Initial Coin Offerings
Why the good will ultimately outweigh the bad.
Over the course of the past year, ICO’s have gone from the hot new thing to a concept generating more bad press every day. Even with this bad press, ICO’s have raised nearly $3 billion USD in 2017. With anything new, it takes time to fully understand how it impacts an existing ecosystem. The perspective we will take in this article is from the ecosystem of startups looking to secure funding. This leads to our first question:
Why host an ICO?
Traditionally, ICO’s have been looked at as an alternate way for technology companies to raise capital. But at its heart, an ICO can also be seen as the democratization of the venture capital process. This viewpoint is powerful, as an ICO is able to remove barriers of both class and geography in venture capital. As an example, how many Americans had the ability to invest in Uber during the initial rounds of funding? As a percentage of Americans, the number is quite small, likely less than 1%. This is the class barrier removed. ICO’s allow anyone possessing cryptocurrency to get in on the ground floor of startups. Being a part of a startup at this time opens the opportunity to the astronomical gains venture capitalists find when they hit a home run.
Another example is the Facebook IPO. While technically open to all Americans (though access to IPO’s such as Facebook are quite limited), what if you are not an American citizen? How could the average person in France, or Nigeria, or India participate? They could not. This is the geography barrier removed.
Removing these two barriers provides a simple, positive answer answer to the question ‘Why host an ICO?’; the startup has expanded the potential pool of investors from a local puddle to a growing international ocean.
This being said, at the Veris Foundation we feel that the most powerful advantage of an ICO has not yet been heavily discussed :
The the ability of US based nonprofits to access venture capital via an ICO.
Traditionally, mission-driven nonprofits have had difficulties accessing startup capital due to the nonprofit legal structure not containing any equity to trade in return for venture capital. The ICO solves this problem. Nonprofits can now access funding by creating tokens tied to blockchains that further their mission. Clearly, the most suitable business entity we have in the United States to showcase the transparency of a blockchain is the nonprofit, not any type of public benefit corporation. Blockchains and non profits can be a powerful match.
Problems with hosting an ICO?
Startups looking to ICO today find themselves in the midst of what will likely be looked back upon as ‘the wild west’ of initial coin offerings. Three factors drive this:
Tokens for the sake of tokens — Many companies are issuing unnecessary tokens. Digital assets such as (insert your favorite LiteCoin fork here) are being pushed to market without offering any type of technological or economic benefit. There is no need for tokens specifically designed for spending on bread, video games, or gasoline. This is compounded by startups building products on blockchain which are better suited to traditional centralized designs.
Uneducated Investors — The act of democratizing the venture capital process comes with a negative that all of the regulations in place to help protect investors from making foolish financial decisions have been removed. Many of these investors are not financially sophisticated, and have never seen a due diligence process — much less participated in one.
Fraud — The number of ‘startups’ holding token sales with no intention of ever producing a product is on the rise. Firms are actively advertising the creation of white papers and websites as an ‘ICO for Dummies’ turnkey solution.
What does this mean for a startup looking to create an initial coin offering? We believe it means these startups will have to take on the expense and time associated with proving the validity of their product and viability of their success. What does this mean specifically?
How can ICO’s gain legitimacy?
1. No ICO without a working product. We are in the healthcare space. In the past month over ten startups have announced ICO’s. None have working software. None of them promise any product until after the ICO is complete. I think the way to look at this is the analogy I’ve been told many times about starting a business — if you won’t invest in yourself, why should anyone else? Failure to get to the proof of concept phase strongly indicates these startups don’t believe in their published vision.
2. Publicly publish the details of your business entity. Go and look at the majority of ICO’s. What company is getting these funds? Where are they incorporated? Who are the officers? These are basic elements which allow an investor to determine who is accountable for the performance of the startup.
3. A whitepaper with specific measurables. What are their expected ongoing operating expenses? When do they plan on generating revenue? What type of market growth will determine if they are successful?
These are three simple things a startup can do to differentiate themselves from the ICO crowd. More so, these three simple things are items that even unsophisticated investors can view and confirm. Thus, the behavior of the startup compensates for the lack of regulation intended to protect investors.
This will not change the fact that over 90% of businesses fail. Nor does it protect an investor from investing retirement savings into these types of risky endeavors. What it WILL change is that startups trying to disrupt industries will have a better chance at this funding and drive out fraud. No financial platform can survive long term fraudulent behavior, and it is in every blockchain startups best interest to structure their offering in a way that frauds are easily spotted and subsequently driven from the ICO space.
