We have all heard stories of how companies raise millions or even billions of dollars to build the next hottest company. Many traditional tech companies have considered ICOs as an alternative to raise funds for their next expansion phase as compared to traditional venture capitals. This is because founders no longer have to give up stake in their startups to raise funds, and the ease to easily crowd fund the money they need to run the company.
As the VC industry is most disrupted industry by ICOs, we have seen a growing adoption in VCs and hedge funds turning to start their own cryptocurrency investment arms.
Although the number of ICOs and amount raised have risen since last year ($6.3B raised since the start of the year till April compared to ~$4b in 2017), many companies find that they are no longer able to hit their hard cap in the fundraising process, or even raise enough funds to hit the project soft cap. This may be because of several reasons, and I’ll explain more of these reasons below.
Source: Thought Catelog on Unsplash
Tokenomics are an important factor considered by participants in a token sale. Typically, investors favour projects that have both a speculative value and utility value. This value usually comes from building an application or ecosystem that will utilise the token that otherwise could not have been done with existing fiat or point systems.
Many companies, enticed by the stories of raising easy millions in a cash grab, simply neglect the utility of their token or that their project does not need to exist on the blockchain. Their tokens hold no value, does absolutely nothing or does not solve a compelling enough problem that existing systems can not do — this forms a sort of deterrence to your project.
Your investors are people looking for the next “moon”, and will not part with their money unless your project can promise that. Much of this comes from the potential speculative value, like from potential or existing partnerships with big brands that will also utilise your tokens or project on their platforms, or having the right advisors and team players to build a successful project.
Source: Zachrie Friesen on Unsplash
Marketing is an important aspect in any sort of business, and much of the crypto space is plagued by projects with a seemingly unlimited marketing budgets. To build a project that stands out is difficult in any space, and much more so in the crypto space.
Getting funds in at an early stage is extremely difficult, and more so when nobody knows you. Much of the advertising in the crypto space is done by influencers, and they’re usually incentivised by bonuses (usually in additional tokens on large token purchases), which are then re-marketed to their groups in the form of pools. These influencers then take a cut of these bonuses as fees after investing a comfortable amount, and disperse the rest to their pools.
Early adoption by influencers is extremely important as it breeds an invested interest in your project. Since their own money and reputation is at stake, they’re more inclined to aid in the successful fundraising of your project by marketing you to their communities or getting other influencers and communities on board.
Source: Charles Deluvio on Unsplash
The success of any team is determined by the players behind the project, and not having an experienced enough team, or having team mates with a tarnished reputation may bring down the legitimacy of the project. Much of the blockchain space is very young and new and the communities extremely small and a bad reputation from a scam project goes a long way.
A year ago, you could write a whitepaper on your idea, launch an ICO and investors will simply throw money at you. These days, fund raising through ICOs are getting increasingly difficult as investors become more savvy, and look into more details before deciding to invest in a project.
ICO typically invest a lot in the design and production of their initial website to drive investors onboard and take months to release an actual product, or simply just neglect the product altogether.
Much of the space do not actually have a working product, and that has been one of the key issues to drive investors away from your token offering.
Source: Mark Basarab on Unsplash
When the market conditions are bearish, investors are less likely to invest as they’re more cautious with protecting their initial investments. Much of the ICOs that raise huge amounts do so in great market conditions, and when the market takes a huge downturn, it impacts the amounts raised from different ICOs as investors are likely to reinvest profits from past ICOs into recent ones.
With their recent ICOs underperforming when it hits the open market in exchanges, users simply do not have the capital to reinvest in other projects.
Source: Kate Joie on Unsplash
Investors are always concerned that if your ICO doesn’t sell out, or that if your market cap is too high that it will lack in demand from investors to buy post-ICO. Post ICO demand comes from investors that fail to take part in your ICO or investors that already bought during your ICO and would like to purchase more of your tokens. This drives demand in the market, and the lack of demand is a huge red flag for any ICO project since somebody will have to buy the tokens from your investors. If your market cap is too high, or that if you host an uncapped ICO (no obvious hard cap — these projects are very popular in 2017, but we do not see many of them thee days, example being Telegram’s ICO), the concern to investors is the lack of demand as everyone that wants your token already has your token, and that the supply is a lot greater than the demand in these tokens.
Another concern is also if you’ll be raising enough to be able to pay for listing on credible exchanges. Exchange listings on Binance has been recently reported to be more than USD 5M, and listing on other Chinese exchanges are upwards of 6 figures.
The ICO landscape has grown to be a vastly different beast from what it was last year. Projects are no longer able to raise astronomical figures from just a simple whitepaper and investors are a lot more cautious and savvy with their investments. Regulations are clamping down in the form of KYC/AML frameworks, or even outright banning ICOs in China.
When we conducted our $8M ICO for Switcheo, it became clear that blockchain companies now need a lot more than hype to execute a successful token sale. Today, Switcheo is a decentralised exchange on both NEO and Ethereum blockchains with more than 25000 users.
The future of the ICO landscape is heavily reliant on what these projects may bring to existing blockchain ecosystems, and not just the creation of the next 10,000 shitcoins. As investors get more educated in the space, projects that are launching ICOs should also look into the contribution they may bring to the space, and not just as a tool for fundraising.