Initial Coin Offerings – The Next Frontier of Startup Funding
Blockchain.com wallets reached 81 million wallet users in April 2022 (Statista, 2022). According to Statista, the global user base of all cryptocurrencies increased by nearly 190 percent between 2018 and 2020.
These numbers indicate that it is more than just a flavor of the season and has gained massive popularity for a good reason. The technology has evolved, and the emergence of cryptocurrency, NFTs, and ICOs has brought about sophistication and complexity to the entire system. The NFT market cap grew nearly ten-fold between 2018 and 2020, which further led to an elevated interest in NFTs. The best part is that you can create your own NFT collection on Appy Pie and start exploring this lucrative business opportunity.
In fact, with Appy Pie, you can even create your own Cryptocurrency app without coding.
Considering the popularity and wild success of blockchain and cryptocurrency, there is a high probability that you have had at least one (maybe more) good blockchain-based idea. How do you plan to fund it, though?
Traditional startups can raise funds through a seed round from private investors or venture capitalists, or raise funds through crowdfunding.
With your blockchain-based startup, you have another option – initial coin offerings. Let’s start right from the basics and address the most important question – what is ICO?
What is ICO?
An initial Coin Offering or ICO is the blockchain equivalent of an Initial Public Offering or IPO. A blockchain-based startup can launch an ICO to raise capital for startups. Investors who are interested in the ICO can buy into it and receive a new cryptocurrency token issued by the company.
This token can represent a stake in the company or have some significance related to the service or product offered by the company. Much like an IPO, a company that launches an ICO, desires to raise a certain amount of money in a stipulated period. Should they fail to raise this sum, the ICO is considered a failure causing the token value to drop.
Why are ICOs so popular as a way to raise funding for startups?
There are multiple reasons why ICOs have gained such massive popularity for start-up business funding. Let’s list them out:
- Quick processing – These crypto tokens take very little time to create. For example, an Ethereum-based token like ERC-20 can take only about 100 lines of coding.
- Liquidity – the market for these tokens is global. Hence you can sell your token any time, from anywhere!
Freedom from gatekeepers – as of today, ICOs can get funding from any crypto wallet holder anywhere in the world.
- Control over ownership – the token holder does not automatically get ownership rights unless it has explicitly been included in the smart contracts.
- Rich community – by its very nature, ICOs tend to bring in the early adopters, aligning them to contribute to your success.
- Minimal bureaucracy – though it depends heavily on the regulatory status of your token, the disclosure requirements and paperwork are minimal here.
However, simply because there are multiple benefits to launching an ICO, it does not mean that everything is rosy!
The crypto and blockchain world is extremely competitive and subject to great scrutiny from the regulators and the community. The failure rate is disturbingly high. In fact, as of February 2018, 46% of the previous year’s ICOs had already failed, even though they had raised more than $104 million.
How does ICO work?
In an ICO, a startup creates digital tokens and sells them to people through crowdsales, typically in exchange for cryptocurrencies like bitcoins. If the startup reaches its goal, the participants receive their tokens automatically, and if it doesn’t reach the goal, participants get their funds back.
Here are a couple of critical things that you must consider while designing your token.
- Token Utility
Though the purpose of the token varies for every startup launching an ICO, it is imperative that the token has defined utility within the company. The crowdsale participant, in the future, must be able to transact with the startup in some way, whether it is to buy products or gain access to features, among other things. What these tokens are not – are shares. They do not translate to equity for the crowdsale participants.
- Token Exchange
Post ICO, companies can list their tokens on any cryptocurrency exchanges. Doing this lets people buy your token, creating a demand for it in the marketplace.
Things to know before launching ICO to raise capital
First and foremost, question yourself whether launching an ICO is the right strategy for you.
Though the prospect of raising millions in months can be quite appealing, it is important to acknowledge the fact that not every project can raise capital with an ICO.
- Put a team together
The strength (or the weakness) of a project lies in the team behind it. A good team invokes trust and faith among the investors.
- Be legally aware
Though the ICO world is less regulated, that does not mean it isn’t subject to any local laws or regulations. You must get expert legal advice to understand the precise legal nature of your token, the regulations it is subjected to, and how to remain compliant with them.
- Choose the right technology.
Your choice of technology is fundamental to the success of your fundraising effort. The essential technologies include the blockchain, a smart contract, a token, and a combination of back-end web and security infrastructure.
- Blockchain – though most people prefer using established platforms like Ethereum, some projects require the startups to develop their own blockchain to run the ICO. Developing your own blockchain is more complex and time-consuming, but it also offers more flexibility and customization. It all comes down to your unique requirements.
- Smart contract – the smart contract acts as the engine to your ICO, handling the incoming token purchases, letting token holders sell or transfer the tokens, connecting it to your wallet, etc. hence, the functionality and security of your smart contract must be top-notch!
- Tokens – Tokens are essentially codes, which means they can be programmed with different features. Tokens can be categorized into utility, participation, investment, or asset-backed. Depending on the category of your token, different regulations may apply to your token, making it an especially critical detail.
- Infrastructure – apart from blockchain-specific services, you will also need servers to manage your website traffic and onboard users. In general, this is automatic KYC services or manual verification.
- Security – even though blockchains are secure, there are vulnerabilities in smart contracts and websites. So, you must get your smart contracts professionally audited, DDoS-protected hosting service, and domain monitoring.
The underlying idea is to make sure that the supply and price of your token for the ICO are in perfect tandem. A high supply will bring down the token price, and a low supply of tokens may not leave enough tokens for your investors. The high prices may even put off your investors.
However you decide to design the economy around your ICO tokens, you must ensure that it supports the nature of your offerings and the price of your tokens. Two more factors that need to be considered are the allocation and distribution of tokens and the token supply.
- Allocation and Distribution – one of the first decisions you need to make here is whether you want to launch a public or private ICO or use a combination of the two. Launching a private ICO means offering pre-mined tokens to a selected group of investors in a pre-sale event before the ICO goes public. Public ICOs, on the other hand, allow pretty much anyone with a crypto wallet to invest in a token. You must strike a balance because if the employees and early adopters end up controlling too many tokens, they can affect the price of the token by dumping or selling them in the market.
- Token Supply – there are three terms you must remember to understand the concept of token supply. The maximum Supply is the maximum number of tokens that can ever be created or mined. Total Supply is the total number of tokens that exist at the moment. Circulating Supply is the number of tokens currently in circulation and have not been locked up or burned. Your token supply plays a big part in determining the value of your token.
Moving on from the economy of ICO tokens, it is time to look into the best-suited sale model for your tokens. The idea here is to balance simplicity with diversity to appeal to and serve different types of investors.
Here is a list of some highly effective and popular token sale models:
- Soft, hard, and hidden caps
- Uncapped or capped with fixed rates
- Dutch auction and reverse dutch auction
- Collect & return
- Dynamic ceiling
The launch of your ICO is not your prime objective. An investor would be interested in the reason behind your ICO launch and want to know why you are trying to raise all that money. You need to have a product map ready to convince your investors that your business is legitimate.
Investors do their due diligence before putting any money into an ICO. By putting together a white paper, you let the investors have access to all the relevant information in one place. Your white paper should include everything we mentioned above, from research to your team, technology to token economy, and your token sale model to your product map. The more elaborate your white paper, the more legitimate and credible it appears to the investors.
How to prepare for the ICO drop?
Launching your ICO is more than mere technology. Let’s list out the top points you need to remember while preparing for your ICO drop.
- Create a website and build a brand
- Build a community through the following
- Community groups
- Social media
- Paid ads
- Influencer marketing
- ICO Calendars
- Rating agencies
Now that you know the basics of ICO and how you can use it to fund your startup, it is time to get cracking and bring your blockchain idea to reality.
What would you do next? Generate NFTs, create a cryptocurrency app, and build an NFT marketplace? Do you have any ideas you would like to share with us? Drop a comment below. I would love to help you bring it to reality!
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