Initial Coin Offering, or commonly known as ICO, is a form of crowdfunding or fund-raising activity based either on established cryptocurrencies such as Bitcoin (BTC) and Ether (ETH) or fiat currencies. Startups that are incorporating coins into their product’s design, are using ICO as a method for capital raising since it is easier and more efficient, bypassing in this way the rigorous, time-consuming and regulated processes required by venture capitalists and banks. An advantage of this method is that it allows a team to focus more on their product rather than marketing and pitching to investors, which usually takes a high percentage of time.
ICO campaigns extend over a period of a week or more, in which potential investors are allowed to purchase company’s coin (analogous to shares). During the campaign, investors buy the company’s coins and this purchase is executed as a form of smart-contract, that is equivalent to shares’ acquisition agreement. If the company does not raise the minimum funds required, the money should be returned to the backers, while if it is successful the money is transferred to the company for carrying on with product’s development. This is encoded and secured via a smart contract and the data should be publicly available for transparency.
As of May 2017, it is claimed that over than $380M have been invested into ICOs. It worths to mention that cryptocurrency ecosystem is experiencing a tremendous rise, with Bitcoin market capitalisation growing from $11B to $47B in one year. Many startups follow the ICO direction for fund raising by advertising mainly a whitepaper and a coin dependent on a small (initially) network of nodes running the underlying infrastructure of their Blockchain.
Below we summarise some key points that startups planning to go through ICO should pay some attention.
- Whitepaper: Aim to develop a whitepaper that is clear, consistent, of well-explained content and clearly explains the technical details of the product. Don’t leave room for disputing the underlying technology and make sure have the answers to the majority of the expected questions.
- Ensure that the incorporation of a coin into your product follows naturally. If you just plug in the idea of a coin in order to go through the ICO way, it is wiser to seek for traditional fund-raising ways.
- Ensure that your technology is correctly chosen and implementable, in terms of which Blockchain framework to select. Address all issues of scalability, fault-tolerance, security, efficiency, latency and transparency for your proposed architecture.
- Ensure that you are in a position to answer in fully requests regarding where the assets are going to be stored, if they are going to be secured and how they will be secured.
Community and Advisors’ feedback:
- Aim to receive sufficient feedback from experts within the community before you publish the whitepaper. Such feedback can be obtained by publishing posts and ideas in various channels/forums such as Reddit, Bitcoin Talk Forums, Bitcointalk or even social media such Facebook, Twitter and LinkedIn.
- Form an Advisory Board and bring in people from both Industry and Academia that have experience in Blockchain technologies and Cryptocurrencies. Ensure that this team can advise you on technical, business development and marketing/sales issues.
- Attend conferences and workshops such as Consensus, Blockchain Expo, Blockchain and Smart Contract in order to have direct access to experts’ opinions.
Legal Issues & Transparency:
- Be as transparent as possible with your intentions, stages, milestones and coins/funds allocation, especially for the founding team.
- Ensure that the legal framework is fully defined and leaves no room for disputing. Hire (or partner with) a lawyer if possible in order to make sure you don’t break the law.
- Use the funds in an efficient way and explain step-by-step how you plan to spend them for product development.
- Be open and transparent to community’s requests.
- Protect your investors. Keep investors’ terms very clear and ensure that there is a process in place for returning the funds to the investors in case the ICO is not successful. A de facto requirement has become the collection of all funds in a multi-signature escrow wallet with all the names/key-holders announced to the public. Some of this keys are held by people uninvolved in the project so that any conflicts of interest are minimised.
- Keep transparent the ICO framework as many investors are cautioned to be wary with ICOs as some of them might be fraudulent due to lack of regulation by financial authorities.
Professionalism and Planning:
- Define the vision/goals of your product/idea and clearly communicate it to the community and potential investors. Never over-promise, over-plan or oversell your idea.
- Meet the deadlines and milestones as listed in the initial project plan or whitepaper. This will show that you are trustworthy and you have seriously planned the project idea from the very beginning.
- Ensure that there is a market need for your product and that you really solve a real-world problem. Never create new or more problems.
Ensure you understand technical, business development and marketing related details of your product.
About the Author
Dr Theodosis Mourouzis
Programme Director of MSc in Business Intelligence and Data Analytics
CIIM – Cyprus International Institute of Management