ICO as a fundraising instrument

Venture capital 2.0

At first glance, we can suggest that the ICO model may just replace Angel Investors and Venture Capitalists (AI/VC) in the coming years.

While ICOs do offer a new a way of raising funds for start-ups, they are structurally different from AI/VC.

ICO is a tool while AI/VC are stakeholders.

Here’s a closer look at ICO features against Angel Investment and Venture Capital:

Raising through VCs and AIs gives access not only to capital but also to market expertise, mentorship and network, in exchange for a stake in the company.

There are many ways to raise funds, here we compare all the financial instruments:

The ICO model introduces a new method to raise funds and offers considerable benefits to investors and venture founders.

ICOs are more flexible funding tools: projects can raise funds at any stage, from anyone, as long as they are crypto savvy.
From the investor’s perspective, there are minimal nominal requirements and lock-in period.

However, it is important to highlight some limitations: launching an ICO drains resources and does not give access to mentorship or raw services. Furthermore, there are considerable security risks in the cryptocurrency space for both investors and fundraisers.

ICO conventions

Introducing a digital token has become less resource draining thanks to the emergence of blockchain development platforms.
Today, anyone can launch an ICO with minimal programming skills, a website and a marketing campaign.

Projects need to share extensive information about the token’s utility, economics, market, stage of development and roadmap in order to create a trustworthy environment for investors.

Market, product and disruption

Decentralised projects have to publish their source code for the public to scrutinise.
Not only the code needs to be available to everyone, but the founding team should also be able to explain the technology in simple words, so that even the less tech-savvy can comprehend the product.

Furthermore, since an ICO is the introduction of a product, investors should expect some market analysis in the proposal, including the size, competition and disruption opportunity.

Token economy

Before buying any tokens, one needs to understand its fundamentals and economics carefully – just like when you purchase a stock, bond or even a car. Investors should expect transparency in the following:

  • Function/utility of the token
  • Distribution of tokens (tokensale, founders, advisors, future emission…)
  • Valuation of the tokensale and the token eco-system
  • Emission rate of tokens
  • Fund allocation

Project stage and roadmap

Some ICOs have managed to raise substantial funds without even issuing a prototype.
As ICOs become more mainstream, this practice will hopefully fade out. Giving a valuation of an “idea” without a product or prototype does not make sense.

The founding team needs to disclose the current stage of development and project roadmap rigorously.
This will help investors feel confident about the project’s ability to fulfill its mission and consequently galvanise investments.

Investor relation & communication

The same way a start-up pitches to Venture Capitalists, ICOs pitch to a broader yet less investment savvy audience.
In this scenario, organisations leveraging ICOs need to build strong investor relationship during and after the fundraising event.

It requires a minimum of infrastructure including a digital media presence, a web application and an appealing design.
The point is to promote the product and its business model as a safe and promising investment vehicle.

Going through an ICO obliges the organisation to share business-driven relationships with token holders.
Since most of ICO projects launch at an early stage in the product lifecycle, it is vital to keep investors aware of the project milestones and whether or not the project timeline is on-track.

Failure to keep regular communication might have a significant impact on the token ecosystem valuation.