyze what the team has done up to date, in terms of research and testing their ideas.
Long Term Survival: What can we learn from our mistakes?
Testing and the Lean Startup Methodology
In the case of dotcom bubble’s biggest failures, companies received hundreds of millions of dollars without having a tested product, or done any market research or sampling. After the bubble crashed, startups realized that it was extremely important to test their product at a small scale before creating a larger version of the product.
From this perspective, the lean startup methodology was born.
The idea is to test the product in small sample groups where each stage verified the need and usage of the product, and as those stages showed success, more money and iterations would continue building the idea.
The best ICOs that are currently out there (like Kik’s KIN for example) are in fact following their pre-existing market research (Kik used its expertise of running one of the largest social networks out there). So there is still hope that we are learning from our dotcom bubble mistakes! The fact that KIN funds are locked in escrow till certain milestones are reached and the coin has an intrinsic utilitarian value is one of the best examples of what an ICO with good forethought and budget allocation looks like, preventing both pump and dump scams and investing in long term success.
Since the teams behind ICOs are not vetted similar to the dotcom boom, the few indicators of whether an ICO really can survive if there is a market crash in the value of the two main tokens used by the ecosystem (Bitcoin and ethereum), is whether they can derive their value from something other than these currencies. Most ICOs will inevitably fail if there is a pop in the bubble, however the ones that will succeed have strong social network effects and can rest on their own without much backing.
It’s also hard to estimate what will happen with the prices of some of this tokens. Many of them are based on the ERC20 (Ethereum Token Standard), which makes them in some way tied to the value of Ether, or at the very minimum, makes them dependent to the infrastructure reliability of the Ethereum network. If Ethereum were to fail, what would happen to these tokens?
What is different this time?
As with everything, no two events in history are repeated the same way. ICOs are occurring at a time in human history where access to information has never been better. This means that they will be more critically analyzed as the information and criticism is passed (hopefully).
Tokens also have the added benefit that they can provide some form of decentralization to the network. This means that if the company delivers the token successfully, it is possible that the users of the network will have power to mold and modify the decisions made by the company. This can make the ICO quite robust by providing loyal customers that are both stakeholders and users of the product.
If we can avoid the pitfalls of the past ICOs may issue in a new bright future. One where people can invest income as they see fit — voting on early stage products and ideas they want to see built. As a community who believes in this future it’s up to us to demand appropriate regulation, reveal shady practices, and tie our investments to accountable milestones.
Even the dotcom bubble left giants that persist until today. We will see the same with ICOs — the question is how big a crash will we have to endure this time around?
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