This article is courtesy of Jagdish Pandya and Shahin Noble Pilli, which was published in Forbes India Marquee, March 2018.
The world held its breadth and witnessed in wonder , the most prominent among news-worthy stories, the rise of a Fintech innovation called ICO in 2017. In laymen’s language-Initial Coin Offering. ICO implies crowdfunding a new cryptocurrency and an innovative idea that can be implemented on the blockchain technology. As of now, ICO mostly is raised for this reason. But what is interesting is the way it has changed the whole ecosystem of fundraising.
Until now, entrepreneurs with groundbreaking ideas found raising money for their projects an immensely cumbersome process. However, with the introduction of ICO the speed of fundraising has witnessed an unprecedented acceleration with astonishing ease. Let’s take a closer look to decipher this phenomenon called ICO
What is an ICO (Past, Present and Future)
In the past, fundraising for even the most brilliant idea would take ages for the founders. Without a strong network connection accompanied with an aggressive media presence it would take several rounds of meetings to close a single round of funding. Time, which the founders could have spent making their offering/idea better, was wasted in these endless meetings on fundraising 1.0.
With the introduction of online collectives such as Kickstarter and IndieGoGo the funding process started to improve. However, though these online crowdfunding platforms believed in meritocracy and helped raise fund quickly and easily earlier, there were still some disadvantages for the entrepreneurs. One of the most important one was that these platforms charge 5-10% of the total funding and many start-ups didn’t have a large social media backing or PR presence. But it was nevertheless Fundraising 2.0, which was better than the previous, and thus people went ahead with it,
Meanwhile, there were developments taking place at a phenomenal speed in the realm of financial technologies and soon we saw Fundraising 3.0 in the avatar ICO. What the world witnessed in wonder in 2017, is a result of some earlier developments attributed to some visionaries. It was J. R Willet, the pioneer, who studied Computer Science at Seattle Pacific University, and invented the initial coin offering (ICO) finding model in 2012. On July 31st, 2013, he launched the first ICO, Mastercoin (now called Omni), and raised about US$500,000 for his project and since then the ICO has seen rapid and aggressive growth in collection of funds and number of ICOs.
Willet sated that, “Everything I was doing with Mastercoin (now called Omni) was new and untried. I was really excited about creating a decentralized exchange, and I thought that price-stabilized assets would be a really big deal someday.” Since the first ICO in 2013, there has been a flood of ICOs with new ICO launching every other day. In 2016 alone, 54 major ICOs raised close to US$103 million. 2017 has been phenomenal for ICOs, raining around US$4.80 plus billion in 90 plus ICOs. Cryptocurrency market capitalization increased from US$7 billion in January of 2016 to over US$550 billion as of December 31st 2017, and the wealth generation for early investors was extremely exuberant and having profits in multi millions.
This triggered a positive cyclic motion for ICO and various types of cruptocurrencies. Today, ICos are revolutionizing the way start-ups, entrepreneurs and corporations raise funds efficiently and directly to investors, compared to time taken via the VC route and IPO or private placement. However, this has not resulted in the annihilation of the traditional ways of fund raising. On the contrary, the VCs and Private Investors had tried to move with the changing time and actually co-exist and contribute to this new phenomenon. The top VC firms like Sequoia Capital and Andreessen Horowitz participated in the recently held Filecoin ICO, signalling a positive reaction from their side or maybe as an act of testing the waters before going full throttle.
The tremendous rise of ICOs is a result of more than one reason. Apart from its ability to unleash funds for the founders, it has revolutionized the overall Fintech sector by triggering massive convergence of various ideologies and technologies that further shape the way we do business transactions, raise capital for an idea that kept us awake, or untie ourselves from the existing methods and means of monetary straightjackets.
Interestingly, the vast majority of ICOs thus far have been used to raise funding for a technology project related to crytocurrency, blockchain, or some other form of decentralization. But in the future, the same can be applied for other types of business as well.
Maths, Myths and Metaphors about ICOS
Tokens are compared to Kickstarter-style crowdfunding in traditional IPO sales. As tokens provide utility and are redeemed by the issuer, they provide token holders with unique equity insight to a functional project/product/service and opportunity to redeem in the future. Additionally, it also provides expected potential appreciation on the possible progress and success of the project/product/service of the issuing company. An ICO’s functioning is simple: a team with an ide, but short of fund, uses blockchain technology to issue a certain amount of digital tokens (aka “coins”) sold in an auction to people paying in either, Bitcoinor Ether, regular money like US dollars or British pounds. “Token” might sound like Monopoly money, but their impact on the real world is growing by tne day.
The mechanics of an ICO involves setting up a crowdfunding website and whitepaper with information about the business model and founding team. Details of the whitepaper will include the problem that the platform is trying to solve, management structure, plans for development and allocation of resources.
Buyers then deposit an established crytocurrency such as Ethereum or Bitcoin to receive a primary key (in the form of a cryptographic algorithm for new tokens.
- The business idea: Ideally, the coin/token should have some value inside your business idea but technically it is a choice.
- The team: A strong leadership means that the credibility quotient will go high.
- The technology: In the ever-changing world of cryptocurrency, the faster and better ones will take it all.
- The White Paper: It is like your Pitch deck in the form of a webpage putting out your details like your daily active users , revenue, user acquisition strategy, what do you intend to do with the money etc. in front of everyone who is interested in participating your ICO. And then you need to prove your credibility to the world that you can deliver on what you are saying in your White Paper.
- Coin economics: This is part where the reality kinks in. You and your ICO participants should know exactly what is going to be with the coins in pre-ICO, ICO and post ICO stages and what will be the distribution, usage and returns in the long-run.
- Post IPO: The goal is generally to get the token listed on as many reputed exchanges where others who missed out in the ICO can buy it later. The more the demand, the higher the price and valuation of your company.
According to Tokendata, a total of US$5.6 billion was raised from ICOs in 2017, based on 442 ICOs, with the median of US$ 4.5 million raised, another historic milestone eclipsing the US$265 million raised from 2014 to 2016 combined. But in spite these facts, there are so many who think that Bitcoin, Ethereum and Blockchain generally are Fintech or cryptocurrencies. It’s like missing the big picture and fundamentally misinterpreting the power of innovation that has already started changing the world.
The main advantage of investing in ICO and tokens is that it is listed and liquid, unlike seed stage /start-up stage, as the investments are locked and not listed, so no liquidity. In the crypto exchange, these ICO/Tokens get listed, and immediately the investors can sell their tokens in the exchange, much like a public stock exchange. But on the flipside, the investors have no control over the board on the decisions, for the fund deployment, project decisions etc. Investors should do their due diligence on the promoters and feasibility and viability of the project.
As the market steadily matures, more sophisticated investors and large VCs and other asset investors will invest in ICOs and token in start-ups and existing companies will take the ICO route to raise funds faster and efficiently. ICOs and tokens on blockchain are a very powerful economic strategy for investors and fundraisers, leading to more innovations and technologically transforming the entire global fundraising industry, a major disrupter and game changer.
Top ICOs in 2017 and Current Market Capitalization (in US$ million)
Name of ICO
Current market capitalization
Basic Attention Token
Blockchain Capital Fund III
Source: Autonomous NEXT Analysis and Bison Consulting Research