You’ve seen them trending everywhere. Those amazing companies that raise an exorbitant amount of money during their Initial Coin Offering and achieve high levels of success. It all started with Ethereum which initially raised what can now be called a measly 18.4 million. That was just the tip of the iceberg. The floodgates were opened ICOs on the Ethereum network increased exponentially.
To date, some of the top contenders are:
Filecoin: 257 million
Tezos: 232 million
EOS: 185 million
Bancor: 153 million
The DAO: 150 million
2017 started the craze, and 2018 is hellbent on taking this madness to the next level. The hype is still very much alive with Telegram surpassing these figures and even reaching a probable $850 million. Oh, the humanity of it all!
So Why are we saying that they shouldn’t raise millions?
Contrary to popular belief, we actually have legitimate reasons. From cautionary tales to raving successes, this article discusses the benefits of setting realistic and tangible goals instead of only seeing dollar signs.
1. Exorbitant and Crazy Expectations
Usually, ICOs that raise millions of dollars are ill-equipped to handle the kind of infamy, and eventual scrutiny that comes with raising so much, so quickly. Tezos, for example, underwent bitter feuds, governance issues, public lawsuits, and a restructuring of their board of directors, all which hindered the actual release of their Tezzies coin for approximately 7 months. Investors are now watching Tezos with high anticipation to see if these new leaders of their governing body can actually deliver on their promises. With the amount of money raised, the stakes are high.
This is why, we are arguing that making millions, while a dream, actually sets unrealistic expectations for the actual product. Raising such an amount so quickly also diminishes the respect that companies should have for money and can also lead to lavish squandering of funds. Does your company actually need a large and ostentatious fanciful office? Or multimillion-dollar amenities for the employers before you’ve delivered the final product?. If the product costs less than the millions raised, what consequences would you potentially face from investors? These are the hard questions that require in-depth reflection.
The lesson: It’s important for start-ups or companies looking to break into the ICO market to really, genuinely evaluate what they actually need the money for and how to use it intelligently. A key tip for companies looking to start an ICO should actually under-promise and over-deliver. Over-estimating how long it will take to create a product provides a safety cushion and allots time to address issues, should they occur.
2. Threat of Hacking
Companies that are thrust in the limelight at the early stages of their business often find themselves at a high risk of getting hacked. And then some.
Enigma, for example, was touted as a security and cryptography coin, that boasted about new, and innovative encryption methods. According to Coinist, Enigma’s mailing list, website, and Slack accounts were all hacked ahead of the company’s ICO. Hackers used Slack to reach out to investors about a fake early ICO. Some rightly called the email a scam, but many others pulled the trigger, and hackers made off with around $500,000 in Ethereum. Enigma CEO Guy Zizkind’s account was hacked, because he hadn’t set up two-factor authentication. This is a staggering mistake. Two-factor authentication is a common feature on wallets and exchanges, and is regularly emphasized as one of the most important things users can do to protect their coins. The CEO of a security-focused ICO neglecting this is comical. Many prospective investors were scared off for good.
The lesson: Verify your claims. Set realistic expectations on deliverables and always set-up two factor authentication. These are just basic things that can make both you, and investors, much happier in the long run.
There are so many cases of companies using an ICO to raise funds and disappearing with a lot of money, leaving devastation in their wake. One of the worst ICOs of 2017, according to Coinist, was OneCoin.This was a textbook scam from start to finish. OneCoin was a multi-level marketing Ponzi scheme and there was never any tangible proof that a token was ever created. The team had little concrete to show investors, and certainly no working prototype. Coinist states that some of the team’s biggest members had previously been linked to other scams. Dr. Ruja Ignatov, founder and COO, may have falsified her qualifications on the company’s website. Speaking of the website, it was a parody of a scam site. Spelling was poor, and technical problems were common. Numerous governments warned against investing. On April 24th, Indian authorities raided a OneCoin meeting. 18 were jailed, but not before OneCoin scammed investors out of 350 million. Tellingly, they accepted funding in standard currency, not Bitcoin or Ethereum like most ICOs. The story was a black eye on the crypto world.
The lesson: It goes without saying that researching and anticipating hacks should always be part of the plan. Every effort must be made to ensure the protection of both investor frauds, and employees creating the final product/service.
What should companies who want to raise money do instead of an ICO?
1. Raise in Series
There is a tried,tested, and true methodology to raising capital that already exists. Traditional business have been using it for decades. If the risk of an ICO negates the need for an ICO, then the perfectly defined world of fundraising should be explored. Traditional fundraising models almost always goes through a friends and family round, a seed round, an angel round, a bridge round, series A round, series B round, and so on. Even less-risky crowdfunding options like kickstarter, are still viable options to explore before an ICO. Yes, they require more work. Yes, they also require an vast expansion of your network and resources, but there are opportunities out there. Jumping on a hype train because of the #FOMOFeelz exposes start-ups to a plethora of unexplored risks. There are also plenty of traditional avenues to explore. ICOs should be seen as a last resort, when all traditional routes fail.
2. Alternative Fundraising Options
Ever heard of DAICO? This is a new decentralized fundraising model for the Ethereum Network, outlined by Vitalik Buterin himself. DAICOs (pronounced as Dye-Cee-Ohs by BlockX Labs Employees) propose a more democratic way of controlling ICOs. Simply put, it is a combination of the “old” ICO concept with a Decentralized Autonomous Organization (DAO), which is run by hardcoded rules. This provides an added level of control for new investors and allegedly provides protection against fraud. According to Aaron Cunningham, DAICOs minimize risks in several ways. If vote manipulation raises the tap value, the team has the ability to lower it. If malicious actors manipulate the votes somehow to cancel the project, investors get their money back. The team could create a new DAICO and investors could simply resend their original investment back to the team.
So if you are ready to dive into version 2.0 of ICOs, DAICOs are definitely a innovative route to be explored. Be sure to tune in to our article next week where we deep dive into DAICOs and explore what they’re about.
The nature of ICOs has evolved and has become a uneven minefield for blockchain and crypto start-ups. While ICOs have proven, in some cases to be an effective method of raising capital, more and more scams and threats are emerging. Whiles most start-ups find themselves unrealistically craving millions, a smaller figure may just be able to achieve the very same goal. Developing an effective product, that is well-thought out requires innovation,may not necessarily need millions of dollars. Just the drive to make it happen.
Do you think that raising millions is a bad idea? What alternatives to ICOs would you recommend exploring? Let us know in the comments below or contact resident Blockchain Consultant Laura Marissa Cullell at firstname.lastname@example.org.