ICOs, Only for Blockchain Products?

Unless you’ve been living under a rock, you probably heard of ICOs.

While there is much to say on this topic, I would like to address a particular recurring question:

Does a product need an excuse for a token to justify an ICO? In other words, are ICOs only for blockchain companies?

The current expert consensus seems to be “yes”. Unless your product absolutely needs a token to provide its core value, you shouldn’t be doing an ICO. I would like to challenge this status quo.

What ICOs Really Are

In essence, ICOs are just another way to raise money.

Instead of going to a VC or taking your company public, you can leverage the power (and hype) of the blockchain to create and sell your own token, raising unprecedented sums of money in the process. People go out and buy said token because they believe that it will appreciate in value over time, and you end with a whole lot of Ether.

So what you basically get is an IPO, without most of the legal hassle.

So a Token is a just a kind of stock?

Yes.

But wait, if a token is a stock, why is it essential for it to serve some functional role in my product to justify its existence? Google stocks have nothing to do with its search engine. Tesla’s have nothing to do with the Model 3. Why should a token have role in a product’s core offering?

Well, I don’t think it’s essential at all.

But…

I know what you’re thinking. If a token has no use beyond arbitrary value storage, then there’s nothing preventing it from becoming worthless as soon as public interest wanes, right?

Here is where you would be right. Unlike a stock, after the initial ICO a token has almost no connection to the company that raised the money. It will remain valuable only for as long as people trade it.

For live examples just take a quick look at Coinmarketcap. There you can see that most tokens today have value just because they’re actively traded. Even tokens with promising products behind them (GNT, OMG…) are currently just tokens, with the products themselves existing only on whitepapers. What will happen if the projects fail, or public interest wanes?

Blockchain projects tend to tackle this issue by saying that the token has value because it will play some critical part in the product. The people who end up buying the token either believe in the dream or are speculating on the token price.

Does this mean non-blockchain projects are left out? Nope.

Projects like this have two options:

1. Make the token a security and offer some benefit or dividends for those who own it. Note that by making the token a security you give up on the benefits of an ICO and must answer to the SEC. It works but will be expensive and against the whole idea of an ICO.
2. Find a way to offer a benefit to adopters, while avoiding being labeled a security! This is easier said than done, but once we figure this out, ICOs will go mainstream in a big way. One possible example: Token owners could get discounts when using your product. (Need help designing your token? Hit me up).

This is Just the Beginning

There’s intense market pressure for non-blockchain products and companies to raise money through ICOs. It’s easier than the alternatives, and you don’t have to give up board seats. Unless governments come up with some heavy handed legal measures, ICOs will inevitably become the go-to way to raise money in the near future.

If you have a non-blockchain company and want to jump on this bandwagon, I urge you to go ahead and not limit yourself because of soon to be outdated opinions. Make sure you avoid the “securities” pitfall (for example, offering rev-share is a no-no) and be creative with your token and the benefits it gives buyers (beyond price speculation) — there’s absolutely nothing wrong with raising money though an ICO, even if you’re not a blockchain company!

Blockchain today is much like the internet in 1997: It’s only the beginning of the boom. Five years from now we’ll be looking back and laughing at how primitive ICOs were in 2017.

Thinking of doing an ICO? Not sure how to design your token? Looking to build a blockchain product? Hit me up on LinkedIn.

The author is a Blockchain product consultant at Nexchange.io and various startups.