All is Not Rosy
The number of Initial coin offerings has surged over the past six months. However, all is not as rosy as it appears. A nuanced assessment of token distribution activity tells a tale of two very different issuer experiences. Architect Partners evaluated over 100 project white papers augmented by data published by Smith + Crown and tokendata.io to move beyond the breathless headlines.
Successes
Yes, there are many successful token distributions. Since the beginning of June 2017, 46 projects have completed an ICO in line with their stated objectives, raising over $1.6 billion. On average these projects have raised $36mm to fund their efforts although outliers skew the data as the median raise was $19mm. Clearly these projects have demonstrated excellent receptivity by token purchasers.
Failures
However, most ICOs fail, sometimes miserably, at achieving their objectives. The vast majority of issuers indicated their token distribution goals via a stated goal, a soft cap or a hard cap. We simply evaluated final results vs. stated objectives. If an issuer achieved greater than 75% of their hoped-for token distribution, we considered it a success, below that level, a failure.
The token distribution market has quickly become more difficult. In June 2017, only one project failed to reach their objective. However, subsequent months tell a far different tale. From July 1 through September 25th 2017, 51 ICOs launched with high hopes, yet failed to meet their own objectives. These represented an astounding 59% failure rate for all ICOs during that time period.
Some may contend that even failure is beneficial to a project as it raises funds to allow the initiation or continued development of the project and team’s vision. In some cases, that’s a quite reasonable argument, however, in many cases the value proposition of the actual token issued is seriously compromised, perhaps permanently. Also, the level of capital raised from a failed token distribution is rapidly declining, from a median of $4mm in July 2017 to $2mm in September 2017 and 21 (43% of the total) raised $1mm or less from their efforts.
Chart: Token Distribution Success Rate
The chart below details each project evaluated and the results:
Lessons and The Future
We are clearly seeing a first step in the maturation of the ICO market. While each token distribution success and failure requires its own analysis, it’s clear that the market is doing what markets do best: make efficient decisions. That’s not to say all the successful token distributions will become successful projects and vice versa, however, a stark two-tier market has quickly developed via “crowd behaviour”.
In addition to a more realistic regulatory environment, which is coming quickly, we expect to see measures of quality become increasingly important. These measures include i) careful and complete preparation prior to seeking a token distribution, ii) more advanced project development, iii) a clearly-articulated basis for a robust token economy, iv) strong project merits and large market opportunity and v) quality and cohesiveness of the team responsible for execution. In other words, the ICO market will require all the same characteristics that would be important to attract quality early stage investors.
Special thanks to Eric Xu for his efforts.