ICO: Boom or Bust?

The volume of the growing crypto economy and the opportunities it has in store can’t be underestimated. Over the past year, the market capitalization of dominating cryptocurrencies has increased more than eight times, exceeding $100 billion. The ICO market volume is undergoing galloping growth. Specialized funding proposals have already come into existence, and classic venture players are actively investing in blockchain technology — about $232 million in Q2 2017 alone.

Fundraising has turned out to be one of the biggest hurdles for any new company, and there’s no question about that. To pull the plug on this problem, startups can turn to an ICO or a VC. The former has recently gained popularity because the blockchain and virtual currency are worming their way into wider popular culture. The later, which means fundraising from traditional capitalists or so-called business angels, has been around for many years.

Even though early-stage companies have a right to choose, the new crowdfunding model is believed to be the ideal option. Of course, the ICO market, as well as the cutting-edge technology, is young, and the number of proposals still beats the quality. However, the digital asset market has valid reasons for further development that should not be discounted.

Is ICO the New VC?

An ICO is the sale of tokens or coins issued by blockchain companies for their financing. The tokens are offered for sale on crypto exchanges, where their price increases or decreases depending on the quality of the product, consumer demand, and speculation.

It might sound like a pipe dream, but literally anyone can become an ICO investor. If you have access to the internet and can purchase coins with a stellar reputation such as Bitcoin or Ethereum, then you’re in. It doesn’t matter where you live in a city or in the country. Unless your idea is promising, you don’t even need a “work product” to engage supporters. ICO investments are open to both skilled users and newbies.

Risk-takers aspire to make a profit by gaining early access to possibly revolutionary protocols and applications, just like the first investors of BTC and ETH. For example, if you invested $100 in BTC in January 2011, your BTC would now be worth $1.5 million. Enthusiasts hope that new tokens will eventually appreciate (grow) in value, which will allow them to make a profit when they sell it in the future. Users are primarily looking for a brilliant concept that will be an effective path towards strengthening the relevance of the project, especially after its launch.

Mature firms favor classic VC investments. Therefore, crowdfunding built on the blockchain is a better match for startups looking for easy access to money. ICOs offer an effective way to tackle the problems of new companies all at once — they provide both funds and the opportunity to form a basis for the development of the project.

Because there is no need for paperwork, many online scammers make an official document about a non-existent product or service and launch an ICO. Tricky developers can hide crucial project details to present it in a positive light to potential investors. As a result of such manipulations, ICOs and crypto tokens have gained negative PR, and are often referred to as online fraud.

If many people believe in your idea, your startup must be worthwhile to command such respect among users. But if something goes wrong, you may be treated as a scammer. Under these circumstances, you will end up all alone, most likely blacklisted, and the chances of returning will be close to zero.

The blockchain makes raising funds as easy as possible. You just need to create a smart contract and ETH address without any intermediaries. In a political sense, this revolutionary technology has challenged our usual centralized network and fueled a discourse on currencies and values, digital governance, and the overall foundation of our internet.

Traditional Venture Capital

Unlike ICOs, where investors act as token holders and don’t actively participate in the company’s life, venture capitalists become co-owners of the business. They have a significant impact on the product or a system to their advantage; they can block transactions, appoint directors, and much more. These solutions tend to help to avoid unnecessary risks. Funders are focused on creating the largest increase in revenue possible, but unlike an uncoordinated pool of ICO investors, they can straight up manipulate this indicator.

Business angels are professionals of their craft. You have to provide a convincing idea, a meaningful whitepaper, a detailed outline, and a complete roadmap. Be prepared to give specific answers.

One of the core benefits of such investors is that they are not looking for a quick buck and will stick around for a while. In addition to providing sufficient financial resources to effectively implement your plan, VCs grant companies a variety of valuable things, such as scalability, business recommendations, or advice. They also provide a crucial link to accelerate the adoption of new business by established firms.

With all its benefits, venture capital is, nevertheless, rife with problems. Sometimes, participants become overzealous, taking part in the startup’s life and causing conflicts among the team. Also, money is often excruciatingly difficult to get. You have to prove the viability of your project. Now and then, blockchain-inspired solutions show mind-blowing results — we are talking about a thousand-fold return in the shortest possible time. In classical venture capitalism, the same numbers are significantly lower.

VC fundraising is direct evidence that your project is successful. Why? Due to the wide experience and careful study of “friendly hands,” partners invest in your project only if they believe it will prove beneficial.

Which Is Better?

One way or another, the risks for investors are extremely high in both cases. Venture capital has a filter for scams and unpromising projects (the expertise of funders), but it is difficult to judge the professionalism of contributors in blockchain crowdfunding, where anyone can participate. Some dishonest entrepreneurs raise capital and simply disappear. The biggest example is Confido.

The crypto market is bound to grab investors’ attention with the chance to make quick cash to kick-start your business. However, the risks that its participants take on are among the greatest in the industry; this is proven by the difference in the behavior of ordinary investors and professional venture capitalists. You rarely find qualified people among ICO participants. Those who invested in new crowdfunding models are usually inspired by a romantic faith in blockchain or a thirst for quick profits. Enthusiasts hope that every $1 invested will turn into $100 in a few years, just like it has with the dominating coins, Bitcoin and Ethereum.

What’s Next?

In the coming years, key centers of the crypto economy will be formed around the globe. They will concentrate most of their operations and assets in this market, giving a significant boost to their own digital economies through the introduction of blockchain technologies. The speed of change in the industry is astounding. Every country is trying to find the most effective model for regulating operations with virtual currencies, including ICOs. For example, since April 1, 2017, Japan has allowed crypto exchanges to function in its territory and exempted exchange transactions from its taxes.

Considering such optimistic forecasts, you can imagine an idyllic picture in which promising projects no longer need to seek money from venture capitalists, wasting precious time. In the near future, is it possible that startups will find investment on favorable terms with the help of ICOs, and everyone will be able to become an investor? Only time will tell, but the answer is probably yes.

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