To all the honeys makin’ money: when doing an ICO makes sense?

Being a co-founder of a blockchain-based startup and saying that ICOs are not always the optimal way to raise money might seem contradictory. Especially that once I state that I work in the blockchain space, I almost always get asked when we are going to do an ICO. My answer is ‘when the time is right’.

So when is it ‘right’?

First of all, what does ICO actually mean?

ICO is an Initial Coin Offering — a form of a crowdfunding mechanism — where a startup unveils their idea to the world and asks people to contribute money so that they could make the idea come true. The details of the idea as well as the project roadmap will usually be found in a whitepaper. The contribution by the supporters will actually be in cryptocurrency, most often Ethereum (ETH). And what people get in return for their ETH will be tokens.

If you want to find out more about tokens and what impact they can have on how we exchange value read this piece and that one.

ICO = fast and furious?

Many people seem to believe that raising money through an ICO is a piece of cake — you put up a landing page and write a whitepaper overnight and bam, you raise $40 mln.

Well, if that was the case we would all be doing an ICO just now. Again — it’s similar to a crowdfunding process. In the beginnings of Kickstarter it was nice and easy to raise money. And most of us remember the legendary potato salad raise $55k. In the ICOs world the times where a startup wanted to raise just few millions, and they accidentally ended up with a $100 are over. As we know preparing a proper crowdfunding campaign takes time, and so does preparing an ICO.

First, you need to know what you want to build and get people’s support — so basically you need to come up with a product. In order to share it with the cryptoworld you write a whitepaper. And then explain it to various stakeholders, change it, adjust it. Write more about the bigger vision and where you want to be after the token launch. And you write on Medium, reddit, your Telegram & Slack channels and wherever you get asked about another detail of your idea. And then you write and discuss even more.

Second, you need to think through your token design. Yes, that’s how it’s called, and there’s even a name for the person focusing on that — a token designer. It basically means what is the promise that you give to your token holders. What do the tokens represent? What can the token holder do with them? Not going into all nitty gritty details of a token design (which are btw super interesting and you can read about them here and there), a token can e.g. give you access to use the platform (like in the case of Ethereum or Golem); a token can represent a fraction of an actual physical object (like in the case of Maecenas fine art pieces) or equity in the company (which many platforms are working on to make it a legal and technical possibility, such as Neufund). As many tokens there are, as many there are token designs. And of course you need to be able to explain what your token does and make sure it is feasible from the technical standpoint.

And then you need to think about the way you’ll go about the crowdsale of the tokens. Why does this matter? Because this can build or destroy trust in the community of supporters. If the crowdsale is planned poorly or in a suspicious way, it can lead to a disaster (such as Tezos founders that raised $232 now facing a class action suit). So you need to consider several points. Will you put a cap on the amount of money you want to raise? (you might think — why would I need a cap, give me all the money, but well.. sometimes having too much is a problem as big as having too little). How will you price the tokens? You could put a price on a singular token. But you could also tell your supporters — put the money in now, at the end of the sale you’ll know how many tokens it represents. How much time will the token distribution last? You could go for a short time period like a month or opt for a year-long period (like EOS). There are several more issues to be considered, and you can read explore them in a piece by Vitalik.

And those are, of course, not even all the basics. Not to mention building a team on the way, preparing a marketing campaign, getting users in a case of developing an app, and talking to lawyers to make sure it’s all legal and not breaking European or US law.

Easy, right?

No equity = No voice?

In the majority of ICOs token holders are not given equity in the company, which entails that they are also not given any rights to them including voting rights. From the founders perspective that is of course an interesting solution — raising money without having to give a chunk of your company to an angel investor or a VC. It might seem that is their dream come true.

But not so fast.

Giving up equity usually also entails letting the investor sit on your board and approve major decisions. In the case of an ICO it could feel like having thousands of investors on your board. How so? Those people are the ones that believed in your idea, believed that you could be the next big thing and that, obviously, you could let them have an amazing return on investment. And even without giving them explicit rights to your company they feel that they have the right to voice their opinions (and most often, rightfully so). And it’s obviously great to have a support group believing in you, your team and your mission. However, it might actually stop you from making your product better. Because you promised your supporters the product described in the whitepaper and they believed in that idea. This means that changing directions, pivoting, getting rid of certain features will be much more difficult or risky than in a classical angel/VC setting. In this hyper volatile crypto world getting rid of an awaited feature could cost your project a huge loss — in terms of the number of supporters as well as losing a big chunk of your valuation overnight (or even over few hours).

But all in all, is ICO always a bad idea?

Hell no! As with anything in life — there is a time for that. In my opinion a good time would be once you’ve built a team that works well together and have a prototype. You’ve possibly pivoted a few times and now you feel you are close to your product market fit. Once you’ve probably raised a round from angels or a VC that did not only give you the runway to get to an ICO, but also know you well, believe in your vision and can be one of your supporters in the ICO.

And if you have a working product, that has been tested, that has at least a small community of supporters, doing an ICO can be a great way to get out to the community and scale your business.

About me: European lawyer by degree, briefly flirted with the corporate world and moved to the startup world to discover the world of digital health and now blockchain. Co-founder & CEO of Trivial.co: an Ethereum blockchain interface where you can check anyone’s tokens & transactions.