Leo is a savvy, accomplished, Head of Consulting, Innovation & Business Development highly regarded
“Whoever told you doing ICOs was easy simply haven’t done one”
This is a true roller-coaster-ride-story of launching ICO in Hong Kong in 2018, insights that you don’t know but should know.
Chris, who I knew for over 10 years, the founder of a Shenzhen-based software company approached me for the second time, persuading me to join him to transform his company from a software development house to a SaaS-based company underpinned by a self-developed Blockchain platform. Given my vested interests in Blockchain and being an entrepreneur; and knowing Chris had received a pre-A round investment of around $3M; seeing 30 odds software developers rolling days and nights competing for next sprint and batch of feature release; I accept his invitation and took a role with a strategic focus on the International market development and fundraising.
We were working tirelessly to launch the first commercialized blockchain platform in China in the real estate sector and providing KYC and asset tokenization services to financial service providers and real estate companies. The Platform finally went online on May 2018 and we were able to register a number of clients in the first week of launching the platform. On the flip side, the business required more money to continue, to support the expansion and platform operation and development. We started with a rather traditional approach, i.e. going after VCs with the aim of raising an additional $4M at company pre-money valuation of $16M and, it was not going to conclude in time, and soon enough we were introduced to what’s was new to me at the time — Initial coin offerings (ICO).
ICO just had its Epic year 2017 as ETH peaked at Jan 2018 with a straggling price of $1,384. 97% of ICO was able to reach its soft cap (typically $1M~3M), and many of them reached its hard cap, i.e. $30M if not more in 2017. Given we are one of few “reversed-ICO,” i.e. having a working platform ahead of ICO and with real clients who were actually paying for the use of our services; Our 30 odd software developer made us look like an army competing with other Blockchain startups. It seems to be a very logical thing to start our own ICO at the time. The only question is — how?
Raising money via ICO was told to be easy or at least pre 2018. It looked like a few geeks who can write a whitepaper will be able to walk away with millions of dollars. That perhaps was the case before 2018. The gust of wind started turning from late 2017, when China took the shot on ICO and banned it completely on Sep 4th 2017. The ICO market reacted rapidly and converted from public sale driven in 2017 to private sale driven in early 2018. This resulted in an influx of crypto-funds — a new sector who benchmarks themselves as investment bank of the crypto-world. Meanwhile, a counter-servicing consulting industry was born — ICO advisory.
In essence, the ICO advisory firms provide service over four different phases.
1. Due diligence phase — essentially develop a set of documentation supporting your ICO campaign. i.e.
a. The Whitepaper that highlights your solution, Token economy that underpinned your project, ICO plan, your team etc.
b. An Investor deck for private sale
c. Legal opinion
d. Sales & purchase agreement
2. PR & Marketing phase
a. Online channels i.e. ICO website
b. Social media marketing i.e. Linkedin, facebook
c. ICO listings, KOL review
d. Press coverage i.e. Forbes, medium
3. Fundraising phase
a. private sale stage 1 — typical 5%- 10% of your hard cap
b. Private sale stage 2–80% — 85% of your hard cap
c. Public sale — 10% of your hard cap
4. Post ICO phase
a. Public listing on an Crypto exchange
b. Market making
c. OTC (over-the-counter) trading
ETH hit the bottom early April 2018, but Crypto world continued to evolve, and a few personas emerged, and some of them made buck loads, i.e. Crypto exchange, lots of them eventually pulled out of the crypto world.
ICO companies — they are your typical startups but with a mixture of intents. Very few of them stuck to the calling of setting up a DAO (decentralized autonomous organization) and kept on developing and growing the platform and business in 2018. The way I see it — if you had no real collateral and equity invested in a business but managed to raise $30M to develop a platform, but all of a sudden your company value declined 70% as ETH priced dropped down to $381 from $1,384 in less than three month, what are you going to do? Mind you, most of ICO Company’s valuation based on ETH or BTC, and most of them kept Crypto tokens instead of converting them to Fiat-currency. So most of them panicked and started selling ETH, the snowball started to roll in June 2018.
Crypto investors (professional crypto funds) — they are early bitcoin / ETH miners and investors, some family offices. They are typically investing in ICO companies during the private sale phase. Depends on which stage that they invested in, it is common to get somewhere around 20–50% discount of the listed public sale price. The offer comes with a lock-down period, i.e. 3–6 month when these token will be unlocked and open for sale. Considering most of ICO listed in exchange were getting 2x to 10x of growth in the first 3 months of ICO public listing, this is definitely a lucrative business to invest in.
Crypto investors (public individuals) — they are an individual, i.e. crypto enthusiast, speculators and ordinary individuals who have no clue of what ICO/Cryptocurrency is but sold with the belief that they are buying the next Bitcoin. Lowest trophic level of the food chain and many of them lost a fortune in investing in the cryptocurrency in 2018.
ICO advisory firms — these are the most chaotic yet sophistic persona of them all. They are early ICO practitioners, marketing companies, legal and law firms, financial companies and play a role throughout the ICO phase. Many of them are well equipped with content knowledge and expertise in their corresponding areas, i.e. in trading, digital marketing, legal and regulatory practice but remarkably few of them had actual ICO experience. Considering there were less than 1,000 ICO launched by the end of 2017 globally (909 to be exact according to icodata), there are just not enough experts with the end-to-end experience. Despite all that, in the age of gold rush, you will take whatever tools you can get to succeed in the competition. Who made most of the money in California gold rush (1848–1855), I won’t know for sure, but I am certain Levi Strauss — founder of Levi Jeans definitely made the most successful business out of the gold rush by selling a pair of blue jeans to the working man — “For men who toil.”
Media likes to report on how much money startups fundraised via an ICO, but you rarely see anyone talk about the cost of doing ICO. So how much does it cost from planning to the closure of an ICO? It is a rather large amount, which also depends on many factors, i.e. your project and solution maturity, country of your ICO, the advisors you are working with, timing. Our ICO were conducted mostly in Hong Kong, if I decouple direct cost, i.e. cost of staff with the indirect cost of doing ICO, i.e. money that you need to pay to external service providers, the indirectly cost alone is in the range of $500K and $3M. What the heck! Yup, that was the cold hard reality, which is why most of the startups just can’t afford it.
· The single biggest cost item is to pay for listing on a Crypto exchange. Large exchanges, i.e. Huobi, Bittrex can charge you a million dollar to be listed.
· Advisory service during the due-diligence phase can be in between $30K to $300K
· Legal fee is another small fortune, i.e. $50K — $80K to get a legal opinion to certify and vouch that the ICO token is not a security token.
· Cost of running a marketing campaign can burn $100K per month subjects to the media platform and scale of your campaign.
Many successful ICO fundraised somewhere of $15M to $50M in 2017 and Q1 2018. 55% of ICO failed to complete in Q2 of 2018, i.e. reaching the soft cap. Ones who completed ICO are only getting a fraction of what’s in 2017, i.e. $1 ~ $5M. That’s one of the fundamental reason of why the majority of ICO cease to exist towards to the end of 2018, as the cost of doing ICO is almost level up to the amount that the company can fundraise.
ETH rose up to its last peak in May 2018, i.e. $806 and it has since been experiencing a steady decline. By Q3 of 2018, the cost of doing ICO was no longer economical for most companies who are still in ICO. The party had finally come to an end. No one wants to talk about it; blockchain companies no longer want to associate themselves with ICO as this whole thing was a scam and gags. But was it?
ICO started well as it offered an alternative path to startups to raise sizable funding without substantial business at an early stage, which was not possible before it. The issue has been germinating since people had a false expectation on the underlying technology, as Blockchain is not the panacea for everything; “Greed and speculation” spoiled young startups like giving excessive amount cash to a 10-year-old before he knows what to do with it.
I am not a cryptocurrency investor, and I don’t know enough about this market to see where it will go. However, I am a believer in history always holds signs to the future if you know where to look. Behind any ICO and any crypto token, there is a common ground — someone like to call it Blockchain, industry experts like to call it Distributed Ledger Technology. Regardless of its name, you need to understand the fundamental problem that technology resolves that others cannot, and know to how to identify a DApp powered by a viable use case to make an informed investment decision.
Where you will likely find the successful use cases, we are yet to see a killer DApp in the B2C world, and I think it will continue to be the case. Is Bitcoin the one? I don’t think so, it is not user-friendly, same goes with most of the common Cryptocurrency. I am sceptical about B2C Blockchain Apps and ICO companies as I see they are trapped in the paradox between being efficient and user-friendly with being is autonomous and trustless. Can you imagine if Uber will work as efficiently and user-centric as it is now if it was built on the decentralized and autonomous model? Who is going to pay the developers that work towards a unified goal? On the same token, Linux is an open source OS which hasn’t been widely accepted like windows, not because of the technology but its design principles.
I am in favour of Blockchain companies who focus on the B2B space as well as on the protocol level, where they gaze on enterprise problems and interests underpinned by 6 intrinsic features of blockchain with long term potential for disruption and transformation.
1. Distributed shared data over peer-to-peer (P2P) networks reduce single points of failure;
2. Consensus-driven trust cuts out the intermediaries;
3. Immutable transactions ensure trust
4. Hashing-based data ensures integrity and security
5. Automated smart contracts promote touchless interactions across process and value chains
6. Permissioned and permissionless flavours give enterprise users flexibility
These six blockchain features are changing the way we think about business transactions, data storage, and even industry value chains and associated revenue models.
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