It has become increasingly common in media to report about the frenzy surrounding blockchain startups via their ICOs, or Initial Coin Offerings as they are called. Most articles and posts discuss the ridiculous amounts of money they collect in a matter of hours, with very little due diligence done by the investors. There are still no success stories from these ICOs and the startups have yet to prove that they can complete any of the ideas that they promise in their white papers.
The blockchain technology can benefit everyone when the actual projects and the problems they solve are in focus instead of the fund raising process and the speculation for a quick buck. I have tried to compress the information to five main points that I want to share with you.
1. What problem are you solving that can only be solved using the blockchain?
This is a critical question to ask yourself before jumping on the blockchain train to the ICO launch. The core of your solution has to be tied to decentralization and minimizing trust between parties before it should be even considered as a blockchain app (also called dapp for decentralized application).
Many web applications today run very well through cloud powered AWS or Azure servers that can automatically scale up or down based on traffic to the applications. The speed at which their databases can process data is unmatched and the price has never been lower to run your own backend infrastructure. Handling thousands of transactions per second is realistic even for a small business owner. Compare this to the Bitcoin blockchain which is currently able to handle 3 transactions per second, or the Ethereum blockchain at about 30 transactions per second.
The benefits from building your app must outweigh these limitations and also weigh in the transaction fees that you will need to deal with for every single transaction between two parties. Transaction fees play an even bigger role if you are considering micro transactions where small amounts are passed around, since the fees can actually be greater than the amount sent.
Still think your idea should be built as a dapp? Ok let's move on to the next point.
2. Is your target audience tech savvy?
Let's be realistic, if you are reading this article or considering a startup running on the blockchain you don't belong in the 99% slice of the population that have yet to even hear about the blockchain. The obstacles facing non-technical newbies trying to learn about this new technology will deter most of them from even learning about your startup.
If you are going to offer a tradable digital token to represent your services or products, you will need a target audience that can first figure out how to trade their fiat cash via an exchange to Bitcoin or Ethereum, then use them to buy your tokens via encrypted public addresses without making any mistakes in copy/pasting hashed addresses around. However, if you are smart you will build a dapp that hides all token handling and blockchain transactions from the end user and focus on the user experience. This has yet to be done and there are huge opportunities for startups who can bridge the gap between older generations and the blockchain.
3. You still face the normal obstacles with starting a business
So you got your shiny new dapp built as a smart contract for the Ethereum blockchain. You feel satisfaction from having learnt new technologies and solved your technical problems (or your partner did). Let's take a step back and look at your dapp as a general piece of software. If your application had been built as a standard web or mobile application, would it immediately attract the attention of users and make them want to use it? Does it solve a problem your target audience has, that no other company has solved?
If a competitor would try to solve the same problem in a centralized manner using content delivery networks that place their application near almost every potential user in the US, would their solution fail compared to your decentralized application? Will your users be aware of or even care how you handle their data? This is important since a large portion of the population still has no idea about online privacy or how they can and should protect their personal data.
The first thing a user will notice is how you handle the user experience, speed of your service and the way you solve their problem. You have to educate each user about the blockchain benefits on top of doing marketing like every other business. You are basically facing problems that cause over 90% of small businesses to fail within 3 years including new ones that did not exist before the blockchain came along.
4. Handling support issues with a smart contract
Your startup has officially launched and is attracting users. However, you are noticing that some of your users are complaining that there are issues with your service or worse, they are losing money from a bug in your smart contract. In a normal situation with a startup that uses the cloud to host their app, this would be bad on many levels. Reputation is critical when you are new and every user makes a difference, and then having to correct issues with your data is another unpleasant experience you don't want to deal with. You are not a normal startup as you know, so this is much worse situation for you.
Every bug has to be handled with a fix put into the smart contract which has to be re-launched and re-funded with Ethers to afford to run on the blockchain since you can't make changes to existing smart contracts on the blockchain once they have been confirmed by nodes. You are paying for your bugs quite literally. You or your technical partner has to be very good at building a test framework that eliminates most or all bugs before you have to go through the painful process of dealing with angry users and the inconvenience that is the blockchain.
Compare this process with the standard process of making a bug fix, committing it to your github repository which triggers a pipeline that automatically builds and publishes your app to the cloud server. The whole process could take minutes and be done at virtually no cost as many times as you need, it could even be done by your outsourced IT team in Bangalore when you sleep.
5. Failing ICOs hurt the entire blockchain ecosystem
If you successfully raised funds from an Initial Coin Offering (ICO), you should be aware that not only is your reputation as a founder and business owner at stake, but that of the entire ecosystem. The blockchain technology is so new that you can be sure that if you fail there will be news about it and it will blow up in mainstream media. You will not get a second chance, and many entrepreneurs may not even get a first chance to launch an ICO after you decide to fold your publicly funded startup. This may actually be a good thing to limit the hype currently surrounding blockchain related startups, but it may also prevent projects with a lot of potential from succeeding.
If you instead decide to grow over time using funds from investors that double as your advisors where the application can go through several testing phases, you stand a much greater chance at succeeding long term. You will at least have a beta version of your application ready before you launch and much less to prove to new investors even if they are willing to throw dumb money at you during an ICO. Just look at what happened in the aftermath of the Status ICO, this startup has not even had time to start working on building their beta version and thousands of investors and users of their platform are already upset and leaving them. I am sure this will prove to be a bigger issue for them long term than the upside of having $270 million USD in the bank.
Bottom line is, grow slow and steady until you have a beta version that works instead of creating a fluffy white paper based on fancy business talk and empty words if you want to succeed long term. I wish you luck and look forward to seeing you in a decentralized future.