There has been a lot of talk over the past few weeks and months about whether ICOs (Initial Coin Offerings) /ITOs (Initial Token Offerings) are the best way for young start-ups to raise funding, rather than going down the traditional VC/Angel routes, or even the emerging crowdfunding route.
But What Is An ICO/ITO (hereby referred to as ICO only)?
In essence, the release of an ICO is an example of crowdfunding, but rather than offering equity/convertible debt for money, start-ups create and issue their own ’token‘ (or cryptocurrency). The token can relate to ownership of the company or can be used for payments within the platform e.g. eBay has released their own cryptocurrency, called Yabe, which you use to buy goods or services from eBay instead of traditional fiat currencies (such as USD and GBP). Individuals then buy tokens at an agreed upon valuation (e.g. 1 Bitcoin = 1000 Company tokens).
But What Are The Benefits?
The cryptocurrency space is huge and has barely touched the surface of where it could go. Bitcoin is currently reaching new highs ($5800 per coin), and a lot of early adopters made a fortune in this space. With just $1,000 in 2011, you would be a multimillionaire today. A multi-multi-millionaire.
More and more people, and companies, are entering the blockchain space because of how it could revolutionise nearly every existing industry out there today. From buying houses; to autonomous vehicles driving themselves to a charging point and paying for the charge; to booking a holiday; blockchain is, potentially, the future of everything. And people are looking to capitalise on the current focus.
New joiners to the space have seen how much the early adopters made with Bitcoin, and so are looking to find that new coin that can give them 1000x return, rather than an annual 5% return in the bank or in standard stocks or share. So, there’s a lot more liquidity introduced to the industry — which is attractive for start-ups.
It can also be a lot easier for a start-up to raise money through an ICO rather than going down the VC/Angel route. Ask any entrepreneur who has a company that has secured funding, and they’ll tell you that going through a funding round is one of the worst things when running your own company (along with hiring!).
Preparing pitch decks and business plans, filling out applications, practicing for pitches and then the pitches themselves. It’s draining; and can feel unrewarding. And all the time you’re focussing on raising money, the less time you have to develop and/or sell your product, so there’s a risk of your business stagnating during the process.
Compare that to raising money through an ICO. You write a white paper (similar to your BP), create your currency in minutes on the Ethereum platform, create a timeline for the release and do some marketing. Job. Done. No meeting VCs or Angels, no pitches, no back-and-forths agreeing term sheets.
You can see why ICO’s are attractive.
But Is It The Right Move?
It depends on your company, on your vision and your reasoning for releasing a token.
• Does it genuinely make sense for your company to have its own cryptocurrency?
• Will it improve your product or platform?
• Are you going to release the token as equity or a tool to purchase goods or services?
• Have you reviewed whether your token could be classified as a security and, therefore, what regulation you should adhere to?
Too many companies saw the opportunity of raising easy money with an ICO, and capitalised. They raised millions in minutes, surpassing even their wildest expectations, drawing more and more people to the space.
And not the good kind.
Browse through any Reddit cryptocurrency group and you’ll read about the disdain for all the ICOs that the community believes were scams. Whether that is true or not is not the subject of this article, but that is the feeling in the community. And they’re not alone; China took a huge step in suspending the release of all new ICOs back in September until they can bring in appropriate regulation to ensure the safety of investors.
This is obviously a good move to protect the integrity of the market, and in the UK, the FCA have released warnings to any potential investors whilst they review the space. Expect regulation to come in shortly.
So, Should I or Shouldn’t I Raise Funding Through An ICO?
If you believe your company would truly benefit from releasing its own token and are aware of the regulations that would be required to adhere to, then it may be for you.
At TAP APP, we toyed with the idea. We are in a competitive space of in-venue mobile ordering and payment, and going through an ICO would be an easy way for us to raise capital. But is it right for us?
We couldn’t justify to ourselves why we definitely needed our own cryptocurrency and why it would, without a shadow of a doubt, improve our product. I mean, it would be cool; people buying drinks in a bar in London using a TAP APP token — how awesome is that?! Unfortunately, we just haven’t been able to justify why we need it. That’s not to say that we may not change our minds in the future. We’re fascinated with this space and want to ensure we continue developing our technology with the market. We definitely haven’t closed the door on the idea, it’s just sitting on the shelf for now. We’ll see what happens.