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ICOs are a promising funding method, but mixing traditional best practices with a dose of self-regulation benefits all.
The onset of Blockchain into the world’s financial markets has brought with it many new ideas, introduced rapidly to wide-eyed market participants over the last few years. Despite how far we’ve come, however, all the progress we can currently boast about was predated by a simple product called Bitcoin.
Revolutionary at the time (and still today), Bitcoin showed people that a safe financial ecosystem is possible without centralized authority figures, and that cryptocurrency is a great way to invest and trade. The idea caught on like a brush fire, and a new industry was born that seeks to forever change how we define money.
Bitcoin quickly spurred other projects like Litecoin, a more efficient clone, and Dash, which added a governance model and instant transactions. The industry stayed quiet until around 2015, when developers who recognized the Blockchain model’s wider applications introduced Ethereum. This was seven years after Bitcoin first hit the scene, but began the revolution anew. Since then, Ethereum has built its own loyal following and has even spawned new ideas of its own, unrelated to Bitcoin.
One of the most important functions of Ethereum is its ability to launch other cryptocurrencies. In what’s called an initial coin offering (ICO), companies can sell their own tokens, each with proportional relative value to Ethereum, and allow angel investors to exchange their Ethereum for these new tokens. Ethereum itself has value relative to fiat money, so launching an ICO became the new standard for startups that wanted to crowdfund cash fast.
ICOs boomed in popularity because of many factors. One important component was accessibility. The lack of regulations and ease with which anyone can buy cryptocurrency made the identification of willing investors an easy task. A second factor, speculation, encouraged these ICO investors to participate. Speculators and investors saw ICOs as cheap, high-potential investments. Early launches only solidified these expectations, with investors piling haphazardly into new ideas just to sell their tokens for large profits once the rest of the crowd caught on.
It’s important to remember that startups which launch an ICO owe their investors nothing, except the appropriate number of tokens promised. No equity needs to be sacrificed for funding, as investors expect nothing other than a business that keeps its promise to create a good or service, one that makes its tokens valuable in turn.
This potent value proposition has made ICOs the way to go for any new company, with ICO funding surpassing venture capital (VC) funding in 2017. However, despite the advantages of the ICO model, installing checkpoints and milestones into this untamed world helps filter out Blockchain startups that detract from the young industry’s delicate image.
The ICO method of fundraising is potentially excellent for both investors and startups alike, assuming both have noble intentions. However, for investors, the ability to “pump and dump” inexpensive ICO tokens is unhealthy and creates ill will within the community. Companies, too, must commit to milestones, make smart use of their newfound capital and deliver real results. Unfortunately, this doesn’t always happen.
Scam ICOs have proliferated in recent years due to low barriers to entry for new cryptocurrency brands. Diamond Reserve Club, for instance, was an early ICO that promised to invest in diamonds and give out diamond discounts to those who contributed most to the token sale. The founder, Maksim Zaslavskiy, did not return the funds invested nor had any intention of launching his business. Despite SEC intervention, many investors lost their money entirely. There are numerous other examples of such behavior.
Anyone can write a shoddy whitepaper, put up a website full of buzzwords, and create a smart contract that disseminates tokens to willing investors. Learning how to spot a real ICO from a fake one, or a high-quality, high-potential ICO from a weak one is vitally important. Since ICOs are unregulated in many jurisdictions,it falls on the community to protect itself.
The Blockchain community is nothing if not clever, and is starting to figure out how to combat this unfortunate reality. Innovative companies have cemented themselves in the ICO process and seek to bring control and stability to the community. One such company, Iconiq Lab, seeks to nurture other would-be Blockchain companies by serving as a startup accelerator.
Patrick Lowry, CEO of Iconiq Lab tells Cointelegraph:
“A lot of the best crypto startups out there have been bootstrapping to build a real product and service, rather than rush towards an ICO without even a prototype. It’s essential for them to raise additional funding to cover legal and marketing ICO expenses with so much already being put into business development. It is essential to identify these real, tokenizable business cases, provide the ICO-related funding needed, and accelerate startups like in the case of Iconiq. This ensures real business cases are developed and tokenized, providing high quality ICO participation opportunities.
A community is forming around the creation of smarter ICOs, and such groups may have the greatest impact on ICOs in the future. By sourcing, funding, nurturing and then launching the industry’s best startups under one roof, incubators demonstrate the possibility of maintaining high standards without regulation. Such self-regulation is arguably the best way to keep government officials from breathing down the industry’s neck.
Accordingly, other services are carving out their own innovative approaches to improving the ICO market. LaunchMyICO, for example, uses a comprehensive, single platform to give new startups all the tools they need for a quality ICO event. Included are portals where these companies can write a whitepaper, build smart contracts and distribute tokens, engage in marketing efforts like developer bounties and community management and even handle customer service.
BullToken is a different spin on the “ICO investment community” model. Holders of BullToken can use their coins to vote on which startups to collectively invest in, and the winners will be able to ICO using the group’s support and funding. Starta Accelerator is another firm entering this new space, but takes a more traditional approach by inviting young companies with ICO ambitions to fly, pitch and join the company on the ground floor.
The ICO craze shows no signs of tapering, and it is increasingly the responsibility of experienced incubator and accelerator programs to stem the flow of scams or ill-prepared projects. Smart startups will jump at the chance for a new mix of traditional and “Wild West” funding, especially given the alternatives. Venture capital funding is slow and painful, requiring founders to sacrifice equity for cash. Bank loans aren’t any better, and attach companies to a ball-and-chain of troublesome debt and interest payments.
Even conducting an ICO without any guidance is dangerous and prone to failure for the uninitiated. In the future, as investors seek to limit their risk, gaining entry to an ICO co-op will become a prerequisite to uncovering cryptocurrency funding. This is the way it should be.
Installing obstacles and effective filters into the ICO process is good for the industry and for participants themselves. Most importantly, it maintains the young industry’s positive image for an audience that has quickly grown more scrutinous.
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