ICOs Might Not Be An Option Anymore, But A Necessity
In 2014, the current CTO of Coindesk Balaji Srinivasan and Naval Ravikant, co-founder of AngelList famously said, “Bitcoin is more than money, and more than a protocol. It’s a model and platform for true crowdfunding — open, distributed, and liquid all the way.” The time has come for a new paradigm of crowdfunding, but are ICOs the answer?
To demonstrate why ICOs have become a necessity for tech entrepreneurs, let's first have a glimpse of the ICO process.
The rationale behind ICO funding is that once a product launches and acquires users, demand for its token will increase dramatically, causing token values to rise to the benefit of their holders. Pre-sale participants are often further rewarded with additional bonuses on their token purchase to compensate for their additional exposure.
An example of ICOs making a company successful is Binance. Binance started in China in mid-2017 but shifted base to Hong Kong after the China government banned cryptocurrency exchanges. Binance, being a centralized exchange like Bittrex and Poloniex, adopted a unique way of funding themselves through the ICO, which concluded in July 2017.
The ICO set the stage for the company’s popularity and public perception. The initial traction gained by the ICO helped Binance spearhead to become the top exchange in the world in less than 6 months.
Recently, Zhao Changpeng, the CEO of Binance advocated for ICOs in a blog post on their site. The points that he made in the blog post is summarized below.
ICO vs VC
Ease of Fundraising:
If given an option between doing powerpoints, pitch decks, term sheets, investment agreements and so on for a cumbersome 6 months of hearing how your business plan is not good enough, only to get a $100k of funding; or writing a WhitePaper and pitching the idea to hundreds and thousands of people and have the potential to raise millions in capital, most will choose the latter.
Now let's change the perspective from the entrepreneur's to the investors. Majority f the investors are interested in ROI. A data set which took in account 155 tokens from 2016 and 2017 found out the ROI to the investors was an astounding 1373 percent, while that of VCs was 5000 percent.
Accessibility to the General Public:
Let’s take for example that you always knew since UBER’s inception that it was the “next-big-thing.” However, you had only $1,000 that you wanted to risk in a risky asset. There was no way to do so. ICOs solves this problem.
The Wisdom of the Crowd:
The wisdom of the crowd is the collective opinion of a group of individuals rather than that of a single expert. While many VCs are very good at their job, they have biases and lean towards certain traditional types of business models. With crowdsourcing, there is an increased probability that the people who are investing in your company will use your products and services. VCs, take a gamble on this.
It gives the project creators an opportunity to build a community around their projects. Having a healthy community gives a product immense credibility. Plus, the members of the community can have real say in the direction of the projects and keep the creators accountable.
Criticisms of the Initial Coin Offering Model
Because there is so little paperwork involved in ICOs it attracts many scammers who can simply create a bogus white paper and make off with a lot of money. Some developers also purposefully omit certain important details from their white paper to make their projects look more appealing than they actually are.
However, all new industries attract a lot of scams. Try remembering the internet in the late 90s and early 2000s. The place was and still is filled with scammers. As the market matures, so will the knowledge of people around it. People will easily be able to identify scams in the future and there will be automated solutions to the problem too.
When you are investing in a project in an ICO you are investing in the idea of the project. You read the white paper and if you think that the team is credible and the project has promise then you invest.
So, basically, you have no idea whether the project will even be successful or not. Now, this is not a problem that is limited to ICOs. Most of VCs investments are based on speculations too. An investor has to do their due diligence on the team members, business plans and the industry the company is trying to disrupt to find safer bets.
Regulatory problems from governments and establishment institutions seem to be the biggest hurdle for mass adoption of ICOs. They have been resisting this revolutionary paradigm in the same way established automakers resisted electric cars for decades; they do not want to lose their monopoly. Things are changing now.
Many countries like Japan, Estonia, Malta and so on have ICO friendly laws. As time passes, even bigger countries will have to hop on the crypto-boat because of public pressure and free trade. It is only a matter of time.
Loss of Private Keys:
In conventional financings, the issuer is a trusted third party. If you lose your stock certificate, the issuer will almost always give you a new one if you pinky swear that you really lost it. But if you lose your private key for your wallet or if your wallet is otherwise compromised, the situation is a bit direr. This issue is already being solved by companies providing wallets with 2-step authentication process that uses your biometrics.
“Your old road is rapidly agin'; Please get out of the new one if you can't lend your hand; For the times they are a-changin.” These words from the legendary singer and songwriter Bob Dylan seems to sum up this situation.
Many VCs like Matrix Partners, Sequoia Capital, Lightspeed Venture Partners have been looking into blockchain ventures. Notably, Andreessen Horowitz is trailblazing the path of VCs in crypto by launching a dedicated crypto fund.
Companies can take inspiration from Binance and gain confidence from it. As the crypto-based businesses start to blossom, we can see companies and individuals who are behind the curve to catch up.