From crowdfunding to venture capital firms and traditional institutional loans, the global entrepreneurial sphere has seen a steep rise in the number of companies getting funded through different stages of their growth cycle. One area that has gained much popularity over the last year has been in the form of Initial Coin Offerings (ICOs) – leveraged as a means for startups and established businesses to raise capital.
The process basically refers to a company releasing its own cryptocurrency for the purpose of funding. It releases a certain number of crypto-tokens, selling them to investors, most commonly in exchange for other established cryptocurrencies. If their investment goal is reached, they will then release the currency on the public market.
It should be noted that the process does also incorporate the exchange of these tokens for fiat (regular) currencies. Similar to an Initial Public Offerings, ICOs are organised to raise funds, but, instead of stock, they provide investors with a new type of coin or token, an asset rather than a security. As with any asset, these coins can appreciate in value in relation to their adoption.
The Industry’s Exponential Growth
The industry has raised many an eyebrow over the last several months with companies finding this new medium of crowdfunding to be extremely effective. Take Brave, for example, a web browser founded by former Mozilla CEO Brendan Eich, which raised US$35m in less than 30 seconds.
The company uses blockchain technology to make Internet advertising more efficient for advertisers, publishers and users – promising faster loading times, tighter privacy controls, and increased revenue through content consumption. The platform leverages the Ether-based Basic Attention Token (BAT) – where users are rewarded for viewing ads based on the amount of attention spent on each one.
Many backers of ICOs dream of being part of the next Bitcoin or Ethereum but success cases are few and far between. We list a few factors to take into consideration before investing in the medium:
1. The technology should be disruptive
The company should be raising funds to provide a service that solves a current problem within a specific industry. The above example of Brave provided potential investors with a unique proposition through a viable business idea. It didn’t set out to copy other cryptocurrencies or for the sole purpose of profiting from existing ideas. Ethereum, too, has a viable proposition, in the way it can be used for smart contracts.
2. The founders/backers should hold some weight
Aside from the business idea being a viable one, it’s a big plus if the founders have credentials in the area they are venturing into. Prior industry knowledge in blockchain technology can double-up as a huge asset to any company starting out in this sphere. An example of this is seen in the fact that Ethereum’s founder was also part of Bitcoin before he ventured out on his own.
One should also ensure that the team behind the idea is balanced. For example, a founder’s technology background should be complemented by the team’s sound marketing and business development backgrounds to facilitate growth.
3. How the funds are going to be appropriated
Many investors often overlook this factor. Aside from providing a detailed roadmap for the business moving forward, you should find out why the company is targeting US$20m in funding. Such information should be readily available when any company decides to woo investors for funds, not unlike the standard process involved in an initial public offering.
Ensure that the company operates with full transparency in this regard, and it is particularly pertinent as the industry operates with limited regulation in comparison to traditional securities.
The usual investing advice of doing your own research is even more applicable to the ICO realm. It’s extremely important to find out what you are investing in and keep in mind the points highlighted above if you decide to go ahead.
This is part of an ongoing series of articles about cryptocurrency. Check out our other articles here.