In recent weeks there has been a raft of activity in the increasingly popular ICO crypto-funding market, with a large number of successful Altcoin launches. The most successful being Ethereum raising $18 mln, who now holds a market cap of $1 bln, Waves raising $16 mln, Lisk $10 mln and several others currently inflight, including Lykke.
With the high profile shenanigans surrounding the DOA that poured cold water over ICOs a few months back, and the odd attempted scam reported in the Blockchain press, the appetite for ICOs seems better than ever.
So how do you spot a good opportunity? How does the investor identify whether or not the management team is onto something, has something real and the information provided is accurate and above all realistic – or is an ICO just another long shot, nothing more than a blind punt on a business idea?
The concept of an ICO is simple. With each download of the Bitcoin open source code you get an Altcoin – alternate coin – that is used as the underlying token to support the movement and transfer of value between the participants on the Blockchain network. Management allocated the new coins, which at this stage are tokens to investors, may benefit from the increase in their value as the new business wins customers and/or the new coin gets traded.
But given there are already 800+ cryptocurrencies circulating, how do you spot a winner?
ICOs are not for the faint-hearted or budding first-time investor. It is important to know your way around the technology and understand the business problem the new Blockchain business is trying to solve. Initially the token, as a new coin, has a value placed on it by management to reflect the amount of capital they are trying to attract.
Stand back and consider
To avoid getting caught in the frenzy, stand back and consider. Remember the basic rules of Prof. Steve Blank. Ask yourself: what is the business problem the investment proposition solves?
How will your money be spent on building the idea from the ground up or does the management team have something they can already show, a pre-production solution, an asset?
Is the business plan credible and does it provide clarity on how their proposition works and why would customers buy it?
Consider the management team, are they qualified and what experience have they had starting and running a business?
Is there enough information on which to base an investment decision?
New financing ecosystem
ICOs are an evolution of crowdfunding – many now call crypto-funding – and in theory right for our time, helping to finance the emergence of a new technology called Blockchain.
However it is worth remembering that ICOs remain unregulated, the new coins have zero value from day one and many platforms that offer ICOs don’t do much due diligence and some don’t do any.
There is however a long list of successful funding using Initial Coin Offerings – Ethereum, NXT, Mastercoin, Madesafecoin, Waves, Lisk, DigixDOA, NEM Synereo, Bitshares, Factom and many more, with more than 40+ planned in 2017.
With general levels of investment in Blockchain through traditional venture capital channels dipping in the last six months, are we seeing ICOs as a part of a new financing ecosystem or a temporary solution?
ICOs do have a role to play because they are happening, but for how long nobody knows.