For anybody not already drunk on BTC, ICON or grabbing a “quick 10x pump” in late 2017 and earlier 2018 — looking from the outside in on the ICO industry was like looking at a window of insanity (that made many big monies).
This is how it happened.
1 — One day Joe wakes up sometime in 2017 and has a million dollars in magic internet monies sitting on his laptop. There are ten thousand Joe’s not exactly randomly selected — they were all forward thinking enough to HODL that coin instead of buying pizzas. However Joe is more or less just a Joe and he has been given a gift of a million dollars worth of “crypto” casino chips.
2 — Most “Joes” aren’t going to cash that out — they don’t even know how to if they wanted to and certainty don’t want or know how to pay taxes on it — so they sometimes buy pizzas, amazon gift cards, find someone to take some crypto who will book them airplane flights. Other Joes’ find weird European companies who will give them debit cards they can load with crypto.
3 — So Joe in 2017 — basically has a bunch of “crypto casino” chips that he thinks it will be fun to replicate and play a game so he throws some on the first ICOs he sees and somehow Joe makes 5x on those. Warren Buffet says a “Bubble happens when people see their neighbors who are dumber than them getting rich.” I’m not to say who is “smarter or dumber” but Dr. Bob who has a PHD and been working his whole life hears about the neighbors son Joe who just got “rich” off of bitcoin and then turns on CNBC and hears about John McAfee cutting off his penis if Bitcoin doesn't reach $100k.
4 — Welcome to Bubble 1.0— for those of us that were around for the web 2.0 bubble, it looked very familiar. Basically anybody who could say they could be the “_____ for _____” and be the first anything to show up would get funding and then the “coin” would go to an exchange and get pumped up by retail investors, the early and fast profited and the slow and late maybe got caught holding a bag, but they got a whiff of the thrill and potential and tried harder to “get in early” on the next one. This kept going until most of the retail investors got cleaned out.
Which leaves us in a situation where there are no naive “Joes” with magic internet monies on their laptops and no brand new retail opportunity seekers leading to a market pump. All we have left are the ones that didn’t get cleaned out, slowly reducing their stack waiting for the next “bull run.”
But is it coming? Yes — but not as it was before.
As someone building a “real” company in Unification, (more later on how we define real and not) — we did not participate in Bubble 1.0 — in which it was dominated by narrative ideas, “white papers” that basically lied and made up unattainable goals and “teams” that were more optics than reality. During this time we were building out what we hope will be the future infrastructure of Distributed Identity for the globe.
A few interesting examples:
a — I was told by a potential investor that if I got “two Chinese PHDs” on my team then he would invest. I told him that our tech was fine and we were always looking to do better, but why two Chinese PHDs?— and he said that the last 3 projects he made money on had Chinese PHDs so it was a good signal, and that he knew someone that could “loan” us some in exchange for some tokens.
b — We saw blockchain projects that were one-upping each other in transactions per second in their white papers and then getting massive funding and making a few people rich. “Your blockchain only does 30,000 tx a second, well mine does 40,000 tx a second,” (Ethereum, the most widely used chain, currently does about 25 tx a second to give reference on the gap between white papers and reality). These of course would be backed up by some orchestrated “test net” where some guy who doesn't speak English well points at some obscure screen with numbers running across it, telling you that they just made a blockchain that is faster and better than Ethereum or whatever.
c — Invention of Terms to describe the mundane — My tech team was once flabbergasted for a day when a colleague started telling us about some amazing new invention called “state channels” which apparently were the reason that a few companies got 8-figures in funding to pioneer the technology and were the hope of the future of blockchain. After spending a little time reading up and researching these mysterious “state channels” — my CTO came to me with a remarkable conclusion that a state channel is basically transactions not on the blockchain. Or, “how we used to do things before blockchain” — or maybe we could just call them APIs. The point being that a whole sub industry, interest group and funding mechanism was built up around things that we already do, but people give new names to.
d — Due diligence teams (DD) — LOL, we still can’t get over this one. A few years ago, we were involved in a (real world) project that raised a 2 million dollar Series A from a traditional Silicon Valley. The amount of research and DD they performed was amazing. They actually found out who the team was, back to their high school GPAs, background checks, etc… But with ICO 1.0 what did you need — a LinkedIn account? Well I never actually used LinkedIn before, I mean we have been at the entrepreneurial game for over 10 years — but LinkedIn is just something that we never used. So we glossed up our LinkedIn for the show. I understand why this happened, mainly because there were so many literally fake projects — usually by Eastern European teams who would make up fake people with fake credentials and who is the new investor supposed to trust? So for lack of DD, they just follow what they can find online. I guess if you have a LinkedIn, then you are good, and please make sure to put “blockchain expert” in there as well.
So I guess this comes down to the conclusion that money was just being made on a pump and that there was so much going around so fast that the reality of “what will be a usable technology” and “what coin will pump” got very blurred.
Fortunately at least on a cursory level — this aspect of the industry is on the waning side and the industry is moving into a new phase in which companies which develop technologies that people will use will be able to thrive.
So just being real here. Everybody is really interested in technology, but still, many are saying “ok whats next? — where is the industry going?” Or to translate, “how do we make our next batch of money?”
Well, there are a few things and Security Token Offerings (STOs) are not it. There seems to be a narrative that “security tokens” are the next thing. Just to put it plainly, they will be a “thing” but its not where the industry is going full stop (the reasons for which we can cover in another article as this is a very politically fueled discussion).
For now Utility tokens are fine and here to stay, but how to identify a “winning project” as we enter Q4 of 2018 and slide into 2019? Well there will be a few things:
1 — Can this company be revenue positive? Yes I know that this goes against the “blockchain ethos” of decentralization, but let’s be real here — we are in the middle of the biggest transfer of wealth of the century. Money is being made. So when looking at a project, look at their business plan — if they have one. Some organizations will have a “foundation” which deploys their open source code and then a commercial entity. Some will skip that legal jujitsu all together and just have a for profit company like in the good old days. Why is this important? Well, the reality is that as we move this industry into usable applications, not everything will be decentralized. In fact, very little (but key components need to be decentralized), the rest is people making useful stuff and making money out of it.
2 — Are their team real people active in the industry? Beyond their LinkedIn and self identified credentials (“blockchain expert”), are you seeing these people attending conferences, being photographed, writing articles, participating on panels, talking in forums, arguing on twitter, etc. It sounds very basic, but those that win, will win big and the core team members need to be sort of budding superheroes of the industry. You need to know who they actually are (regardless of whether you like them or not). The ones you hear about (besides what you read on their website and internal docs) are the ones that likely will bring the win. Furthermore they need to have a deeply set win condition where they aren’t just looking to “raise” but are committed for the full roadmap — more on this in the Breaking the Rice Bowls Article from earlier this year.
3 — Are they committed to “both sides” of the industry? Mostly above we have been talking about a lack of tech commitment and overly interested in the “coin” side of things. However, now as a pendulum swings we get “tech” teams that don’t understand the fact that the whole reason anybody is giving them anything is because they want a healthy coin. The translation of this: is the team committed to supporting the coin on a quality exchange and knows that doing well at that part is just as important as building solid technology?
The market has cleared out drastically. Case in point, in January 2018 we went to a conference in Singapore — it was filled with booths and ICOs pitching every single coin that could do anything for anything. When quizzed about the details of what their technology does, most of the “founders” just talked about the bonus you would get when you buy their coin.
Fast forward to another conference in Singapore in September 2018 — there were literally, count them — 1,2,3,4,5 viable ICO projects there that were either currently raising or raising soon. These projects included an advanced concept blockchain, a derivatives trading platform and some innovative layer two approaches. What was the difference?
Well, no “DApps.” It is clear that DApps are good, but they don’t need a coin, and that tech that is going to win needs some chops.
To summarize there are 3 types of projects as our industry moves forward:
1 — Blockchain. This is to execute our smart contracts. There will be public ones that win and consortium (private ones). These are generally good bets, but the winners are determined by enterprise adoption. Just look for the Rockstars.
2 — 2nd Layer (Protocol). This is like an operating system on top of the Blockchain — this makes it usable, standardized with an interface. These things are good and can have their own interface which creates an ecosystem for data and DApps.
3 — DApps. We can’t see much of a reality where any DApp needs its own coin or to ICO for that matter. This will quickly evolve into a revenue positive business in the old sense of the word; where someone provides a service that is of value to someone and they get paid for it (rather than issuing an abstract coin and supporting the ecosystem and then dumping their reserves once the price goes up).
Now it is October 2018 where do we and the industry stand? I can tell you that there is a chatter that “no projects are raising” — this is not true. We are raising fine and I know of a few other high quality tech based projects that are raising. Money is coming from Asia/Russia where they seemed smart enough to liquidate their ETH before it dumped (most westerners HODL’d their ETH all the way to the bottom — maybe it is a cultural thing).
Most pseudo “funds” are giving the narrative that they are “getting into OTC.” Translation: anybody who says they are getting into OTC means they don’t have shit to do and aren’t making any money. Other “funds” are saying that they are doing “incubation and roadshows.” Translation: they don’t have any money or know actually how to ICO, but are going to try to ride their reputation and introduce them to all their buddies that made 30x on ICON in hopes that one of them still has monies to invest.
So Unification did the groundwork (and a lot of learning). But if you are a few steps behind in the process, genuinely are in this for the long haul, believe that your product has the potential to shift the fabric of reality and want to make this work — here is your roadmap:
1 — Get small seed capital if you don’t already have it and make a budget. This means an operating budget, ie. paying people to do what you need them to do. Can you go gracefully for a year developing and keeping the lights on? I saw a few promising projects fold and go home after wasting what could be an operating budget of a year on some overpriced conference sponsorship and an overpriced “consultant” who didn’t actually know anything about crypto.
2 — Don’t waste your money. What is waste? Well, the reality is most advisors will ask for fiat first and then settle for tokens — you don’t want consultants either. Nobody knows anything special and anybody who can actually “make magic” knows they can make magic and will take tokens or an allocation. In fact if you take on “industry advisory” you should give them tokens, but also ask them to make a small investment to show skin in the game. If anybody is worth anything, they have something to invest.
3 — What to spend money on then? Realistic salaries; Nobody should be making more than $5-6k a month while you still are in startup mode. Also strategic conference sponsorship, never more than $5-15k likely works for most. You may have to spend a little on some agencies for marketing. What to spend here? Well, telegram growth is good, make a nice airdrop, maybe pay $500 for an article on some top tier crypto publication. Realistic things that move the needle. The reality is not many actually know what they are doing, they are just “social media consultants” who are riding the crypto gravy train.
4 — Understand the importance of exchange listing and market makers. Yup, so many coins these days forgo this and go flat. Common knowledge says about 15% of your raise needs to be put aside just for the sake of these aspects. Yes that is a lot, but people donating tens of millions of dollars buying up your magic coin is pretty cool too and you need to take care of them and provide them with a platform for liquidity.
5 — Do a real budget. Gone are the days of teams setting arbitrary hard caps based on whatever they can get. Set a 36 month operating budget based on best case. If you don’t know how to make a budget, then go home. After 36 months you will either clearly be winning or go home so you don’t need longer than that. Make your hard/soft cap based on this budget, adding for the exchange fees.
6 — Find an anchor advisory. The right ones will invest in you, you won’t be paying them. Hear that very clearly. These are the guys who will intro you to the industry and help you set the table.
7 — Even with an anchor advisory, you will still have to do all the work. These guys are advisory because they already made it — don’t expect them to do much other than talk on the phone and introduce you. In the end you need to make the calls and execute.
8 — Set dates. You won’t raise much until you put your d**k on the table and give firm dates for the private/public and exchange. Why? Well investors need to estimate their risk and liquidity. If you say public sale and exchange in 2 months, then they can estimate. If you leave it open ended there is a risk it can never get there. The exception is of course your seed investors who give you time to learn and grow before the mother-load comes in.
Yup, its not easy — it hasn't been easy for us, but we know that you don’t need to outrun the lion you just need to outrun the other guy. :-) I am building a small network of 1st class CEOs and founders of blockchain related projects and am happy to share with you what resources have worked. If you are a fellow founder we should help each other succeed and feel free to reach out you can find me in our Unification Telegram Group.
Or if you are on the tech or investment side of the industry and want to start the process of getting involved — you can find out more information at www.unification.com
You can follow Neyma on Twitter @neyma