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Why It Doesn't Pay for Companies to Break Promises After Completing an ICO

Blockchain companies must demonstrate a significantly greater level of transparency than typical startups.
Why It Doesn't Pay for Companies to Break Promises After Completing an ICO
Image credit: Courtesy of Stankevicius MGM
By Stankevicius MGM

Comments by Constantine Kurbatoff, chief strategy officer of BANKEX, a top 50 FinTech company worldwide:

Financial pyramids, “bubbles” and fraudulent schemes—these are common opinions about ICO (ITO) in the society. Mostly these accusations come from those who are far away from understanding blockchain technologies, the philosophy of crypto community and business models of fundraising of blockchain projects. After spending recent years working in the blockchain industry, I've come to the conclusion that it is extremely harmful for companies that launch their ICO, but do not keep their promises afterwards. Let’s get to the bottom of why that is the case.

First and foremost, let’s try to figure out why companies decide to run an ICO campaign. Whenever a breakthrough idea comes to the mind of an entrepreneur, it will then be passed on to the developers, who will have to face a series of tasks. One of those tasks is how to fund the project. A new product or service is always accompanied by high risks - development costs for one, but also the risk of failure once the product or service is put on the market. Business angels are a great source of initial investments, which are usually spent in building prototypes, delivering beta versions and running tests. Now, in the blockchian industry, in order to execute the plan, a much larger amount of capital is needed. The solution is obvious, to attract multiple investors, the more the better.

The next step is to prepare the White Paper. This fundamental document is something like a Constitution for a future venture, it provides an in-depth description of the business and the idea: the essence of the company, what problems it is trying to solve, what the company has already done and its future plans. At this point, a significant number of entrepreneurs that were led by emotions when they decided to go forward with fundraising through an ICO discard the idea. Make no mistake, it takes a lot of market knowledge and a good background to summarize the markets history, pinpoint its problem areas, define them and formulate a solution not to mention anticipate the market demand. Company executives must meet high market standards. This stage is nothing less than the natural selection, only the strongest will go forward, these are entrepreneurs with real execution experience, ones with a few successful startups they have taken to market under their belt.

After the White Paper is written, it is revised by vast amounts of people - potential investors, partners, experts and stakeholders. Unlike traditional crowd sales, that raise relatively small amounts of funds to bring a new gadget to life, the crypto community members tend to communicate and discuss new blockchain solutions. This is what sets the crypto community apart from the rest - if any inconsistencies in the business plan are found or a technological gap is discovered the information spreads like wildfire instantly reaching potential investors (especially big ones). ICO’s are a lot like stock exchanges—multiple investors name the price they are willing to pay, the mean price for this exact stock reflects its real value. If information of the project and its expected value doesn’t fit investors’ expectations—ICO will fail.

From my personal experience I can point out, that the quality of such “community based analysis” is by far greater than what venture capitalists may count on, since the so-called crowd wisdom is activated. Many big projects that managed to raise substantial funds were thought through much more thoroughly than the majority of start-ups seeking venture capital investments at the very start.

In fact, after a couple of months of such zealous survey only the solid projects would survive. Within my network almost all entrepreneurs and business owners that have entered the crowd financing market in hopes of “easy” money either veered off the path or were forced to play by the harsh but fair rules of total transparency.

What also requires our attention is reputation.

Blockchain companies must demonstrate a significantly greater level of transparency than typical startups. Entrepreneurs with questionable backgrounds doubtedly make it to market, much like those who are not 100% confident in their abilities and are not prepared to put a reputation at stake. The price of any mistake here is very high, any foul play will become open knowledge to the vast majority of the blockchain players. Therefore the executives and founders of a company that is either planning or has already successfully raised funds through an ICO are forced to commit to their promises and put a lot of effort to do so. Even publicly traded companies sometimes deceive shareholders, but the price of such deception for managers is quite high. Similarly, for companies from the new industry, fraud is possible, but is not the best strategy in the long term.

These changes have brought a significant shift in the venture capital market. Capable entrepreneurs with experience in managing complex technologies and operational teams move straight to crowdfunding since they can easily demonstrate both their entrepreneurial abilities and the aforementioned ability to execute. Therefore these entrepreneurs no longer approach venture capital funds and move straight to the crypto community, seeking investments for their projects. This is a very displeasing trend for venture capitalist as the inbound stream of projects loses the most lucrative and promising ones. As a result venture capital funds are forced to take on the more risky and often less successful projects, those that were either unable or unwilling to raise funds through crowdfunding.

With the market becoming very transparent the cost of fundraising has significantly dropped. Without doubt some individuals and companies have taken a hit and are experiencing loss of profits and investor's money, but in general the industry's performance and efficiency is increasing.