Risky Business — Chances and Challenges of ICOs
Investments involve risks. It always does. Venture capitalists check and re-check start-ups — over and over again. They do everything possible to minimize risk. The slightest hint that a particular investment might carry a slightly too high risk leads them to pull out. Still, they face regular loss.
Word-of-mouth holds it that a staggering 90% of all start-ups fail. Boston’s global investment firm Cambridge Associates wanted to know better and recently conducted a one of a kind study on start-ups: They tracked the performance of 27,259 investments between 1990 and 2010. Counting each investment with a return lower than a factor of 1x a fail. The results: Since 2001 the failure rate was never above 60%. The highest failure rate occurred when the Dotcom bubble blew up in 2000 at 79% (1).
Now, this data teaches us two things. Number one: The risk is far lower than commonly believed. Number two: There is no doubt and no denying that any investment in start-ups is a high-risk venture. Any investor — large or small — must take this into account, also for investments in ICOs.
Sometimes those risks appear as a very unpleasant surprise. Again, nobody denies these. We just recently have been victims of the now infamous Parity bug. No matter how this situation turns out, we pool all forces to make sure that our investors are not impacted. Being as transparent as possible with the event itself as well as our course of action to correct it.
In this article, we therefore want to consider the most important chances and risks of ICOs and how wysker plans to counter them with you. After all, ICO-warnings have been issued recently by financial regulators like the European Security and Markets Association ESMA (2), Germany’s BaFin (3) as well as regulators in China, the US, Canada and the UK.
To be honest, we are rather surprised that the UK’s FCA had a light bulb moment and wrote: “ICO’s are very high risky speculative investments.” Eureka! All investments in start-ups are risky — as above numbers demonstrate. And any risk assessment must account for this before buying. The only thing that indeed reduces the risk is a well planned business plan, built on an outstanding idea, with qualified experts on board. Starting something novel stays a risky business.
The Stellar Development Foundation and The Luxembourg House of Financial Technology Foundation conducted an extensive study of chances and risks of ICOs (4). Here are the most important aspects and how we intend to deal with them:
Corporations may benefit from a considerable network effect. Decentralizing their business into the blockchain, they automatically generate a large and active user base — enhancing operation, security, and validity. With over 1,000 investors so far the user base makes itself noticeable at wysker — every day and with considerable positive effects. Additionally, the App will not start from zero. Each of our investors wants wysker to succeed and hence becomes a brand ambassador. The fundraising process is comparatively fast and the overhead is reduced.
Discussing the pros and cons of an ICO, it is important to remember: ICOs aim at the tech-savvy investors. With an innovative and disruptive idea like wysker, the combination of all of the above amounts to the ideal funding mechanism.
So what are the chances for investors and consumers? Popular tokens get traded on cryptocurrency exchanges. There are liquid markets that reach a staggering volume. Some token exchanges accumulate millions every day with these transactions. This allows investors to pull out or opt-in more easily than in other forms of investment. Additionally, the value of a token has the chance to rise quickly. Many investors clearly place a bet on these gains. Here, ICOs are not different from conventional markets.
Most important for wysker: Investments get democratized. ICOs are funded worldwide, not just in global venture capital hubs. They don’t only collect large sums from huge firms but investments large and small from average Joes to global players. This also applies for wysker with more than 1,000 investors.
Now for the main risks: Many ICOs lack due diligence. Many teams conduct ICOs before they have even built a functional product. The approach at wysker was different: Our core team invested all its time and efforts as well as considerable personal funds for over two years. Our ICO now runs at a point in time, where we have a fully functional product — the wysker App. We don’t claim that our product is 100% bug-free. But our core technology already exists. It’s tested and it works. The App will be released on 31st of January 2018 on iOS and Android.
A high priority is given to due diligence issues. We had well known financial and legal experts on board from the beginning. With KPMG, we found a highly valuable partner advising on regulatory aspects. wysker may use unconventional funding and work on a novel product but we are conservative when it comes to risk and legislation. wysker is audited to classic standards.
Transparency is vital for wysker. We keep our investors in the loop. There aren’t many start-ups openly providing direct access to the management team. Using our open telegram channel, investors and potential investors are advised about every essential step we take. Their opinions are taken seriously and their arguments are taken into consideration. Hence, harnessing the network effects mentioned above.
Often there is an uncertain basis for token evaluation. Our business model does not merely aim to finance wysker with the wys token. The wys token is planned as a means to trade access to users — while protecting their privacy. Advertisers and retailers use this access to find users that have a purchase intent and gave consent to be contacted. This use of the wys token dictates its growth potential. Not only is the wysker App a valuable commodity, the wys token is one too.
We’ve now seen the chances and risks wysker is able to influence directly and which steps were taken to make investments save and successful. There are some risks which are — at least partially — outside of our sphere of control. Among them is the extreme price volatility of crypto-markets. Values potentially move radically — chances of rapid growth and the risk of fast value loss have to be considered.
Last but not least: there seems to be a regulatory-panic concerning ICOs right now. After the state agencies slept away for years, they are suddenly prone to overreact. At wysker we fully support a smart regulation of the ICO market. We operate entirely under German law and take precaution that far exceeds the industry standard to ensure investors safety. After all, our investors deserve the best protection they can get. Hence, we currently feel to be on the right track.
We want to leave you and our investors with a simple fact:
Failure is not an option for us. Nearly everyone at wysker invested considerable amounts of money, time, effort, passion, and — yes — love in this project. We are fully in there with our investors. We want this project to succeed. And we want to achieve this goal safely.
Sources:
(1) Grifith, Erin; “Conventional Wisdom Says 90% of Startups Fail. Data Says Otherwise.“, Forbes, 27.06.2017, http://fortune.com/2017/06/27/startup-advice-data-failure/
(2) ESMA; “Conventional Wisdom Says 90% of Startups Fail. Data Says Otherwise.“, 13.11.2017, https://www.esma.europa.eu/press-news/esma-news/esma-highlights-ico-risks-investors-and-firms
(3) Froelings, Lisa; „Germany’s Top Financial Regulator Warns Against Initial Coin Offering (ICO) Risks“, Cointelegraph, https://cointelegraph.com/news/germanys-top-financial-regulator-warns-against-initial-coin-offering-ico-risks
(4) Lin, Lindsay and Allaert, Emilie; „The technology, benefits, risks and regulatory measures you need to know about ICOs now“, 19.09.2017, Techcrunch, https://techcrunch.com/2017/09/19/the-technology-benefits-risks-and-regulatory-measures-that-you-need-to-know-about-icos-now/
