An Exciting Option for Startups to Raise Money: Ever Hear of an ICO?
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Change is everywhere, and regardless of what industry you’re in, it's inevitable. Leading the pack for change is technology -- and it can be overwhelming to try to keep up with its breakneck speed.
Right now, the technology topic I'm trying to become expert in is blockchain technology, and the cryptocurrencies it underlies. I'm also studying the rise of Initial coin offerings (ICOs) -- the newest way for startups to raise capital, and an attractive option for individual investors, as well.
An ICO usually takes one to four weeks, during which people can buy tokens in exchange for cryptocurrencies or fiat currencies. The token provides buyers with access to future services from the ICO company and its community. And at the heart of that ICO? Blockchain technology, which manages and tracks digital transactions via smart contracts.
ICOs as a fund-raising vehicle
While it is still new to many, blockchain is a topic people like me are eager to learn about because something big is about to happen -- at least I believe so: I'm making the bold prediction that 2018 will be the year that blockchain, cryptocurrencies and other companies will be evaluating an ICO as a fund-raising vehicle.
Of course, things are just getting started: According to a survey by LendEDU, as much as 79 percent of Americans have heard about the best-known cryptocurrency, Bitcoin. But of these, only 14 percent actually own bitcoins.
But that's where entrepreneurs come in: Most of us at some time have had to raise capital and look for investors to infuse money into our ventures. As our businesses grew, we continued to search for venture capitalists, angel investors and other types of funders.
VCs, until recently, were he main source of funding. But now, we can add ICOs to the mix. In 2017, ICOs raised over $3.6 billion in digital tokens, reflecting a faster pace than that of any other early-stage venture capital funding source.
While I think it essential for every entrepreneur to be as knowledgeable as possible about cryptocurrencies and ICOs, here are four specific things to do you before you jump into the fray.
Test the (ICO) waters.
As with any other business decision, jumping in without testing the waters first can prove disastrous. ICOs are cool right now, and they get your name into the annals of the cryptocurrencies world. But, ask yourself, "Will my product jive with the decentralization that blockchain technology provides?"
If your product is not ready to deal with the market's volatility, it might be best to sit this one out, for now. ICOs are easy to enter, so you’ll get another shot at this, unlike what happens with VC investment.
What's more, ICO success stories, while plentiful, are still not the common outcome. But there are some: An example is cloud storage provider Storj, which had one of the most successful token sales of all time -- raising $20 million in six hours.
Over the subsequent seven days, the company raised $30 million, which was its goal. It was able to exchange tokens for cloud-based storage space, enabling its decentralized platform to compete with theindustry giants Microsoft, Amazon and Google.
Just remember, not every business model is ripe for an ICO. So, don’t try to fit a square peg in a round hole.
Before you go for an ICO, your product needs to be mature. We’ve all seen and heard of products billed as the "next best thing" that's going to revolutionize the market. But the reality is that the product has a limited purpose and therefore, limited viability -- and it doesn’t really "revolutionize" anything.
Think of this as you would a traditional business plan, where you clearly state what your product does and what problem it solves and where you provide other specific details. The same process should apply to anyone going for an ICO.
While such detailed treatments are not yet a requirement, they will show potential investors you are prepared and not just submitting the kind of brief, general abstract which could create apprehension.
You should also realize that without a practical or useful value, your token's chances for being considered a security are not particularly high, and are also subject to additional government scrutiny. This also applies to the application of securities laws -- still considered nebulous territory.
Recently, the Securities and Exchange Commission (SEC) issued a report warning that ICOs could be improperly used to quickly attract investors. The speed with which ICOs can raise money is of concern to many regulators because sometimes there’s a lack of product, plan or technology in place.
In the VC world, not having all your ducks in a row won't get you very far. In the world of ICOs, it gets your foot in the door. And that's not necessarily a good thing
As you move forward, then, be warned: An ICO might be a less restrictive proposition than an IPO, but without a viable product, you’re bound to have a bad ICO, and that could have negative repercussions for the future, should you subsequently try to raise venture funds.
Build a community.
The value of your token will have a direct correlation to how the community perceives it. Communities take some time to create, so it would be naïve to assume that just because you build something, customers will come. As with any other business venture, you need to make inroads with the community -- face-to-face, online or both.
Then there's timing: It’s never too early to engage the community, so if you’re thinking about an ICO, start reaching out now.
Popular hangouts are: Reddit, Slack, Facebook and BitcoinTalk, to name a few. Since blockchain technology operates globally, you'd be wise to expand your horizons when soliciting feedback. For example, Japan has already started to recognize Bitcoin as a legal payment method. Russia, which initially frowned upon the use of cryptocurrencies, has now reversed its stance. And Australia has revised its policies to remove a policy of double taxation for merchants who accept digital currencies.
I’m always a proponent of pushing boundaries and stepping out of your comfort zone. If you’re wondering how to build a community, start small. Pitch your product to the community's members, outline the problem it solves and specify the landscape that investors can expect when you do launch.
Having a thriving community, ready to back you up should come with the territory by the time you’re at that point.
Know the risks.
As I mentioned before, there are plenty of risks associated with cryptocurrencies and ICOs. Volatility, deregulation and a shift in value are just some of the gray areas currently being addressed, to achieve more parity within the system.
If you’re a startup that has previously raised venture capital and now wants to test the waters of an ICO, there’s a real risk of a shift in value from the equity holders to the token holders.
Moreover, assets being offered in an ICO aren’t backed by any current existing revenue system. So, if someone can’t access his or her tokens or suffers a theft of assets, that currency is gone for good. Bitcoin’s price is set only by supply and demand.
There are also skeptics who believe that cryptocurrency's bubble will burst at some point. Others, like me, believe that we may see a small bubble burst due to cryptocurrency's naturally volatile nature.
Still, it won’t be anything like the dotcom bust. Bitcoin has taken a hit the past few weeks -- but as quickly as it dipped, it has bounced back. That wasn't earth-shattering news. And it shouldn't come as any surprise that there are risks involved. But, if you’re willing to take the risk (and can withstand it), then ride that wave; it's the future and as with any other big changes, there are going to be risks.