What is an ICO and is it right for my startup?
6 minute read
While companies looking to raise funds would typically normally seek financial support from outside investors in exchange for equity, more and more companies are starting to consider an initial coin offering (ICO).
We cover the basics in this article – what an ICO is, the basic process involved, and
What is an ICO?
A growing number of today’s businesses and startups looking to raise money to get their industry-disruptive ideas off the ground are embracing the promising claims and lucrative advantages that an initial coin offering (ICO) can provide them.
Simply put, an ICO is the equivalent of an IPO in the mainstream investment world played and transacted in the blockchain or cryptocurrency platform.
The basic ICO process
ICOs basically begin with an idea. This could be any concept for a blockchain-related project that a company would like to pursue and would like to propose to the community.
When the startup finds traction with the concept, they proceed with drafting a white paper that outlines all the details of the project—from its goals and objectives to how much initial funding or capital it needs to raise, from the team working behind the project to its technical aspects, and all other information necessary to help investors come to an informed decision on whether to participate or not.
The token sale
Once the white paper is put together, marketing campaigns are then launched and an ICO date is scheduled when the token sale is set to begin. Normally, a given time period for the sale start and closing is defined for raising the required funds.
Once an investor decides to put money on the project, he will be awarded the project’s cryptocurrency (in the form of tokens) in exchange for making an investment. Depending on the nature of the project and arrangements made, tokens can be bought in exchange for other cryptocurrencies or for ‘real’ fiat money, including U.S. dollars, euros, and others.
As simple as it may sound, despite a lot of work obviously going behind the scenes, ICOs basically boils down to having a pool of individual investors receiving tokens in exchange for helping raise funds for the project with the hopes of earning profits with their investments.
ICOs and Startups
Businesses looking to go into new ventures, to create a new app, or to launch a new product or service choose to launch their own ICOs simply because they are capable of producing huge returns on the investment. So how exactly does one go about launching an ICO? Here are the essentials every startup should be aware of and understand:
1) Get started with the basics. Build a powerful white paper that clearly explains the problem you’re looking to provide the solution for, the reason why your solution will work, and the reason you need the funding. Calculate the critical values of your chosen token to use and get a lawyer on board to help you with the legal technicalities, among others.
2) Carry out the groundwork. Weigh your options on the token technology that you will implement for your ICO. Depending on the structure that you want for issuing your tokens, you will have to decide which platform to use. Here you need to research on the countries that actually allow investments into ICOs and puts ICOs in a positive light and be biased toward working with them.
3) Gear up for launch. Procure a multi-signature wallet, set up the nodes and the necessary hardware for your chosen ledger technology, and put up the website for the ICO. Assemble a top-notch marketing team to optimize awareness online and offline about the ICO, ensuring marketing campaigns reach the furthest and widest across your targeted audience of investors.
What are the benefits of having an ICO?
Topping the list of advantages businesses get from launching an ICO is the opportunity to invest in an innovative technology. Most ICOs that have been put up were aimed at revolutionizing the industries the businesses were targeting, where a rigorous analysis of the ICO process help investors make informed decisions on investing and back the right startups and businesses.
Here are the main reasons ICOs make for a smart investment for businesses, organizations, and companies:
- Minimal (to zero) entry constraints. As opposed to most traditional IPOs that limit participants to a closed group of large-sized businesses and multimillion investors and capitalists, ICOs provide everybody the chance to make small investments and an equal opportunity to reap huge returns on investment when the ICO project turns out successful.
- Potential for exponential growth. In the cryptocurrency world, players use tokens to purchase goods or services offered by the company. Today, tese tokens have a collective market cap of billions that continue to increase each day. So imagine the purchasing power and the return of investment you get if the ICO cryptocurrency you invest in acquires the market trust over time.
- Worldwide access and connection. ICOs sets no geographical barriers. The cryptocurrency platform breaks down barriers and discrimination between professional capitalists and small investors, allowing millions of people across the globe to grow their network and become amateur traders where some will succeed and some others fail and most likely lose it all.
- Easy and simple validation. If you intend to buy tokens for the ICO, you simply need the private keys or code to validate your ownership and you’re instantly a major player in the whole market, where cryptocurrency assets and properties are not decided upon by a national court but by an international blockchain platform.
What are the risks and drawbacks of having an ICO?
As with any investment plans, ICOs come with its own set of risks and drawbacks, categorizing them under those involving consumer protection, market risks, and regulatory compliance. The major ones include the following:
- Consumers are not protected from the ICOs’ lack of due diligence, as no formal processes or systems are being set up to audit these organizations who may carry out token sales even prior to making significant milestones in creating a functional product or having no proof or guarantee that the technology will actually work or the business will be able to operate successfully.
- The lack of clear token valuation systems in ICOs can put consumers at risk, especially when buyers are not made aware that token prices and value are based on expected resale profits, which can be very unpredictable, rather than the underlying economic utility. This can encourage Ponzi schemes and bubbles that merely favor older investors gaining from the inflow of capital of new investors.
- Token prices in ICO sales are highly volatile, which obviously translates to high risks for investors, a clear and direct reflection of an underlying market manipulation, another major risk in the cryptocurrency market. Amateur traders should be fully aware and be vigilant of the various manipulations that the token currency can be subjected to. These can include manipulative practices from “whales,” front-running, spoofing, pumping and dumping, among others.
- With tokens being easily sent to and from cryptographic addresses, anonymous or pseudonymous token buyers are rampant in the crypto space, making it more difficult to implement know-your-customer requirements that are vital in enabling existing anti-money-laundering regulations that help counter the risks of terrorism.