Why ICO’s Are Laying The Foundation To Capital Markets 2.0

The anatomy of ICOs, understanding crypto-economics and the rise of the Blockchain economy…


As I get closer to initial coin offerings (ICOs) through my active involvement helping budding entrepreneurs and a couple of my own projects, I have tuned into the new world of crypto-economics and formed my own take on this emerging Blockchain economy. In some ways, ICOs are not much different to traditional funding methods, albeit they do cut out ‘middlemen’. the role of banks, intermediaries, corporate financiers, and other participants that bog the raising of capital process down with red tape, unnecessary admin, and fees and charges that are disproportionate to the amount of value added. Blockchain entrepreneurs don’t need them, don’t like them, and instinctively shy away from them.

Why do ICOs matter so much…

ICOs are an essential part of the Blockchain eco system, a mechanism to be used by entrepreneurs and investors who want to take part in the Blockchain Revolution. In Don Tapscott’s words we are moving from the Internet of information to the Internet of Value or what others refer to as Web 3.0, and they want to get in on the ground floor.

ICOs lower the barriers to market entry, allow new ideas to get capital, and most of all allow anyone to get involved and invest, even in small amounts, where previously they were unwelcome. Capital Markets have previously been the exclusive bastion of the wealthy and B2B participants, but not any longer. Blockchain Capital Markets or Crypto-Capital Markets have no permissions and anyone can enter the game, become an investor, and trade value.

At first ICOs were abused by entrepreneurs who got away with having a weak proposition and a poorly thought through plan, raising without having to show investors anything of substance, such was the PULL from investors to get involved in this new emerging technology. Fear of missing out saw 2015 and 2016 investments increase to more than $1.5billion.

Are these days now over…

In a sense, yes, because ICOs now carry additional scrutiny and attention. With reports of several ICOs having failed to reach their targets and others having been withdrawn. The examples are clear and the analysis is very revealing and should serve as a cautionary note to those planning their own ICO.

Inchain (Insurance), Ark.io (linking chains), KiboLottery (gambling), Decent (content distribution), Arcade City (ride-share)... all failed. Their failings are summarized below. Each had some or all of these fundamental issues:

  • An unproven Management Team that come across as geeks, lacking a business track record
  • The Business Plan was not at all clear as to the market problems or business challenges the proposition overcomes
  • Limited or no Proof of Concept or involvement/mention of other technologies were available for investors to touch
  • The structure of the ICO was badly explained in terms of how investor interests would be served
  • Poor Public Relations Planning not leaving adequate time to have everything in place
  • Didn’t survive due diligence as it was revealed Kibo management had links to previous scams
  • Under performed on the potential where Decent did reach lower ICO targets but didn’t explain the incentive structure raising a successful $4m of the $20m+ upside potential, an opportunity missed
  • On Arcade some bright spark decided to change members of the management team just before ICO that spooked everyone
  • Common themes a lack of overall transparency and adequate attention to detail relating to investors interests
  • Bandwagon roles on, but naivety is deafening

    ICO activity is increasing exponentially and with it the quality is improving as investors are taking a tougher stance, insisting on seeing something substantive before parting with money. They want to see an experience management team and advisors in place and a well written plan explaining the journey. It is true that many Blockchain entrepreneurs lack general business experience, hoping their technical prowess in cryptography, software development, mathematics and computer science and naive ambition will carry the day without. They don’t recognize that investors want to know how the funds will be used, how the management team will protect investors’ interests and deliver returns.

    Getting inside an ICO

    It is difficult to assess the odds of getting a successful ICO away as any single oversight or weak component can have a material impact on funds raised. As with any fund raising activity, it is vital to see things from the investor position and, although crowd funding (crypto-crowd-funding) could be seen as an easy touch, in order to get the maximum return and reach the ICO potential it is vital to have full transparency and disclosure.

    The question I get asked all the time is how long does it take to get an ICO ready – to have everything in place?

    There are many views on timing and what needs to be ready ahead of time.

    Some ICO advisors and ICO platform providers suggest at least a 12-16 week runway, as their fees are often related to the amount raised and they want to maximise their earnings potential. And who can blame them, as most offer great value and make the different between a good ICO and a great one. Nobody likes to waste effort and end up with a ‘damp Squibb’ ICO, as potential reputational damage is likely. While others in the community say you are good to go when you have the fundamentals in place.

    For me, although you have to pre-announce the ICO start dates many months out, making your intentions clear, the measure of being ready comes down to the ability to create market PULL. Having your entire assets ready to attract and retain interest where potential investors are visiting, downloading, reading and downloading the apps if there is one.

    The minimum ready position should covering off on three investor fundamentals:

    1.Credible Management team, a clear governance and compliance structure

    2.An articulation of the business problem being solved in a Business Plan with a supporting market/industry point of view

    3.Explain how Investor interests will be served, how to buy and sell coins, how their value was reached and dividends (benefits) paid.

    PULL = Momentum, Hype and Excitement

    Some ICOs have been very successful, whether SingularDTV (Content DRM platform), Blockpay, FirstBlood (Sports platform) or ICONOMI (Open fund management platform) and they offer some essential lessons to be learned.

    Attracting crypto-investors is much easier than appealing to general investors, the public or institutional funds who may compare ICOs with what happens today, and disregard it as the Wild West or high risk. So it is key to make the connection to crowd funding (as crypto-funding) which is an established means of raising capital.

    The ICO website or platform will present the investment opportunity differently. It will require a strong concept, depth of management experience, focus on value creation, and avoiding the trap of asking investors to fund your ideas and development from ground zero. Nobody wants to pay to have something built or created from scratch as this is the highest risk part, preferring to invest in the fruits of the teams hard work and personal sacrifice, to avoid the unproven, untested and pipedream objections.

    An ICO website is the measure. Some are fantastic and some are very bad. I quite like www.Chronobank.io, who are mid ICO currently and have covered the main attributes pretty well, which has resulted in a solid ICO performance. www.singularDTV.com, on the other hand, is more complex. It offers the investor all they need to make a quick informed investment decision. Both are considered a success.

    The most successful ICOs have a very strong PR campaign, great branding, a strong online presence and social media strategy, and deploy all their toys to reach a wide audience working across all channels and networks at once.

    How to Tokenize value… What is Crypto-economics…

    The Altcoin represents a token of value. This is the core of the proposal and has to be answered in full. How do you intend to tokenize the value of what you are proposing and how investors will benefit…

    The supply side is key. The total amount to be raised has to be worked back from the value the coin will represent and what the underlying investment is supporting. Is there one phase or multiple investment phases? What does the roadmap for the business look like and what are the stages of maturity? What will the coin tokenize - a license of a product, copyright or IP of something, or linked to an underlying asset – commodity, artifact, asset class.

    Part of crypto-economic thinking is to ask how your proposition will support the liquidity of the coin and what is the opportunity for investors to buy and sell, and redeem its value, is the central focus of crypto-economics. What entitlements, rights and incentives for investors will be linked to the coin, especially important for the deployment and execution of Smart Contracts that automates the governance and administration? Hence the ICO business plan must provide the right level of information to support investor research and due diligence in order to work out their economic returns.

    It is clear that management teams want access to the funds to build out their vision and create the business, but may not have considered the value of the underlying coins after the initial ICO raise. In many cases, the value of the coin collapses after the ICO hype because not enough attention is paid to using the funds to increase shareholder value, asset value, and license or IP value. What do successful ICOs such as ICONOMI do differently, where the performance and the value of their coin, the level of trading activity has increased over time?

    The best performing ICOs focus on increasing the underlying value of the asset fair much better than those that want to spend the money on building cool tech without consideration for how to monetize what they have created. During my Blockchain journeys I have met numerous clever Blockchain entrepreneurs that have built something very good, but don’t know how to get it to market and monetize it with paying customers. They have built the asset but tend to get stuck in endless POCs and prototyping, do not having a plan to work with indirect partners. The value of their coin and business ends up languishing as a result, and investors want out.

    How is the initial value of the coin reached, what will be the starting point and how will this be linked to the underlying value of the business and its operating activities? How many coins will be put into distribution has to be clear and transparent? How the coins are allocated and whether or not there is a Closed Ended Fund approach that limits both coins and time, or Open Ended where new coins are released at intervals? How Investors interact with your proposition, get access to information, coins and will be kept informed, all need to be explained. You also need to explain which currencies you will accept as payment for Coins, will it be both crypto and fiat or will something like ShapeShift be required for conversion of the value between currencies.

    ICO Fundamentals

    These are the essential components that will increase the odds of making your ICO a success…

  • A concise Business Plan explaining how your coin works, use of funds, the compliance and governance approaches and how investors are treated (protected) and the outcome and returns managed
  • White Paper giving the background to the concept, the current market issues and how your approach is different, what challenges are you solving and why customers will buy
  • An ICO website – that is focused on the event – the ICO itself. It is a non traditional website and can be closed after the event, or converted to an investor portal. With all the essential information to hand, the timing of the ICO and How to Invest
  • A promo video where management discuss the concepts, a series of sound bites as Podcasts that will draw new investors and communities
  • The Management Team with their track record to support a Blockchain world – expertise in Crypto, Computer Science, Encryption and Software development is not enough, investors want to see business acumen and experience.
  • A strong Advisory Team – ideally know industry professional is becoming a must have
  • All Channels – Twitter, YouTube, LinkedIn and Facebook company pages with useful content to support the story for the investor pushing traffic to the ICO site or Apps download
  • A list of Partners, PR partners and Supporters and who else is involved in the journey.
  • ICOs are laying down a new fabric for commerce

    An ICO is the demand side of a new layer in crypto Capital Markets structures that play an essential role in preparing core infrastructure for new commerce. ICO’s served by platforms link exchanges and provide essential liquidity to the arrival of Web 3.0.

    The ICO is an essential process to delivering immediate liquidity to the Blockchain economy as government, banks, and traditional capital markets hesitate to make their minds up as to how and where they fit in, with a new generation of entrepreneurs turning their back on tradition sources of funding – seeing them as slow, expensive, placing their IP at risk and finding the experience commercially invasive.

    With each download of the original open source code, a new Altcoin is born as a token, to be used for a new purpose to deliver investor confidence, ownership and entitlements to dividends and benefit from success. They are in fact new hybrid instruments that can have both features of equity and bond. And they will emerge to support new asset classes and tradable instruments.

    Crypto-currencies as tokenized assets are part of a new generation of ETIs that are available to be traded on stock exchanges across Europe and Internationally. This means opening up the crypto-world to capital, which should mean better returns as Blockchain businesses offer the promise of better margins and returns for shareholders.

    Crypto-Capital Markets is here

    In a few years time there will be 10,000+ crypto-currencies and platforms supporting all kinds of industries with the bulk of coins being used to Tokenise things, assets, and different forms of value in new and exciting ways.

    An entire Blockchain ecosystem is being built at speed that will eventually take over from today’s commerce. With many of the key components already in place, Capital Markets 2.0, Web 3.0, and Bank 4.0 will herald the arrival of Commerce 2.0.

    The core elements are here. We have Smart Wallets that allow the user to buy and sell, make payments, and transfer crypto currencies in and out of fiat currencies. There is a new financial rail called Bitcoin for payments and remittance. We are numerous cryptocurrency exchanges (Bittrex, Polonex, Kraken) that create liquidity for the coins from crypto funding and the coins. New asset classes are arriving with a second generation coin that are asset backed, offering the option to create Exchange Traded Instruments (ETI), to be listed through conventional stock exchanges. Fund managers are looking to add a strip of crypto-currency to investment portfolios.

    New industry platforms are emerging for Gaming (vDice, DaoCasino), Music (UjoMusic) , Insurance (ChainThat), Supply Chain (SkuChain, Waves), IoT (GE’s Predix), with supporting Compliance as a Service models (Coinfirm.io) delivering assurance and a key part of the infrastructure for an entirely new capital market. And a new generation of Blockchain organizations will link chains together and deliver new ways for exchanging coins and transaction information from one Blockchain to another, which one might add is the final piece that will deliver Blockchain Capital Markets.

    There is more to come, with several ICOs of considerable note and interest.

    Melon Project (starting 14th Feb and open source for asset management), Contingency (a trusted gambling platform) and Cosmos (a DLT play), SuperDAO, Qtum, Internet of Coins, Gnosis, Rootstock, Bitsquare, EtherEx, Filecoin and the list goes on…

    End note.

    ICOs are an essential part of the Blockchain ecology and are playing an important part of driving adoption and funding innovation, creativity, and new commerce. There will be issues, ICOs will underperform, and unprepared and inexperienced management will waste the opportunity they have been given. But this is all quite normal in today’s economy and funding options, although some will point fingers that ICOs remain unregulated, high risk, and to be avoided. In a way, this will be good for ICOs thinning out the investor community, squeezing out those looking to make a quick buck and leaving only those that recognize the potential of the technology.

    Long live ICOs as they may not be the end answer, but they do deliver the means to get things done today.

    DigitalBOOM © 2017

    Twitter @NickAyton


    Read next:

    Is There Room For Virtual Reality In The Legal Niche?