The primary goal for most startups is to create a defensible and scalable competitive advantage that will make it possible to collect income (a.k.a. "rents") from multiple parties for an extended period. If a business can achieve the coveted “hockey stick” growth trajectory, then someone will want to buy it for an amount that looks like a phone number. Collecting data can be even more lucrative than collecting rents. As Joseph Stalin said, "If you can control the information, you can make them do anything." (Actually, I’m not sure Stalin said that, but I’m confident he’d agree.) With all of the stuff that Facebook and Google know about you, and your friends, and other people like you, it would be tough for an upstart to make better predictions about which ads to show you. Blockchain-based technologies have created a new way to fund startups. Business models built around distributed apps (DAPPS) are going to disrupt the disrupters. We’re going to have Facebooks without Facebook, Google AdWords without Google, and even cryptocurrency exchanges without exchange companies. So the traditional way of building startups, which seeks to lock down value in a company that you could sell, doesn’t work for crypto companies, where the goal should be to unlock value through openness and decentralization.
Most ICO White Papers Are Crap
I read many initial coin offering (ICO) white papers. I rarely finish reading them because the authors either don’t know or don’t care that they should design their coins (also called tokens) to support open, decentralized, and, therefore, highly disruptive business models. All too often, the papers say something like:
20% of WidgetToken transaction amounts will always be paid to Widget, Inc.
When I read stuff like that, I know that the authors are using an ICO as a fundraising gimmick.
Equity Schmequity
In a recent article in Coindesk, Rob May says that every entrepreneur he knows has called him to talk about ICOs:
"In their minds, the primary benefit is non-dilutive financing. They don’t have to give up any equity, or control, of their companies."
The white papers that those entrepreneurs write go right into my recycle bin. I am so not interested in buying a token to fund a company that they own and I don’t. They'll need to find another chump. Amazingly, some of these people have already had ICOs that have raised millions of dollars in funding. The primary interest of those entrepreneurs is to create proprietary value in their own companies, which is, to put it another way, to make themselves rent-collecting middlemen. That motivation directly conflicts with the goal of creating a successful token that anyone else would ever consider using. Since those entrepreneurs care little about the tokens they might develop (if they deliver any working tokens at all), those tokens will be worthless. I'm not saying that you can't make money by creating a service around a decentralized token. Indeed, you should make it viable to do so as an incentive for others to support your token. But when someone tries to lock a competitive advantage for themselves directly into their new token, I'm not buying that token.
White Papers That I'll Read
If you take the following steps, then I’ll probably finish reading your white paper, and I may even invest in your token:
- Identify a rent-collecting intermediary (RCI) – Do you think Uber drivers would like to get a 20% raise? Would Airbnb renters want to get 18% more for each rental? Would consumers like to pay less and keep their personal information private? When you see someone sitting in the middle of transactions collecting a lot of money and information, that's who you should target. Trust is built into the blockchain, and you can replace middlemen functions with smart contracts. Companies that we used to think were unassailable are now vulnerable. Find them.
- Design a token that unlocks value by taking the RCI out of transactions – Create a token with smart contracts that eliminate the need for an intermediary. You can unlock value that the RCI used to keep. That value will not go into your company’s private bank account or acquisition price; it will increase the price of the tokens that investors and you hold.
- Create an organization to develop your token’s platform – Smart contracts and front-end software will be necessary for your token to work. Your organization should create that software and then turn it over to the public as an open source project. You can fund your platform team via a SAFT, or some other way that your government will not object to.
- Distribute tokens to those who can grow your community – Align people’s interest with yours. Give them some tokens just for signing up. Once people own the tokens, they'll be more interested in what you’re doing. They'll want the value of their tokens to go up. And they may even help you create a new market.
- OPTIONAL: Create a business that offers services around your token – You want people to build DAPPS that use your token. But you may have to jump-start the market by doing it yourself first. You’ll be able to use the open source software that your platform team developed (anyone else could use that software, too). If your token is useful, then your service business will likely be profitable.
The critical point about the preceding steps is that the organization that develops your token's platform and the business you create to build services around your token should be separate. The competitive advantage of your service business will be the domain expertise you have regarding the token and the industry it targets. But since the token and core software are open source, and the platform you’ve created is decentralized, the barriers to entry will be very low. If others enter the market to compete with your services business, that’s great, since it means that your token is doing well. Consequently, the value of your tokens will increase. If the competitors beat you in the marketplace, that means they’re adding more value to the tokens that you hold than you are, which will make those tokens worth even more. So while it’s never much fun to lose, the exploding value of your tokens will surely take some of the sting out of your defeat. You can sell your tokens, retire to a Caribbean island and drown your sorrow in a rum punch. And by the way, since I may have bought your tokens, I’ll make a lot of profit, too. I'll see you on the beach.