Watch Out, the ICOs Are ComingCompanies behind these ICOs are promising the moon and the stars, putting out polished websites, white papers, advisory boards, Slack channels, GitHubs, peppering with some legalese language, and topping it with the full dressing support enchilada they can think of; in order to appear as legitimate, as hard-working, as smart and as credible as possible.
Startup diligence is pretty lightDiligence is tilted towards appearances, parabolic claims, white papers, a minimum of legal and lots of online dressing-up. There is relatively little involvement from traditional venture capitalists who typically dispense startup investment. VCs aren’t always right, and granted their model is being disrupted by the ICOs, but they generally have a sense about startups anatomies.
Previously, you were funded because your ideas, teams and initial product progress were worthy of it, at least someone thought so. Now, companies publish a paper making the case for their idea, open some docs for reviews, and ask for money in return for a promise to deliver something maybe in one or two years, that may or may not be accepted by the market.
Along the way, they drag a crowd of investors who buy into it, without necessarily being well informed, nor having used the product. During that process, there isn’t much talk about execution abilities, operational experience, or the rest of the team that will end-up being hired. Much of the analysis is on the surface, often tough to prove or disprove, in part due to a rushing and artificial urgency.
The 3 typical characteristics, team, product and market seem to have taken a secondary position to the 3 new magical words: tokens, blockchain and decentralization.
Token utility linkage is not always thereThe assumption that everything with a potential network effect is going to work with a decentralization starting point is not entirely true. The blockchain is not for everything.
The solution or product being developed needs to have a solid business model linkage that has a particular value when decentralization and/or tokenization of actions take place. The promise of a new model needs to be very compelling.
In the name of decentralization, the promises are big. You can’t just slap a token to anything, and expect magic to happen.
The token is not the business model. The value proposition or utility that is enabled by the token is the business model, and that linkage needs to be there early on. If the direction is not right, the chosen path will not lead to a good place.
The marketing hype is frighteningSome ICOs are being marketed like a rocket ship, but in reality, no startup is a rocket ship. A lot of the communication is biased towards the most optimistic assumptions, but nothing goes up in a straight line.
With an ICO, 3 asynchronous periods seem to have blurred and collapsed into one: early stage, go-to market, product-to-market fit. Just because it makes sense in theory doesn’t mean that it will make sense when the market realities enter the picture.
True that some level of speculatory fever can help to fund projects and give them a longer runway life, but if the expectations get far ahead of reality, the gaps may be harder to bridge, resulting in a downward spiral snap.
For good or bad reasons, raising lots of money can hide a lot of mistakes along the way, and there is some of that going on.
Financial engineering has its trapsA rule of thumb for many ICOs has been to allocate 85% of the tokens to the market, and keep 15% for developers and company, but this is a risky ratio. It is equivalent to raising all your funding at once. In the best cases, companies assume that the token will go up in price, which would enable the company (or protocol operator) to never need to raise money again. But not every company is like Bitcoin or Ethereum, just as not every startup is like Facebook or Twitter.
Of course, a smart company would not release more funding to itself until milestones are reached, but few will exercise that type of discipline. Fewer ICOs make a provision for subsequent funding events beyond the ICO.
All and all, funding a startup is not a one shot deal. Too much financial engineering is just that.
I would urge anyone planning an ICO to re-read the excellent Security Laws Framework for Blockchain Tokens paper, especially the Appendix.The legal grounds are still shakyDespite appearances of success in circumventing legal or regulatory hurdles, some practices just don’t make sense.
Why are tokens allowed to trade before the protocol or product is even out in the marketplace? Heightening expectations with the hope that token prices rise months and years ahead of going to market can go so far before the regulators start raising their eyebrows on that practice. Not all companies can survive the price fluctuations, volatility and speculative waves that will be expected when there is nothing but speculation and trading that drives your token price. Look at the volatility of BTC, ETH and STEEM, and these are examples with actual products that work and have thousands of users.
Crashing the party or priming a launchYes, I want the ICO party to continue, but I’m seeing participants that are just there for the ride. I’m seeing companies and ideas getting ICO-funded on a wing and prayer chance of being successful. Some others who have even previously failed to raise in private circles, are now opting for the ICO route. As I said earlier, here comes everybody. When the party gets overcrowded and unwanted visitors want it louder and bigger, events can turn to the unpredictable.
In technology, nothing great is often achieved without irrational exuberance, but when the pendulum swings too far, there will some damage. In the long term, we hope that benefits far outweigh the pitfalls that are encountered along the way, and maybe that is the only way that good things happen.
ICOs are supposed to be like an IPO with a cryptocurrency, but in reality, these are early-stage funding bets. Most of these companies won’t stand the scrutiny of public markets (which they entered, whether they like it or not), while they wished they had the private lives of early stage startups.
An ICO is the beginning and the means to an end, not the end itself. The ICO is not the great enabler of business models and incredible innovation. The blockchain is. An ICO is an alternative funding, operational and ownership model. You still need to bolt a sound business to it. You don’t get a pass there, and you need to get a few things right.
Take everything with a grain of salt, two pinches of hype, and three sprinklings of wishful thinking.
