Initial Coin Offerings (ICOs) seem to have something of the bipolar girlfriend about them. In 2017, utility tokens were all the rage. They were, in fact, nothing short of being the best performing investments in the world with many up well over 500% or so. This year investors have seen something of the opposite scenario, with ICO funding falling to the lowest it has been since April 2017 over the summer. Did the market for tokens just pop, everyone is asking?
The truth is something a little bit more complex than that: ICOs never really inflated as much as everyone assumes in the first place. This reality consigns the ICO market to nothing less than a huge, misreported, entirely falsified lie that has gone on to start eating itself up. If it isn’t corrected, the result will be the death of Blockchain innovation for the next 5 or more years the same way railroad innovation didn’t get going after the 1920’s until a full 3 decades later. That’s a strong statement, so I’ll back it up with a proverbial cargo freight train of facts. If those don’t interest you, just skip to the last section of this post.
During 2017, the venture I founded, Monkey, looked at the possibility of hosting an ICO. Ultimately, we canceled plans to hold an ICO, for many of the same reasons that Forever Has Fallen’s Kimon Lycos details in his excellent analysis of the problems currently associated with the ICO market and his comparable ICO cancellation (and not dissimilar either to Aleksander Svetsky’s list of reasons getamber didn’t ICO).
Now, after what has been a year and a half of carefully curating and building a real community and in return for canceling, fighting off a lawsuit that the judge ultimately denied, we are finally ready to embark in earnest on this next stage in our innovation’s evolution. But make no mistake about it, our ICO is about token distribution, not about funds raised (which we have administered by a separate panel anyway, so it makes no difference how much we raise, at least not in the short term).
The decision to cancel the initial MNY ICO was not one that was easy to make. At the time there was a total euphoria over ICOs. According to ICO data, contributions to ICOs had risen by almost 200% during the second quarter of 2017, to just under $120 million. The market was awash with hype for the world’s next Ethereum, which to be fair, Monkey was pegged to be by a number of experts. But another bit of data stood out to me at the time, however. That was, the total number of ICO projects funded had dropped by around 25%, in the previous financial quarter, to just 17 fully-funded token offerings.
In other words, a literal reading of the numbers would result in the conclusion that in Q217 there were 17 projects that received an average funding amount of $7 million each, with the remainder receiving negligible amounts of capital. By comparison, in the first quarter of 2017 the number of ICOs funded was approximately 23, with committed funds totaling $40 million, giving an average of $1.74 million per funded ICO.
(Recent more reliable statistics reveal that $1 million or so is about the high end of most ICO raises. Civil, a journalism ICO, most recently confessed its planned $32 million raise had materialised into just $1.3 million in cash commitments. This parallels most other raises that I have spoken to who’ve been honest about what they’ve actually gotten in return for the show.)
Basically, what the data suggested in July 2017 was that while the amount of total funding for ICOs had risen just 2 times over the previous financial quarter, the average raise had shot up 4 times in size. The problem with this is that the number of ICOs funded had dropped commensurately by a quarter in total. It was simply illogical, the more I thought about it, to think that a market would see spikes of such huge magnitude in funding, both on a total funding and on an average funding basis with a commensurate drop in individual projects funded. In no other market in the world does that phenomenon occur.
Some commenters suggested the largest projects were receiving the lion’s share of proceeds, but the data didn’t suggest this at all. In fact, it showed a more — not less — distributed average, with the average raise rising twice as fast as the total amount raised across fewer ICOs.
Then someone introduced me to the chief executive of a microlending platform in Asia and it all clicked. That was the moment I chose to delay the MNY ICO. What happened was I was introduced to the chief executive of a fairly successful (at least perceived to be so) ICO by a Silicon Valley-based programmer who simply wanted to introduce two of the founders of his favourite projects. It was a genuinely kind gesture, except the value proposition that the introducing party seemed to present — that the two firms could establish an operating synergy together — seemed to be secondary among the firm’s CEO’s priorities.
“It has been and is still an epic time for us. In July 24th at 11am UTC+1, we launched our main Token Sale campaign and raised over $26.5 million. We also got an investment from [name removed] Group for half a million, plus further options to a few millions more from major banks,” wrote the CEO gushingly in his introductory e-mail to me. “First, Thank you for your interest, indeed we have successfully raised significant amount of money to move to the next levels,” he stated next in the e-mail. “However, I have always advocated that we need the right balance of crypto contributors (crowdfund) and equity investors (smart money). To my humble opinion, business angels and VCs would be a tremendous advantage/asset for our mid and long-terms approach.”
There are two things that seemed bizarre about this chief executive’s claim of raising in excess of $26.5 million. First, the singling out of a $500,000 participation presumably meant that this was the largest single contribution to the party’s recent raise, while references to “further options to a few millions more” certainly didn’t sound like capital raised already, but rather, ongoing discussion as to capital being raised.
Second, for someone fresh off the back end of raising such a large sum of money, the entrepreneur’s e-mail struck me as unusually solicitous here. This would make sense, I figured, were the company to have not got anywhere near $26.5 million at its ICO but rather, much nearer the $500,000-mark; after all, the latter doesn’t last long when you’re beefing up operations. In time, it so turned out that this Asian microlending platform ICO obtained about $1 million or so of cash funding.
The implication was that we, a decentralized hedge fund, were the “smart money” and might like to hand over a check sometime soon to profit from sales of what were still $20 million+ of fraudulently undisclosed tokens to be flogged off to the greediest money manager. We could get such a huge quantity of tokens, he seemed to be suggesting, for as little as $500,000, too (which at the time we could have easily raised if we had wanted to).
I decided that as tempting as the profits were to procure, I could not be a party to such events. The way I see it, you either tell the truth or you lie. There is no in-between, and you choose which side of that line you stand on. (This was a factor that worked considerably in our favor over time, as it happens.)
As I considered all this the observation that the average ICO raise was in the region of $1.7 million per ICO during Q117 became very clear — the excess amounts raised in ICOs from Q22017 onwards were just fabricated. And so it is today.
How is this done? Mostly, it’s by VC’s taking a chunk of tokens free of charge or at an insane discount. In other words, the exact same method is used of making money by major market actors as that fraudulent method I refused to sign up to and become a party to.
The question comes down to one of conscience and best practice ultimately, which you won’t find our community violating. If a VC buys $100 million of tokens from me for $100,000, then how much have I raised: $100 million or a hundred grand? Most honest people would answer the latter; in the ICO market, it is the former response that is registered, however. What this amounts to is simply an enormous premining of tokens that are later sold on exchanges far below an acceptable cost of sale for the many retail investors who participated in the ICO. If the tokens are free to the VC, after all, he really doesn’t care much one way or another what he gets for them as long as he gets something in return to justify his 20% carry (the percentage of performance fees he takes from his investors).
Take a look at ICO fundraising numbers and you will find evidence everywhere of this strategy, which is born out in ridiculous-sized fund raises. The most ludicrous example was when Telegram, a Russian messaging platform, boasts that it raised $2 billion+ earlier this year. Despite having received so much money in funding, the platform has yet to make a single adjustment to its already second-rate messaging platform (apart from a long-overdue cleansing of the platform of trolls recently, but I doubt this costs a couple billion dollars to implement).
In 2018, the average ICO has raised $25 million according to Price Waterhouse Coopers. That is a further 3.5 times more than the Q22017 number. All this, while the CoinMarketCap Index, a proxy for digital currencies, is 75% lower. Again, one has to consider the enormously unlikely coincidence of these two market anomalies occurring at the same time.
So now we know the problem. ICOs are lying about how much they actually raised in order to get big-name VCs to participate in their ICOs so that retail investors will cough up anywhere from $5,000 to $50,000 on average a pop. VCs then offload all their tokens once the token is listed on an acceptable cryptocurrency exchange and think no more of the venture at all. Meanwhile, everyone is stuck holding investments that are 90%+ lower in net value than the price at which they purchased them.
The only way to counter this side-effect in my experience is to spend at least a year — or possibly more — building up a well-informed, collaboratively-bound community which not only contributes small clips of funding but plays a part in the overall development of the platform.
When you opt for this strategy, you begin to notice that community members contribute in a variety of different ways. Some are more social media or chat room focused, helping newcomers understand the mission and the goal of the project better with incredible fluidity. Others are more technically-inclined, and play their part as trouble-shooters of first resort whenever someone has a question or a problem operating some part of the tech. Others still have great managerial skills; in fact, today, our project’s team is composed entirely of community volunteers who stepped up to the plate at some point over the past 18 months and opted to go all-in, coming aboard as a full member of bona fide management. That is a fact I am supremely proud of.
Further, when you carefully curate a vibrant, engaged and intelligent community that is constantly participating in the value creation process, there is something about the nature of your innovation that becomes somehow more solution-driven than if you had started with a whiteboard and an idea in a room full of VCs wanting to get in on a 90% discounted token investment. That is because you begin to notice and care about the concerns of the people around you, helping you build up this innovation you spend 24/7 immersed in, like an obsessed child. In turn, your thoughts turn to solving their problems, and not just your own. At that juncture, you have an identifiable innovation that solves a greater problem than the one that lies immediately ahead: lack of funding (admittedly that bit doesn’t go away, unfortunately).
Community capitalism, for want of a better term, is essential to every innovation process and has an exponent factor on the end of it that is way more significant than any amount of money. The problem is, you have to have only a very small amount of funding for the longest period of time to discover who are the real members of your community, or else you are essentially just paying them to play.
Once you put yourself, and your surrounding investors, to the test a few times and see who fights the battles next to you, raises the glasses with you and commiserates the down-times behind you, only then do you have a product valuable enough to go out and receive legitimate funding for. As such, we are already getting high-quality enquiries from legitimate funding sources now for the upcoming MNY ICO.
But getting there takes time and pain to perfect, and right now, that’s the only problem anyone on Blockchain is trying to solve with any sort of purpose.
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