ICO: How it Will Help in Funding for Startups
A Definition of ICOs
ICO stands for “Initial Coin Offering”. One could say that it’s a direct reference to the term “IPO” (or Initial Public Offering); a term associated with the initial offering of company shares to the public.
ICOs –or token sales, or coin sales- have been called many things, like “Kickstarter on Steroids”.
That’s because although they are a very new form of funding, they have managed to attract billions of dollars in investors’ money.
The State of ICOs Today
And the trend is accelerating. During the first 3 months of 2018, ICOs raised $6.3 Billion; a whopping 118% of the total for 2017.
To make things simple, you ask people for money, and you give them back tokens for believing in your project.
There are those who believe ICOs are the best thing that happened since bread and butter and those who believe it’s another bubble that will blow up and everybody will lose their money.
Here’s the thing, though. Both sides don’t tell (or see) the whole story. There is a bubble right now.
And it will burst. In fact, we have seen early signs of this in recent months, as more ICOs fail to raise money and many good projects turn to good old private funding for support. So yes, there’s a bubble.
And it doesn’t matter one bit.
Because ICOs are an entirely new class of funding –or fundraising.
The Diversity of Tokens
Just like most of the new versions of old technologies, one product can have many different uses.
For example, 30 years ago, the only use of a phone was to call –or fax- someone.
Today, a smartphone is a phone, a camera, a video device, a compass, and an alarm. Likewise, an ICO can be a fundraising tool, a share, a store of value, a futures contract, and a currency.
So, apart from its obvious uses, a company can go bankrupt and people can still use the coin; something a traditional business can never do.
Go bankrupt and people still trade the bonds the company issued, for example. They will be worthless.
And it’s cheap. For a few bucks on a platform like WAVES, anybody can create a coin, set the rules, and perform an ICO.
Democracy at its finest, right? Right. But things are never that simple.
The Real Cost of an ICO
First of all, the cost of an ICO worthy of people’s time and money can be quite substantial.
From $50,000 all the way up to $300,000 or more, substantial. And yes, as we have said in the previous paragraph, you can create a coin for a few dollars.
But if you are a company looking for seed capital to support your projects, a simple token isn’t good, or professional enough.
Smart contracts, audits, white papers, token creation, website, other digital properties; they all cost money.
This is the reason why a lot of teams start with a pre-ICO, in order to raise funds for their ICO.
A pre-ICO is essentially a presale of the token, usually offered at a lower price (a direct price cut or through other incentives).
It’s treated as a separate process from the main ICO (different smart contracts to handle accounting and auditing).
Pre-ICOs are also cheap, compared to the main event. You can perform one for the cost of 4-5 macchiatos!
You just need to be smart and persistent. Find innovative ways to sell and distribute your coins.
Gamification is a good option here, but not just badges, points and leaderboards.
You need to try harder and segment people and rewards if you want to succeed.
The 7 Prerequisites for a Successful ICO
So, the cost is an important factor one needs to consider. Another big one is the project itself.
Without going into too much detail, the project needs to exhibit certain qualities:
Clear goals and objectives – What problem or pain is this project trying to solve. Potential investors need to have answers to these questions.
Skilled Team – Like every other business, a project needs a group of skilled professionals dedicated to it.
People experienced with ICOs, coders, other technical staff, marketers, consultants, support.
You need them all, and you need to publish their resumes on the project’s website and your other digital properties to show you have the skills and experience to deliver.
A Clear Price Plan – You need to decide if you will go with an undetermined price, a fixed price, or an auction model.
Publish an FAQ and Start a Help Center – You need to answer all questions you can think of, and link them to all of your properties. People must find answers as quickly as possible.
Test the Project – Make sure everything works. Website, emails, whitepaper, social media; everything must be in place.
Do a Pre-ICO – We talked about it before. A pre-ICO puts money in your pocket and measures participation willingness.
Prove it Works – Serious investors will most likely not buy unless they see a prototype or proof that your idea works. Have one ready to show.
Legal Obligations and Conditions
Finally, you have to consider the legal framework covering ICOs. This depends on the country you operate.
Unless you are issuing a token to give to your clients instead of a coupon or a reward, you need at a minimum to have a good lawyer standing by.
More and more countries are starting to treat cryptocurrencies as securities and property.
This means that any money you receive from your ICO constitutes a taxable event.
You also need to have due diligence and anti-money laundering processes in place to avoid being used by bad actors.
People are paying hundreds of thousands of dollars and facing jail time because they neglect to comply with state regulations.
So yes, ICOs is a groundbreaking concept that is revolutionizing funding for all sorts of people and ideas, who up until recently did not have the resources or the technology to start.
But, like any other function that involves the exchange of money, one needs to pay very close attention to the rules; or things can go very bad, really fast.
There are also situations where an ICO is not the best option.
If for example an idea is too complicated to explain, and cannot be immediately adopted by the public, a private funding round could be a better solution.
In any case, ICOs are here to stay. And the way we use them will determine their usefulness and longevity.
DisclaimerThe writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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