An Initial Coin Offering or ICO is also called a token sale, token generation event, or initial token offering. It is an online event in which an organisation sells digital tokens for the purpose of obtaining public capital to fund projects, products or any other initiatives.
Tokens are cryptographically-secured digital representations of a set of rights or agreements: access to the use of a network, or product or software application; share in the future earnings of the business venture; votes in important decisions; as well as the option to redeem and exchange token value to any currency.
In an ICO, investors can start to invest even before a functioning product is presented, allowing funds to be raised quickly. And since it is public event, ICOs can provide entrepreneurs with an alternative source of fundraising. As far and as wide as information can be shared, token sales make investing a lot more accessible to individual investors with smaller disposable capitals from any part of the world.
Despite known risks and in the face of the Bitcoin price index going down by as much as 54% from its peak at US$17,549.67 in Dec 2017, investments in ICOs have grown in dollar volume. A recent PWC report says ICOs have raised US$13.7 billion across 537 projects within just the first five months of 2018, compared to 2017’s US$7 billion invested on 552 projects.
Understanding ICO over traditional fundraising ways (Angel Investing, Crowdfunding and VC)
Although it seems very similar in concept, ICO is quite different from crowdfunding and the more traditional ways of investing such as angel investments, private equities and venture capital. But since it is still in its nascent stage, securing institutional investors during private sales is becoming more important to establish trust and stability in the coin offering.
1. ICO is a global fundraising activity
ICO campaigns are notably global, where angel investing will be mostly limited to the local community. Venture capital investments, on the other hand, is usually spearheaded by the leading investor within their network, and in both traditional types, it is typically very important to decide the jurisdiction of investors for startups.
While it is important to follow proper legal structure with any fundraising activity, ICOs have been able to raise funds successfully even without clear jurisdiction-based regulations. While governments are catching up, many startups have been able to raise US$10-30 million from 5,000 to 10,000 participants from all over the world in the past year, and more are still gearing to raise funds through coin offerings.
2. ICO is a community-driven activity
A successful ICO is community-driven and benefits from participation from as many people as possible. On the contrary, angel investing and venture capital can only be a small group of investors, coming in from a few countries at best. Crowdfunding can bring in more people from all over the world too but not in the same scope as ICOs do. ICOs aiming for a typical funding of US$10-30 million can come from as many as 5,000 to 20,000 participants from all over the world.
Telegram groups are usually created to bring everyone together on one platform for communication and marketing throughout the offering cycles.
3. ICO is stage agnostic
In general, startup fundraising structure is determined by the stage. If it is a new idea, a startup can bootstrap or find angel investors for funding. Once they have detailed and structured ideas and can present a minimum viable product (MVP), they can then pitch to venture capital (VC) investors. As they grow in the later stage, they can talk to later-stage-focused VCs and maybe PEs too.
In the ICO space, startups are not limited by stages at all. While institutional investors require projects to have a working product ready, ICO projects are launched in their early stages from a great idea or solution to an existing social or economic problem. Many an ICO have been able to raise US$20M with only a well-written white paper.
Yet, as the industry evolves, it is becoming normal to do KYC (Know Your Customer) and then do multiple rounds of fundraising. It typically starts with the private sales round followed by pre-ICO and then the ICO itself. A private sales round is held mainly for strategic institutional investors before offering it to the public. Telegram, the messaging app company, for example, was able to raise US$1.7 billion from institutional investors in two private sales rounds only. Pre-ICO is the round opened to the public or selected groups giving early investor discounts. Typically, early investors get more discount than investors who came in later stages. The coin offering itself often opens for several hours to several days before it closes the sale. Most of ICO campaigns have their targeted minimum (softcap) and maximum (hardcap) amounts they can raise set at the beginning of the campaign itself.
4. ICO is a new way of building a secondary market
Unlike the traditional startup investors, ICO investors could get early exit options via listing tokens. There are now lots of crypto exchanges and top ones can trade hundreds of millions to billions every single day. Most of top crypto tokens are listed in multiple exchanges to support investors from different regions and sectors.
Lots of speculative funds and new investors are coming into this market to enjoy this option to exit much earlier than what they are allowed to. In a normal startup investing, it can take up 15 years to make an exit, with 3 years as the shortest. Token listing, on the other hand, can offer an exit in as early as 3 months in best cases. Equity-based funds exiting through the public ICO is a most interesting element of ICO as a fundraising tool.
The future of ICOs
The ICO market is clearly still in its early stage. There are benefits to reap but there are also improvements that need to happen. A smart adoption of ICO will solve the challenges of the traditional fundraising markets and even disrupt it. It will also create lots of new markets. Truly an exciting time for both investors and entrepreneurs.
Two main things are very important to understand to take full advantage of ICOs: Community and Technology.
This is key to a successful ICO. One way of engaging the public is by carrying out airdrops where people can register to get free tokens. A whole marketing campaign can be constructed around such events, potentially reaching out to thousands of people. Recently, when the Lattice80 KAYA Network carried out an airdrop, some 27,000 people signed up and joined their Telegram group (Telegram is a messenger app widely used to manage crypto communities) within a week and without spending any marketing budget!
Managing such a big and global community is quite the challenge. It is not easy to answer all the questions nor to follow notifications from 27,000 people. It necessitates developing new ways of communicating and interacting with virtual crowds that is continuously awake 24 hours all 365 days of the year. Thankfully our messaging platforms are keeping up with the need – for example, one Telegram group can now sign up up to 100,000 members.
Blockchain, the technology behind ICO is giving unlimited potential to everyone. Blockchain’s smart contracts, for example, ensures that the infrastructure is secure, transparent and efficient. This bodes well for both investors and entrepreneurs alike: investors will enjoy a secure, transparent and efficient platform by which to invest, encouraging more entrepreneurs to come up with bigger and better ideas. Although there is still a lot of work to be done, bringing community and technology together will help push ICOs toward a more stable, trusted network.
Initial Coin Offerings – A strategic perspective by PWC (in collaboration with Crypto Valley) PDF
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