Taming the ICO beast
The crypto-dimension where some of us live and breathe has been caught off guard by the fruition of the successful Initial Coin Offerings (ICOs) of 2014, 2015 and 2016. This has resulted in the “ICO craze” of 2017 where unfathomable amounts of money (in the form of ETH and BTC usually) are “donated” (as most white papers call it) in a blink of an eye.
Old Economy vs New Economy
The “old” model of funding involved usually an entrepreneur with an idea, a business plan and a prototype. In most cases that entrepreneur had already allocated all their personal wealth in the project. From the idea to the actual revenue there are multiple rounds of funding where the entrepreneur sells parts of their company’s equity; Angel rounds, VC rounds, Private Equity rounds and finally an IPO to make billions. What is important to take from this:
1. The company is mature and tested before the IPO.
2. To receive the funding the entrepreneur has given up large amounts of equity.
3. Out of hundreds of deals, less than 1% will exit with an IPO
With the above we can conclude that, funding in the old economy was a “buyers’ market”. A market where buyers had more options than sellers. Angel investors will not buy at x6 the equity of the new firm, chances are they will buy it at a discount because the entrepreneur needs the funding to achieve their dream. In this model, buyers have more choices thus they set the price.
The new model is different, the “entrepreneurs” don’t have anything close to a finished product, a white paper a website and a bitcointalk thread by a “hero member” is more than enough to justify an ICO. There is no equity sold, the tokens in all cases represent a non-binding promise to the donor/supporter. The crowd sales focus on the network effect where the founders produce a limited number of tokens which will increase in value as they become widely used. This results in a “sellers’ market” where the selling party has the power to set the prices. The outcome of the majority of these projects is still unknown as it is too early to pull any data. I highly doubt though that the 1% of success with the old model can be improved by the new one. Only time will tell.
Pick a Winner
The failed (old economy) startups outnumber the successful ones by magnitudes but we only hear the success stories; usually involving two people in a garage that dropped out of college to pursue their world changing dream, nobody wants to talk about thousands of people that went down that road and the outcome was negative, resulting in personal financial destruction. So, what is the most important difference between success and failure? As David Scott Hunter and Tauhid Zaman state in their paper “Picking Winners: A Framework for Venture Capital Investment” (link), the only and most important factor is: Founders previous experience. It is not the product or the technology or the innovation that have the biggest weight in determining success, but the founders’ involvement with previous start-ups or with similar projects.
Although there are successful ICO transactions on record and ICOs are poised to be disruptive innovative tools in the digital era the success of these projects and as a result the ROI seed investors will enjoy is not strictly correlated with the technology or the innovative use of blockchain nor with the way founders raised the funds. An indication of a successful project is the founding team and their experience in the field and in conducting business.
So, please… do your due diligence but never forget, markets are irrational!
Thanks for reading,
Your friend, The Whale!