Now that launching an ICO takes $250,000 and at least three months, is it still the right way to fundraise for you? It’s no longer just about launching a website and a whitepaper. Today’s ICOs take 3-6 months to pull together for a team working full-time, and tend to cost as much as half a million dollars by the time you get through your incorporation, legal expenses, marketing, roadshows, and, least expensive of all, the ICO whitepaper. And most of them fail.
Before you jump into raising money through an ICO, here’s a chart of the pros and cons of traditional fundraising through angels, VCs and other funds, versus the process of ICO fundraising today, based on where you are when you start.
General comparison
No matter what stage you’re at, these are the primary advantages of ICOs versus traditional fundraising.
| ICO process | Equity fundraising |
| Token Economy | |
| Pro: If your product/idea really needs a token economy, this is a better fit. (Assess if you need a token here.) | Con: If your product/idea doesn’t need a token economy, you will need to develop unnecessary technology/tokens, and float your somewhat fake economy indefinitely |
| Equity and decision-making | |
| Pro: No equity given to token holders | Con: Equity given to VCs |
| Pro: Token holders have no official say on your company. | Con: Investors sit on your board and, in many cases, influence your decision-making. |
| Pro: Nobody controls the money except for you and your little team. | Con: Nobody controls the money except for you and your little team. |
| Con: If you do not raise minimal cap, you return all funds. | Pro: Whatever you raise is your raise, even if it’s not quite what you needed. |
| Money and time | |
| Con: It will eat up 6 months of your life, full time, and a quarter of million dollars. | Pro: It will eat up 6-18 months of your life, part-time, and can be done on a bootstrapped budget of a few thousand dollars. |
| Con: The pre-ICO round requires you to have a fairly large number of pre-investors, so you have to do a major push prior to ICO. | Pro: You could have 1-2 investors and make your first round, and those investors actively help you on your next round. |
| Legal and regulatory | |
| Con: You really don’t know if your particular country will change the regulation on token sales and you could find yourself retroactively in some kind of financial or legal bind. | Pro: The regulatory environment is clear, and you are unlikely to find yourself in trouble with your governmental and financial authorities. |
| Con: You probably can’t raise funds from US persons, and in some cases, not from people in your country. | Pro: You can raise money from US persons. If you are located in the US and those are all the people you know, that’s extremely relevant. |
| Success and failure | |
| Pro: To date, about half of these efforts succeed in raising their funds. | Con: Nobody really knows how many of these fail, but based on my experience over the past 25 years, I’d say that somewhere around 80%-90% of companies fail to raise either the seed, A or B round. |
For companies at the idea stage
If you just have a great idea, in addition to the above, these are the main issues you need to pay attention to in your decision of going for traditional funding.
| ICO process | VC fundraising |
| Success and failure | |
| Pro: You go through one process to raise a large amount and you’re done. | Con: Several stages are required. As soon as you finish raising seed capital, you pretty much have to start raising round A, and so on. |
| Equity and decision-making | |
| Pro: It’s fairly common, though not easy, to raise money without a proof-of-concept or working prototype. | Con: Without a working prototype, you can usually only get to seed level, but there are exceptions. |
| Con: Over-raising has a high correlation with failure. If you don’t go through the baby steps of creating a prototype, having an active BOD, struggling to get customers, etc., your product can be developed with no real user feedback. Companies who over-raise tend to waste time and money with no consequences, and often fail to deliver. BTW, if you are an experienced business manager, this is less true than if you are a young startup founder.
If you are a young startup founder, I know you don’t believe me, but I’ve been around 30 years and seen it with VC money, Kickstarter, etc. No adult supervision and too much money leads to waste and poor decision-making. If you’ve never managed a million-dollar company, you probably have no business managing a $30-million dollar company. |
Pro: Working on a bootstrap and incremental budget forces you to make tough decisions, develop your product according to what really sells, and spend money wisely. If you can’t create a working prototype someone would pay for, it’s a good thing that you failed early.
Working at a more natural pace allows you to develop yourself as you develop your company. Moving from managing yourself to managing 3 people to managing 10 people to managing 50 people is easier than moving from managing yourself to managing 100 people. It also leads to a better company culture, as you can hire at a more reasonable pace. |
| Money and time | |
| Con: If you don’t succeed after blowing $200,000-300,000, you will never retrieve that money. You’ve also probably had to quit your job for at least 3 months. | Pro: If you fail to raise the money, you’ve probably invested no more than $10,000 and kept your day job. |
Companies with a basic proof of concept
For companies with a proof of concept, the pros and cons are the same as for early-stage, with only one additional consideration. At this point, your chances of raising are significantly higher than those without a prototype, particularly if you have income.
- Does your product work perfectly fine without a token? If not, at this stage, you are lying to yourself and your investors by doing an ICO, plus risking your R&D on something you don’t need. I’m not saying not to do it, but recognize you are about to spend 6 months on fundraising instead of product development.
- Do you really need the token economy? If you do need a token economy, you might want to take a look if it doesn’t make more sense to piggyback on an existing project. You probably have something that could be part of a larger project, or a large project where some existing ICOs could be a part of it. Saving yourself 6 months of fundraising time and creating a joint DAO with someone who has already raised is an option for you.
Special tip: Licensing and Levi’s Jeans
How do you make money during a gold rush? You sell gold mining tools or jeans. In the next blog post, we’ll describe some alternative to fundraising for your startup.
Companies already making money
If your company has serious revenue, or is profitable or at breakeven, you are probably considering an ICO for one of the following reasons:
- You have an idea for a token that could really shift the business and business model, and will revolutionize the industry. (This would replace your current business.)
- You see the benefit in creating an ecosystem in your industry among yourself and a group of partners, or for the benefit of the entire industry.
- You want to grow a lot faster than you are growing.
- You want to create a closed, private-issue exclusive type of membership through tokens.
- Why not? There’s money to be had without giving away equity, so let’s go for it!
- People keep telling you it’s a good idea to do an ICO.
- You’ve tried the traditional way and failed.
- You aren’t really profitable.
You’ll notice what isn’t on this list is “You need a token.” If you needed a token, you wouldn’t be profitable without it. We also covered that in the general pros and cons.
.
| ICO process | VC fundraising |
| Success and failure | |
| Pro: You probably have a good start on the pre-ICO with your existing contacts and clients, and no one person needs to put in a huge amount. | Pro: You already know the industry and are proven, so you probably know the people in the industry who want to invest. |
| Con: Now you have to develop a token economics engine and float a token. This requires more manpower and potential for R&D failure, particularly if you are integrating the smartcontracts into an existing code base. | Pro: At this point, you are probably getting investment from professional or corporate investors, who can help provide other resources and contacts in the industry. |
| Con: If you are creating an ecosystem, your company may not end up being the leader in this ecosystem, and the success of the ecosystem will depend on a lot of people who are not under your control. | |
| Equity and decision-making | |
| Pro: It’s fairly common, though not easy, to raise money without a proof-of-concept or working prototype. | Con: Without a working prototype, you can usually only get to seed level, but there are exceptions. |
| Con: You now have to manage a board of directors whose interests are not necessarily aligned with yours. | |
| Con: If you are creating a foundation, you may find you completely lose control of the company. | |
| Con: If you are creating a centralized corporation, it doesn’t really fit in with the decentralized paradigm of the blockchain community. | |
| Money and time | |
| Con: If you don’t succeed after blowing $200,000-300,000, you will never retrieve that money. The existing company has also suffered because so much of its effort went into fundraising instead of running the business. | Pro: If you fail to raise the money, you’ve probably invested no more than $20,000 and kept your company running as usual. You had an added incentive to show growth in the existing business, so it’s probably doing even better than when you started. |
| Con: You now have to manage an investor community and a token economy. | |
| Pro and Con: If you are creating an exclusive type of membership coin, you now don’t have to manage your pricing model. The token will be sold to the top bidder, who gets your services. On the downside, you might end up working with someone you don’t like or feel is unethical because they were the highest bidder | |
| Ethics and reputation | |
| Con: If you’re already a reputable individual or company, having a failed ICO or a failed token economy can put you in a worse condition professionally. | |
Conclusion
So there you have it, the considerations for creating your own token issue or ICO. If you want someone to go through these considerations with you, my Token Mechanics Consulting service may be for you. Next week I’ll talk about some alternatives to fundraising that could allow you to take advantage of the ICO boom market without sacrificing 6 months of your life and a large chunk of change.
