The last year or so has been quite eventful for the cryptocurrency world. The 2017 saw the value of Bitcoin reaching startling new heights as it gained mainstream attention. Investors started looking at the crypto world with renewed interest.
The interest didn’t stop with the major cryptocurrency, though. Alt-coins garnered a lot of interest as an alternative. As part of this trend, initial coin offerings (ICOs) started to emerge as a valid speculative investment.
With venture capital funding during the same period being just 709 million dollars, it was clear that ICO funding was coming into its own. And, experts agree that ICOs can be a very effective way of raising funds for a startup.
But is it right for your business? In this post, we’ll examine that question thoroughly.
You’ll have access to a faster means of raising startup capital. Unlike with traditional IPOs, your company does not already need to be established. People here are investing in its ideas and future, rather than in its established performance.
So, there’s no need to find the money first to start the company, then waiting for revenue and interested investors. You can get funds as soon as you launch your business.
ICO funding is a lot less regulated – though this is starting to change. The somewhat reduced amount of legislative regulations governing ICO investments makes it possible for startups to raise startup capital without having to meet all the strict criteria that apply to more traditional investments.
But, as we said, this is changing. It’s important to take a look at the cues provided by the SEC in America. Initially, ICOs didn’t fall under the banner of securities. This, in turn, made it easy for companies to raise funds without complying with government regulation.
This, naturally, led to a lot of abuse of the system. In the United States, the SEC decided to start investigating ICOs to determine whether or not these should be handled in the same way as securities. In many cases, the SEC found that the ICOs did constitute the issuing of securities and so some companies have found themselves in hot water.
With the threat of more intense regulations governing ICOs being drafted into being, a company must tread carefully here. While the regulations may not be in place just yet, there is no telling when they might come into being.
Companies that use ICOs could end up retroactively in trouble. That’s why it would be wise to keep an eye on the way regulators in your country are moving in this regard.
It could be better overall to consider this way of funding as you would a traditional form of investment. Make compliance a rule from day one, and you reduce the chances of being caught out by tougher legislation in the future.
Considering that blockchain tech is not quite a decade old yet, there is still a lot of learning to do. While blockchain is not hackable in theory, in practice this proves less true. Take the DAO hack in 2016, for example.
DAO was considered one of the most successful ICOs. It raised around $150 million, and the idea was that it would support projects in this emergent field. Users would be able to invest and then vote on which projects the money raised would be used for support.
It was a solid idea that was let down by a bug in the smart contracts created to handle the distribution of coins. It was this error that a hacker used to drain off $60 million worth of Ethereum. So, while the chain itself wasn’t hacked, the effect was virtually the same.
The primary problem, in this case, was that the transactions are not reversible. So, even though all the illegal transactions can be accessed and the funds traced, there is no mechanism to reverse the transfers. More importantly for a startup, though, it highlights the potential risks of using a tech that is largely untried.
Not only might you lose a substantial portion of the money invested with you, but you stand the risk of real reputational damage as well.
In some parts of the world, like China, for example, investing in ICOs is illegal. Several other countries around the world have instituted bans on this kind of investing as a result of the fraud that is often perpetrated.
Thanks to the general lack of specific regulation, the ICO model is pretty attractive for scammers. As a result of this and several different scams already exposed, the industry has a somewhat tainted reputation. This makes it difficult for legitimate companies to raise capital through this means.
This is something else that investors are becoming more aware of. The honeymoon phase is definitely over as investors have begun to get more particular about which ICOs they invest in. The high failure rate of ICOs might be attributable to the relative ease with which funds can be raised.
People rush into creating an ICO to fund their business without having a clear plan on how to realize the company’s development goals. Poor management and the lack of a good strategy increase the odds that the business might fail.
So, is an ICO the right way to raise the funds that your business needs? It could be a good way as long as you are willing to put the effort. Do your research carefully and create a clear plan for how to progress once the funds are raised, and you could be smiling all the way to the bank.