Compared with the traditional financing model, ICO does not have any complicated regulatory rules, can raise funds in a short period of time, and has lower average cost of capital. Therefore, it has been gradually attracting not only startups and SMEs but also investors, to turn their heads to this new form of trade in hopes of obtaining higher investment returns. But what do companies need to consider when launching an ICO and make it a successful sale? What are the factors investors must consider when picking an ICO? This article discusses this “hot new thing” in the blockchain community and invites Coulla to provide answers for above burning questions.
The past year marked a huge turning point in the cryptocurrency market thanks to the rise of new phenomenon, the Initial Coin Offering (ICO). An ICO is a virtual coin or token that is can be passed between users of a blockchain network, usually is sold to investors in an effort to raise capital for a new company. Depending on the terms of the ICO, the token sold to an investor can represent either an investment security, or a form of currency within a company’s application. And while it might sound a little too futuristic, ICOs are a key tool for launching a business or entrepreneurial effort.
A year ago Bitcoin was 80% of the entire market capitalization of cryptocurrencies, and now it’s less than 50% despite its meteoric rise in price. On the other hand, $3.7bn was raised via ICOs just last year with some projects such as Filecoin and Tezos raising over $200m in a single round of funding , calling into question the future of venture capital.
What is ICO? It is basically a crowdfunding campaign that people can “back” the ICO by contributing other cryptocurrencies (such as Bitcoin, or more commonly, Ether (the name for Ethereum’s coins/tokens). ICO tokens are tradable, which makes them seem a bit like stocks. You can compare these tokens to a grocery store (e.g. Wellcome) specific loyalty point (e.g. hard-earned stickers), something you purchase with a general purpose digital currency and use at a specific location. Additionally and oftentimes, they themselves could be exchanged or used for the company’s native product or service, like in the case of Steem.
Moreover, relying on kind of crowdfunding opens up access to a wider pool of potential investors than the traditional venture-capital process. Besides, eliminating the controlling middlemen (such as venture capitalists and angel investors) and adopting smart contracts enable rapid, simple transfer and payment, insuring significant increased efficiency and resulting in improved, measurable value creation. This suffices to explain why ICOs continue to emerge as an alternative to the traditional models of startup investment and e-commerce growth.
With this trend picking up steam, your startup might be wise to investigate whether an ICO would be right for you.
As is typical of nascent cryptoproducts, there are legal questions and unethical players in the mix. The Consumer Financial Protection Bureau has warned that virtual currencies, including Bitcoin, carry “significant risk” to consumers. This is because unlike traditional fundraisers, ICOs are currently not regulated at the moment. Issues such as hacking incidents can cause investors to lose all of their investment quickly. Granted, such drastic incidents are rare, but major drops in ICO value are not unheard of. Some governments like China has already banned them last September and shut down cryptocurrency exchanges too.
Unlike Bitcoin or Etherium, which have intrinsic utility, most ICO tokens are simply a mechanism the startup uses to transact business, and they are free to change that mechanism. Its flexibility is a one strong competitive edge, but their real value relies on building a product that a significant network of users will want to use. However, if these networks either fail to attract users or never get users to actually utilize the platform, then the currency will likely see a drop-off in price. Many of the recent ICOs that failed to perform after launching did so due to a lack of network engagement.
Just as any enterprises can run out of resources and be unable to continue operations, if a cryptocurrency ICO does not raise enough money or the startup spends more money than expected, the doors close and the network really takes off. These hurdles prevent a startup, or more likely an acquiring company, from creating a new wholly-owned token, seamlessly migrating their customers to it, hence leaving existing token-holders holding worthless tokens in the end.
We are not trying to tell you that it’s easy to succeed with an ICO, which can be every bit as challenging as securing venture capital; but you do have more control over the process. Here are 3 expert tips for anyone launching an ICO:
1. Get get in the right frame of mind
This is not a radical suggestion, There’s one question that surpasses all other questions in ICO planning, and that is: “Why blockchain / ICO?”
This is one of the most important questions you can get asked, and indeed a question you should ask yourself over and over. If what you’re doing could be done just as well with a simple database or a different type of technology, then you’re just jumping on the blockchain bandwagon. That means there’s no reason for you to get involved in the cryptocurrency space — and serious investors will sniff that rat out very quickly.
2. Rediscover the magic of marketing
The competition is tough, and the market is getting extremely saturated, companies contemplating an ICO need a lot of budget to stand out; they also need to employ growth-hacking tactics and a lot of creativity. Many say, your success (or failure) is directly tied to your marketing.
When you are marketing your brand, you must establish a real use case for the token you intend to promote and the blockchain technology that will fuel it. Many claims a new formula for ICO marketing success is to grow a (huge) reliable Telegram community (a social chat-tool that most crypto companies use to communicate) over several months, invest in a great-looking website and video and understand that there are no shortcuts.
Just as importantly all the marketing channels such as Twitter, Facebook, YouTube, and LinkedIn should be activated to support the story for the shareholder and push the traffic to the ICO site. Other crypto-based channels such as Reddit and Bitcointalk are extremely powerful in reaching out to the crypto community.
3. Communication is key.
No two companies or investors are the same, and an ICO is no exception. This is what makes effective communication just as important as your marketing strategy. The way you communicate with investors is essential to your success. A clear marketing message or upscale ICO website puts you in a good light with investors.
It is your job to explain your project’s goals in its whitepaper and roadmap. They will want to see a clearly defined company strategy, and possibly a serious lock-up on token bonus for the founders, to create the sense that the company is in it for the long haul. Alternatively, a cloudy message can lead to your business (and ICO) being overlooked, in favor of the (heavy) competition.
Besides, don’t try to make money, try to engage and be useful to the crypto/blockchain community. If the community doesn’t get behind you, you’ll struggle to succeed. You need to form strategic alliances and get supporters behind you in order to create a successful ICO.