Disclosure: Treehouse, the blockchain-powered investment platform, has previously sponsored Hacker Noon.
According to Coinschedule start-ups raised $6.6 billion so far in 2018 through ICOs. It confirms the appetite for new projects to use this fundraising structure rather than the more traditional ways used in order to attract financing. However, the ICO market is still highly unregulated (at least outside of the US, Singapore and Switzerland). Whether this is a good or a bad thing is not the point of this article and we should anyway be soon getting more details from regulatory bodies on this topic.
In the meanwhile, most of the companies raising money through token sales have often little consideration for the community that supports their project.
There are plenty of examples why a project can be unethical towards its community, among them we have recently seen a particularly concerning pattern emerging during the largest ICOs.
Several projects in the last months have raised important sums of money at the private and pre sale stages and therefore have subsequently limited the token supply for the public sale stage or merely cancelled it.
The issue here is the lack of access to these early investment stages for retail investors. Why? In order to participate to these sales you need to commit to a high minimum investment requirement (ranging from $5k to $100k). On the top of this, by not setting a maximum cap for their private sales and pre sales, projects accidentally raise more than anticipated and do not need a public sale stage anymore during which there is no minimum investment requirements.
The beauty of the ICO market is that not only large VC funds or prominent angel investors can invest in early stage start-ups but also small retail investors. If you strip this feature out of this ecosystem, the whole concept is shaken.
Yes, targeting large accredited investors is a way for projects to avoid being scrutinized by the SEC or other regulatory authorities. But do you really want retails investors, which represent the largest part of the community supporting a project, left behind? If you care about your brand and the future product adoption I doubt you do.
The ICO market is still nascent but in order to gain trust and credibility it needs to follow a set of principles that make the participation to this type of financing fair to everyone (while protecting less experienced investors). The previous example is one among other points that should be treated carefully by anyone preparing for an ICO.
A strong community is the key of successful projects. Therefore you need to protect it and foster its growth.
Here is a set of principles that should be taken into consideration if you have decided to raise money through an ICO:
1. Reasonable Hard Cap: How much money do you need to implement a go to market strategy and gain traction in your targeted market? You surely do not need $100 millions+ in most of the situations. This is not because access to funding has become easier and quicker than before that you should not try to run your business without going for unreasonable expenses.
2. Fair to everyone: every stage of an ICO should be easily accessible by the vast majority of investors, hence no minimum investment requirements to get in should be enforced (you can still mention that for large sums invested there will be higher bonuses or discounts).
3. Proof of concept: the public sale should not happen without the company having a real proof of concept. It should not be just based on theory (and more specifically a white paper and nice written bios on a polished website). It is fair to see a project raising a small amount at a private sale stage in order to come up with a working MVP for the public sale. This being said, going for dozens of millions without a product should not be the norm.
4. Transparency: the worst thing to damage your community is not to be transparent with it. Hence, project leaders should very regularly ask for opinions, let the community knows about advancements and challenges and make sure that it sticks to the original values of the project. Engage with your audience and gather ideas so you can create a product that mirror (to a certain extent of course) the interests of who is supporting you.
5. Equitable token allocation: tokens are certainly an incentive for a founding team to keep the motivation going and deliver on what they have promised. This being said these tokens should be allocated reasonably and act as an incentive to succeed and not a quick way to make a fortune.
6. Accountability: outside of a DAICO or a STO in the US there is little room to make a Blockchain-related project team accountable for the money they have raised. They are pretty much free to do whatever they want with it (at least it was the case so far although regulation will certainly remedy to this in the near future). There should be a legal statement made by the company itself to comply with the money allocation announced pre ICO once the fundraising is finished.
7. Underlying value: your tokens should confer to its holders a value attached to the real world economy and not just act as a way of raising money. If your token has no real application and do not solve a problem, then do not go for an ICO at all costs.
8. Smart distribution: some recent examples demonstrated a rather not well-organized distribution of the tokens post ICO even though the coins were already starting to be listed on exchanges (not talking about decentralized ones here). You must absolutely make sure all of the tokens are released before the coins hit the exchange you chose and take into consideration a potential congestion of the Ethereum network.
As we are preparing for our own ICO we had to think what general values were ours and how we want to communicate them to our community. The team members have participated to a large number of ICOs as investors in the past 3 years and these principles are the backbone of our own project. Because they are the values we would like to see when investing in other projects ourselves
Emile Dubie is a cofounder of treehouse that aims to democratize real estate investment. Email: firstname.lastname@example.org.