We have seen a lot of ICOs on the market recently, so how do they compare to the traditional crowdfunding? As an investment professional who had rigorous investment training, and for good or bad, in depth experiences with traditional crowdfunding platforms, I hope to share some lights and give you a true picture.
Traditional crowdfunding's purpose is to bridge the gap of lack of funding available to small private companies and start-ups. How the process works is the start-up company A, comes to crowdfunding platform B, asking to list and market themselves on B. B reviews the marketing content, please note here - marketing content only, and approves A to market themselves whatever way they like on B's platform. B in turn receives a heavy % of commission, sometimes negotiated with A and unknown and undisclosed to investors, and a performance fee of usually 10%-20% on top. This model is known to be practiced for years since their existence by largest European crowdfunding platforms and others around the globe alike. Please note we are not talking about KickStarter or Indiegogo, which has completely different model.
From the description of the model above, can you spot the problems already that will leave you with 0 on your equity investments? The answer is there are a lot of problems in the above business model. Investors have been nice and generous, and usually attracted by SEIS or EIS schemes to invest for tax benefits, however, the investor still has 50% of their funds at risk and the chances their 50% of funds go to 0 is extremely high.
From the description above, a red alert comes because the crowdfunding platform B does not have investment expertise! They are usually formed by ex-solicitors who somewhat failed as corporate lawyers and want to try something new and hope to make money off that. Or they hire new graduates because they are cheap to hire, but they have absolutely no idea of what are good investments, which companies and if company A is lying on their platform B. What is worse is that 1) B will not and do NOT know how to do professional due diligence on A, 2) B won't even closely review all A's legal documents to make A legit as they say in their marketing documents, and 3) B won't monitor A once your've put in your money and B has already made money off you for commission. Even if B is regulated by financial bodies, and knows and has the information that A has done wrong and has lied to investors initially on their goals to get the funds in the first place, B would not do anything at all to inform investors or help them correct A.
There are a lot of points, but to simplify to everyone can understand - to what reason can you trust the crowdfunding platform B at all by investing your money? Because they have a slick website? - All scammers do to attract money going into their own pockets. Because they say they are the largest in crowdfunding among their competitors? - All scammers to made money ruthlessly can attract capital faster than people who actually put in the hard work and respect proper rules of safeguarding investors' funds. Because you have seen B everywhere and heard about them from events? - That's simply because B has paid a lot of money to put on their own ads, to pay to speak at seemingly credible events, and to pay to show up everywhere, and don't you know where their money comes from - it will be from you if you invest with them.
Now comparing to ICO, of course there are coins on the market I believe does not live up to its claim but was able to raise a lot of money. However, the ICO process, the white paper, company team, background and projects can be surprisingly more transparent than the private companies you were thinking of investing in on a traditional crowdfunding platform. ICO lives in free market and thus need to make a bit more effort to convince supporters, versus crowdfunding platform lives off commission from all users and they get the projects onto their platform to make money, not because of handpicking or endorsement.
Have we got people who used or suffered from traditional crowdfunding platforms? What problems do you think they incur to investors? How transparent were you able to get close to the projects and company, to see what actually is going on? Have you seen the collusion between traditional crowdfunding platforms and companies/projects which is not commercially sound, but the crowdfunding platform promoted it anyway for their greedy fees?