The Initial Coin Offering (ICO) is a new way of raising funding. Currently, it’s almost exclusively the domain of new startups. We’re now seeing existing companies use it for their next round of funding.
The ICO brings with it the promise of high levels of funding as one is raising from across the world, not just the local region or the USA. The funding amount raised by startups with nothing more than a whitepaper has been staggering but those days are fast disappearing in the rear-view mirror.
The SEC has entered the fray to stamp out the fraudsters and investors have become more demanding of ICOs. Today the ICO must have a Minimal Viable Product (MVP) to be taken seriously and truly compelling use case.
From time to time I check back in on deals I saw running an ICO last summer. I estimate that one in five is no longer raising funding or is even in business. In some cases the website is gone and there’s no trace left of the ICO. In one case, I found and ICO that posted a shutdown notice saying they had received a letter from the SEC and they were giving the funds back. Evidently, the SEC gives notice to those ICOs it considers a security offering and indicates if the ICO gives the money back, then no charges will be filed. I suspect everyone takes that option as fighting the federal government is a hugely expensive endeavor.
Today, I’m fielding calls from established companies with $1M of revenue or more asking about running an ICO instead of a venture raise on their next round. Companies with an existing ecosystem of customers, partners, and providers are well positioned to take advantage of the ICO as they need only had the blockchain technology and the token utility to create a new product with new applications in some cases. Established companies are less likely to commit fraud since they have a brand and a reputation to keep. They have a track record that investors can review and a management team in place that they can vet.
The dynamics of the fundraise shift from following a venture capital funding profile to one of fostering a digital ecosystem or network with the support of current and future users. The ICO backer supports the company in return for tokens which can be applied to the use of the company’s digital ecosystem. It expands on the Kickstarter pre-ordering model by compensating those who help build out and run the system and encourages partnering and collaboration with those who can improve the strength of the network.
Hall T. Martin is the founder of TEN Capital and a builder of entrepreneur ecosystems by startup funding through angel networks, funding portals, syndicates, and more. Connect with him about fundraising, business growth, and emerging technologies.
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