During a recent video recording for The Human Factor, at the start-up company Screenist, I asked why it had begun as an ICO, only to then change to a more ‘conventional’ VC route for fundraising. My interviewee, the CMO Csaba Topor answered, “You know, ICOs are bubbles – we all know that, you have to admit it. Reality kicked in, that’s what changed. (Screenist) became a project, a company that really has to live in the real world, and that’s a completely different mindset.”
I wonder if this was just the view of one group of entrepreneurs, or whether tokenized offerings are actually fundamentally changing. As Csaba added, “If you’re an ICO there are certain rules that you have to follow, even if you don’t like them. Now we also have to follow different rules, but we have more freedom.” So ICOs apparently limit freedom, because of restrictive regulation, and they’re a ‘bubble’ about to pop. Or perhaps which has already popped. Let’s see.
From February 2018 to date, over USD 19 billion was raised through Initial Coin Offerings, with Peak ICO being last June, when the ICO for EOS made over USD 4 billion alone. Compare and contrast to the negligible sums raised in January of this year, at USD 291 million, and perhaps we are seeing a dramatic flattening out. Moreover, 116 ICOs ended last month, of which only 32 actually raised funds, with a quarter of the total offerings – nearly 60 – delayed until later this year. And by the way, that 116 completed ICOs was the lowest in a year, from a total January listing of 159, which was also the lowest in a year. This could all be taken as a sign of failure, or more optimistically, a sign that entrepreneurs are making absolutely sure they’ve got the product right before hitting the market. Let’s hope that’s the explanation.
Soft and hard caps were also below average, with soft cap being achieved in 51% of cases, and hard cap in 10%, so anyone who has got the idea that an ICO is ‘a license to print money’ should pay attention to Csaba Topor’s statement: ‘Reality kicked in, that’s what changed.’
Is the ICO model therefore just a bad hand dealt in the casino, and the wise investors would be well advised to cash in their chips and invest no further through this particular instrument? I’ve written before about the inherent problems of utility tokens, and this has become the general opinion over recent times. It could – and I stress could – be a wonderful thing to have a piece of a new business, guaranteed by the cryptocoin of that same business. Over time we hope that the business will grow and be successful, and that its coin will find a value on the exchanges. Equally, utility tokens will ideally have a value on whatever ecosystem is created by the enterprise. There are still many examples where the theory shows that a wide range of third party apps within an ecosystem, all trading with the same crypto, can have significant benefits for users. Inter-related travel, accommodation, and insurance applications are a good example of this.
It relies on uptake though, so investors in an untried business offering its own coin are effectively taking a spin of the roulette wheel. This leads us right back to the origins of ICOs, in the crowdfunding movement. Businesses appealed initially to the ‘friends and family’ small investors (or ‘friends and fools’ as Screenist’s Sustainability Advisor Tamas Solymosi characterized the process in another Human Factor interview!) Originally ICOs therefore attracted large numbers of ‘fans’ who each put in relatively small amounts, which I think is one of the objections made by Csaba Topor about the process: He would rather devote a lot of targeted energy to reaching one prime professional partner than scattergun many small investors.
In some respects this also agrees with my own thinking about what I call ‘Asymmetric Investment.’ Let me explain: Start-ups know that investors want lots and lots from them. They must supply a great roadmap, have a rock solid whitepaper, a winning concept, and be able to communicate it all through inspiring and experienced ‘Front Runners’. The financials have to stack up, and even if the product is still in beta, it has to at least show signs of working! In contrast, most start-ups think they only want one thing from investors: money. That’s an asymmetric arrangement.
A successful ‘ask’ from a business to its investors must include as many questions about the investors, as the investors will ask of the business. It’s due diligence in both directions. This was one of the learning points I took from being with the Screenist team – they don’t just want any investor, they want the right investor. That means a partner that is strategic, has the right connections, brings experience in depth, and so on. I’m not speaking on behalf of Screenist now, but the company is an interesting example of one that is looking for not ‘just money’. I guess that helps to explain the quote at the start of this piece… “A company that really has to live in the real world.”
If Screenist is taken as an example, then in some ways it’s a little surprising that there are – relatively speaking – so many ICOs still alive, (or at least half alive!) Why? Because starting not much more than a year ago, the idea of STOs started to enter market consciousness. Now enterprises weren’t offering tokens which potentially had the future value of zilch, but with an STO there was the real promise of an equity share, revenue share or debt. STOs have the potential to provide real value which can be exchanged and sold on. So, job done then? And if so, why isn’t everyone offering an STO?
Well, now say hello to the new kid on the block, the OPO, or Online Public Offering. Actually OPO platforms have been around for some time, particularly in the American Real Estate sector, but they’re just starting to gain traction in the crypto and blockchain space. Will they leap over STOs? It will be an interesting year.
Meanwhile is the tokenized model in semi-retirement? My interviews at Screenist – admittedly just one start-up – say that it is, and that they’re stepping firmly back to older models of fund-raising, although with new tools and attitudes. Looking at some of the market data also suggests that ICOs are on the slide, although when the figures for this month are gathered in perhaps we’ll see a more positive picture.
And by the way, although I’ve been thinking about Bitcoin in recent articles as the eventual ‘Gold Standard’ of the cryptoworld, it’s interesting to note that of the ICOs last year, Bitcoin had a market share of 1%, compared to Ethereum’s 88%. Now of course there are structural reasons for that, but it is yet another indicator that the cryptoverse is neither a deep or still lake, and the year ahead may bring plenty of storms. In those storms will ICOs sink to the bottom, or as the American writer Mark Twain responded when he heard rumors that he had died, is it a case of: “The reports of my death are greatly exaggerated.”
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