Our London Correspondent Nick Ayton explores the structure and process of a successful Initial Coin Offering (ICO), its pitfalls, traps and the essential things you need to know as both investors and entrepreneurs.

Laying the foundation for next generation Capital Markets

An Initial Coin Offering is now part of the Blockchain ecosystem used successfully by entrepreneurs and investors who want to be part of the Blockchain Revolution as in Don Tapscott’s words we are moving to the Internet of Value or what others refer to as Web 3.0.

With ICOs proving increasingly popular mechanism for crypto-entrepreneurs to raise capital they are not for everyone as this form of finance is not by any means mature and it is becoming harder as investors get smarter and competition for ICO airtime increases.

"At first, ICOs were abused by entrepreneurs who got away with lots of things, raising money on the back of incomplete, poorly thought through propositions without having to show anything of substance, such was the demand from investors to literally take a blind punt."

But these days now are over.

Several ICOs have failed to reach their ICO targets and some have been withdrawn. Examples include Inchain (Insurance), Ark.io (Linking Blockchains), KiboLottery, Decent (content distribution), Arcade City (Ride share). The reasons are summarized below.

  • Unproven Management Team come across as geeks
  • Business Plan not clear as to the market problems or business challenges the proposition overcomes
  • No Proof of Concept available
  • Badly structured ICO where investor terms are not adequately explained
  • Poor PR Planning (timing)
  • Due diligence on Kibo management revealed links to previous scams
  • Decent did reach lower ICO targets but didn’t explain the bonus structure raising only $4m of the $10m+ potential
  • Arcade experienced investor pushback by changing members of the management team just before ICO

ICO Bandwagon pushes on

Overall ICO activity is increasing.

"The quality is improving as investors are taking a tougher stance insisting on seeing something substantive and an experienced management team in place."

Many Blockchain entrepreneurs lack general business experience hoping their technical prowess and skills will compensate, forgetting that investors want to know how the funds will be used, how the management team will protect investors interests and deliver returns.

What is inside an ICO

To improve the odds of getting to a successful ICO as we have seen from the examples above there are several essential elements that must support the process of attracting investor interest and activity.

"But how long does it take to get an ICO ready to have everything in place?"

There are many views on timing. Some ICO advisors suggest at least a 12-16 week runway, while others simply say you are good to go when you have the fundamentals in place. I say you go when you think you can create the right level of market PULL and deliver on three investor fundamentals:

  1. Management team, Governance and Compliance structure
  2. A clear articulation of the Business Plan and business problem being solved
  3. How Investor interests are represented, coins bought and sold and their value maintained and dividends (benefits) paid.

Creating the Momentum, Hype and Excitement

The examples of successful ICOs are SingularDTV (Content DRM platform), Blockpay, FirstBlood (Sports platform) or ICONOMI (Open fund management platform). At the center of each there is an essential lesson to be learned.

"Attracting investors is about creating interest and excitement, a sense of urgency and a business as usual feel. A strong concept, depth of management experience, a focus on creating value for investors rather than describing how you will be using their cash to build something focusing on how you will get paying customers using what you have."

Many of the most successful ICOs I have come across have a strong PR campaign that can reach a wide audience working across all channels and networks and hitting everything at once.

Creating the buzz and noise to get the ICO noticed as competition for investor attention is now something of a premium.

Crypto-economics: how to tokenise value

At the center of the ICO is the coin as a Token of value.

The core of the ICO proposal is to answer the question: How you intend to tokenize value and how will investors benefit?

What is the amount to be raised and what value will the coin represent lies at the center of the opportunity?

The liquidity of the coin and opportunity for investors to buy and sell is the focus of crypto-economics. What options will investors be offered, what level of information will be available to support any research and due diligence.

"The management team has to be very clear and have a crypto-economic plan in mind. The number of coins and their purpose has to be defined - as a mechanism for ownership and distribution of value. What does the token represent, ownership of underlying assets, IP, license, copyright or something else. What is it the investor is entitled to…"

Many management teams just want the funds and don’t consider the value of the underlying coins after the initial ICO raise, and why so many coins have the hike in value at first and then the coin devalues to close or near zero. Successful ICOs like ICONOMI where performance has been consistent and the value of the coin and level of trading activity has increased over time as confidence in the underlying proposition increases.

ICOs that focus on increasing the underlying value of the asset invested intends to do much better, than those that want to spend the money on building cool tech without consideration for how to monetize what they have created.

You have to give clear answers to the following questions:

"What will be the initial value of the coin, the starting point and how will this be worked out?

How many coins are going to be issued? How they are going to be distributed?

How investors interact with your proposition, get access and be kept informed?

What currencies will be accepted as payment for Coins, both crypto and fiat and ill something like ShapeShift be required for conversion?

What level of KYC if any will be done?"

ICO Fundamentals

What do you need in place to improve the odds of making your ICO a success…

  • A concise Business Plan explaining how your coin works, use of funds, the compliance and governance approaches and how investors are treated (protected) and the outcome and returns managed
  • White Paper giving the background to the concept, the current market issues and how your approach is different, what challenges are you solving and why customers will buy
  • An ICO website – that is focused on the event – the ICO itself. It is a nontraditional website and can be closed after the event, or converted to an investor portal. With all the essential information to hand, the timing of the ICO and How to Invest
  • A promo video where management discuss the concepts, a series of sound bites as Podcasts that will draw new investors and communities
  • The Management Team with their track record to support a Blockchain world – expertise in Crypto, Computer Science, Encryption and Software development is not enough, investors want to see business acumen and experience.
  • A strong Advisory Team – ideally know industry professional is becoming a must have
  • All Channels – Twitter, YouTube, LinkedIn and Facebook company pages with useful content to support the story for the investor pushing traffic to the ICO site or Apps download
  • A list of Partners, PR partners and Supporters and who else is involved in the journey.

A new fabric for commerce

ICO is a layer in the new crypto Capital Markets structures that are emerging and play an essential role in laying down the core infrastructure for new commerce. ICOs are on the critical path to the arrival of Web 3.0, a long overdue and much-needed upgrade to the Internet.

The ICOs are an essential process to finance the crypto-economy as government, banks and traditional capital markets make their minds up how and where to play in a Blockchain game, and entrepreneurs turn their back on tradition sources of funding – as slow, expensive, puts their IP at risk and the experience is commercially intrusive.

With each iteration of the original open source code creates an altcoin as a token, to be used for a new purpose that gives investors confidence, ownership and entitlements to dividends and benefit from success. They are in fact new hybrid instruments that can have both features of equity and bond. And they will emerge to support new asset classes and tradable instruments.

Crypto-Capital Market is here

In a few years time, there will be 10,000+ cryptocurrencies and platforms supporting all kinds of industries with the bulk of coins be used to Tokenize things, assets, different forms of value in new and exciting ways.

An entire Blockchain ecosystem is being built at a speed that will eventually take over from today’s commerce. With many of the key components already in place Capital Markets 2.0., Web 3.0, Bank 4.0 will herald the arrival of Commerce 2.0.

The core elements are here. We have smart wallets that allow the buy and sell, make payments and transfer cryptocurrencies in and out of fiat currencies. There is a new financial rail called Bitcoin for payments and remittance. We are numerous cryptocurrency exchanges (Bittrex, Polonex, Kraken) that create liquidity for the coins from crypto funding and the coins. New asset classes are arriving with a second generation coin that is asset-backed, offering the option to create exchange traded instruments (ETI) to be listed on convention stock exchanges. Fund managers are looking to add a strip of cryptocurrency to investment portfolios.

New industry platforms are emerging for Gaming (vDice, DaoCasino), Music (UjoMusic) , Insurance (ChainThat), Supply Chain (SkuChain, Waves), IoT (GE’s Predix), with supporting Compliance as a Service models (Coinfirm.io) delivering assurance and a key part of the infrastructure for an entirely new capital market. And a new generation of Blockchain organizations will link chains together and deliver new ways for exchanging coins and transaction information from one Blockchain to another, one might add is the final piece that will deliver Blockchain Capital Markets.

There is more to come with several ICOs of considerable note and interest.

Melon Project, an open source for asset management, starting 14th Feb., Contingency, a trusted gambling platform, Cosmos, a DLT play, SuperDAO, Qtum, Internet of Coins, Gnosis, Rootstock, Bitsquare, EtherEx, Filecoin. The list goes on…