Initial Coin Offering, Meet Sanity

The Initial Coin Offer (ICO) is taking over. CoinDesk reports that ICO events raised more than $327 million in the first half of 2017 and that doesn’t even include the $200 million+ raised by Tezos this month.

There’s no doubt: at this moment, an ICO is the most direct path to millions of dollars in funding. The path is so direct and, perhaps, easy, that even a project like the Useless Ethereum Token (an ICO that promises to issue a truly useless token with no purpose) has been able to raise more than $70,000.

Put that in perspective: startup founders have had to build strong minimum viable products, jump through incredible hoops, and (sometimes) uproot their entire lives to join an accelerator program or find an angel investor who would cut a check for $20–100k. The Useless Ethereum Token (UET) threw together a website saying they would do nothing, and they raised $70,000. Incredible.

The UET is, of course, an outlier, but the problem is real: there are many projects raising between $5 and $15 million with nothing but a napkin-stage idea. The ICO is brilliant mechanism — one which will enable and incentivize developers to build (potentially world-changing) blockchain-backed applications — but it won’t be around for much longer unless the community raises the bar. Here are a few starting points and questions to ask:

Project white papers should include a business plan.

There is certainly something to be said for projects or companies that are exploring new technologies and are not putting profit first. There’s a place for that and given the state of blockchain development, maybe there should be more than is typical.

But we aren’t curing cancer or building a base on the moon, we’re deploying advertisements, paying content-writers for their work, and betting on e-sports. All worthwhile and practical pursuits, and all things that should have some kind of business purpose or revenue plan. Without it, all we’re doing is having fun burning cash(/ETH/BTC/whatever). That’s not a long-term strategy.

Who’s watching for market manipulation?

ICO white papers make promises all over the map, from destroying all remaining tokens at the conclusion of a pre-sale to withholding 90% of the authorized tokens for future issuance. Each of these and everything in-between are fine, but who’s keeping this in check? If the project has unchecked power to manipulate the market for their benefit, it’s important that we:

Take a page from angel investor best-practice and place major emphasis on the makeup of the team.

Much of this comes down to trust: trust in a world with no real regulation, trust that the team will be able to execute what they say they’re going to, and trust that the team will be able to figure it out when things don’t go quite right. These are vital questions to ask of any entrepreneur and it appears that we’re really not asking these questions.

This includes a strange trend that I’ve picked up on: specialists. There are a few individuals who have established a name and network in this space and have agreed to allow projects to use their name on the team page in exchange for… well, who knows? It’s critical that we ask questions of each team including to what extent everyone is involved.

Token issuance is here and the opportunity ahead of us, as a community, is tremendous. But if we don’t start establishing some rules, we’ll kill the opportunity before it ever had a chance to make a real lasting impact, and risk the financing of blockchain-backed projects for years to come.

My name is Andrew J. Chapin — I’m the Founder & CEO of Benja, the merchandise ad network. We’re launching an Initial Coin Offering, benjaCoin, but we’re doing it the right way.