ICOs 101
ICOs is the new pie that everyone wants a piece of. But most don’t really know what it is all about. Not to be confused with IPOs (Initial Public Offerings), Initial Coin Offerings(ICOs) are a fairly new way for Startups to get their initial funding.
ICO explained:
Theoretically, ICOs are conducted by cryptocurrency Startups who offer a percentage of their cryptocurrency at a discounted rate to early backers in exchange for legal tender or other cryptocurrencies (usually Bitcoin or Ethereum).
In practice, the ICO typically begins with a startup publishing a white paper with a description of the product or service they want to build. Investors then purchase tokens for access to the products/services provided by the company.
Simply speaking, imagine you’re in a carnival where you buy a $10 token from a booth to play the games or enter the rides. The booth is the startup and you are the investor. In a lot of cases the rides are still under construction.
Unlike IPOs, ICOs are usually conducted pre-revenue and pre-product.
ICO white papers are not yet subjected to strict regulations. Thus, most are unreliable, inconsistent and vague about the finances of the company. This also means that investors are subjected to lower transparency and higher risk in terms of protection.
ICOs do not need a proof of concept for investors to get on board, unlike the more stringent criteria for VCs to back early stage Startups.
This translates to high risk for investors but also a high reward opportunity. Case in point Ethereum raised US$20 million in 2014 and is now the second largest cryptocurrency.
The ease at which ICOs are conducted and the hype surrounding it has attracted fraudsters eager to exploit inexperienced investors. PonziCoin launched as “the world’s first transparent, decentralized Ponzi scheme built on blockchain” and it still attracted investors, a crystal clear example of the recent phenomenon.
On top of that, despite the recent buildup around ICOs, more than half of the projects have already failed which might lead to more warnings issued for questionable ICO offerings. Cryptocurrencies have also taken a dip in value in recent weeks, sparking concerns once again about the overvaluation of cryptocurrencies.
Even with the risks surrounding it, ICOs do not seem to be a trend that will die down anytime soon. ICOs if done right can be beneficial to both the Startup and investor. A good starting point is to determine if doing an ICO has business value for your Startup. Is the answer yes? Explore it further. If no, don’t bother.
Our advice would be to gather as much information as possible and to ride the wave with caution!
Referenced from: Emir Hrnjic
The Startup Buddy is Singapore’s founder-friendly Startup builder. We provide step-by-step guidance, resources and pitch optimisation in your Startup journey! Find out more at The Startup Buddy!
