According to a recent report
by PwC and the Swiss Crypto Valley Association, the amount invested in Initial Coin Offerings (ICOs) has nearly doubled that of 2017, with more than $13.7B raised by June 2018.
While this statistic paints a picture of ICOs driving new money into the market, does it mean they’re bringing new investors? If traditional investors are wary of putting their money in Bitcoin, let alone top altcoins such as Ethereum, it’s tough to believe that traditional investors are flocking to these riskier projects.
If ICOs aren’t bringing new investors into the market, are they at least bringing new companies and innovation? Rarely. A report
by Boston College found that 55.8% of new token projects failed within four months of their token
sales, which is drastically higher than the approximately 20%
of startups outside of the blockchain industry that fail within one year.
It’s easy to say, “You’re a venture capital firm, you don’t like ICOs because it could hurt your industry.” Nope. We love to see legitimate
investment funds in the market. Venture capital is an exercise in risk management by professional investors. Pithia, as an example, was founded on the principle of Operators turned Investors.
So, what do
ICOs bring to the ecosystem? I’d argue little and that they’re doing more harm than good. Not only is the ICO fundraising model ridden with fraudulent projects that hurt investors, it also skews founders’ thinking.
To benefit the long-term growth of the blockchain ecosystem, we need to move away from the ICO fundraising model.
Here are three reasons why:
Marketing Over Matter
Too often we meet with blockchain startups and their sole focus is their upcoming ICO. What about their business and execution plan? It’s set aside for work on fundraising. Worse, some expect the irrational exuberance of late 2017 to magically bring funding by simply producing a whitepaper with blockchain and DLT scattered throughout. When companies are basing their entire future on the success of an ICO, it’s a single point of failure.
As anyone with a Telegram, Twitter, Slack Channel, or LinkedIn account knows, ICOs are primarily driven by marketing. The flashy partnership announcements, expensive YouTube reviews, lengthy whitepaper development, social media marketing, and even lavish expenses like billboards in New York City, all look good on paper, but they lack substance. And the space is so noisy that if you don’t execute a quality multi-tier marketing approach, you’re almost bound for failure.
Substance over splash goes much farther. A whitepaper that illustrates the foundation for disruptive technology, go to market strategy, a technology roadmap, and a sound plan that lays your use of proceeds for any type of funding is bankable.
Token vs. Business Returns
Because most ICO projects don’t focus on the business plan mentioned above, most are in the business of speculation. “We believe that we can sell 400 million tokens and, wink-wink, the value will go up.” Often the token value increase is emphasized, but the potential returns of the platforms or projects themselves rarely are. ICOs don’t pitch business returns — they encourage speculation and going “long” on a class of financial assets.
These projects are marketing their products as a hedge on future returns, not actual products or platforms. But what if the token doesn’t pan out as they expect? The market inevitably decides the value — not the ICO bonus structure.
If a project raises vast sums of money, what will they do with it? Lean startup isn’t a marketing gimmick, it’s a structured way of thinking to make better choices for teams and businesses. In an abundance economy, making choices is actually more difficult. There is more funding to speculate, sometimes wildly on longer-term plays that may not pan out. And why not, there is enough cash (you did convert all that BTC and ETH you raised into fiat, right
?) to over-hire, do flashy marketing, and try riskier strategies without short term returns.
We need to focus on what these startups can bring to the ecosystem that demonstrates value addition. The company needs to have a strategy for investor returns and exit in three to five years — not a buying and selling strategy. If founders prioritize long-term growth over short-term speculation, we’re all in. Internally, Pithia has tools that support the founders’ execution plan.
And to complicate matters, we’ve met founders with thin stories of what they will do with the proceeds of ICOs. The prospective raise is often several multiples of an 18-month roadway. What happens to the rest of that cash? Sadly, it’s an incentive for them to fail.
Green with Envy
Highly-successful ICOs often get quite a bit of media attention, understandably so. The problem with this is it skews the thinking of other funds and attracts a less savory crowd. Companies get enamored with these successful projects and base decisions, evaluations, and plans and make their benchmarks the raise set by these projects.
The thought process frequently heard is, “they are in the same industry as us and raised X. Our solution is better because of Y, so our valuation should be X+Z.” This is baseless and creates unrealistic valuations. There are very few, if any, apples to apples comparisons in this industry.
There’s also a new breed of founder whose pitch is, “fund my ICO, ie. the money I pay in legal fees, marketing and token build-out.” It’s often as high as $2,000,000 just for the ICO, not the actual business plan. The business models are soft and depend heavily on a highly-liquid, circulating economy. That circulating economy is dependent on the business model, which has been largely ignored in favor of the ICO…it’s a downward spiral.
Because the core thinking around valuation is so off base, it creates a founder mindset of instant success when in reality, they’ve won a looter’s lottery.
So, why do these crypto projects need tens of millions of dollars to develop a new dApp or protocol? The short answer is, they don’t — but they’ve seen others raise that kind of money and they want a piece of the pie.
We must move away from the era of expecting instant returns and blazing-fast development timelines. By being more realistic with funding goals, the expectations, timelines, and deliverables of these projects become more reasonable.
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The end of the ICO era, in our opinion, is near. Already we see investors being smarter with their money and ICOs will need to adapt to this. They won’t go away entirely, but they will transform into a more responsible and focused fundraising process. Things are developing at the “speed of blockchain.” So, if future startups spend months focusing solely on their ICO, they may miss the boat of actually developing their company.
