Early in October 2018, after years of growth, investors appear to be spooked by rising bond yields that have been drawing some out of the stock market. Fears of further falls led others to sell their holdings. The best-performing stocks over the past year — which include the so-called FAANG companies of Facebook, Apple, Amazon, Netflix, and Google — took some of the biggest losses on Wednesday, October 17, 2018. Amazon lost 6.2% and Netflix gave back 8.4%.
How are ICOs affected by these turn of events? The bear markets of 2018 have generally hit ICOs hard. It has become extremely difficult to raise capital due to related factors in a domino effect — ICOs don’t have organic user growth from an appreciating cryptocurrency, exchanges slow down listings, team morale suffers, and ICO big investors become unhappy.
Autonomous Research found that ICOs raised over $7 billion in 2017 and close to $12 billion in 2018, with some mega projects raising billions of dollars each. ICOs democratize fundraising, wrestle control out of centralized institutions and give it to users, align the incentives of a diverse ecosystem of stakeholders, and launch fundamentally new kinds of businesses built on crypto economies. Idealistic growth, right?
Take note that the tokens sold are promoted as future functional units of currency if or when the ICO’s funding goal is met and the project launches. For those in the blockchain and crypto community, there’s this related all-important question: Why don’t ICOs cash out after raising funds, but keep risking for more — and lose everything?
The KEY is basically this: Lessons from mistakes of past ICOs CANNOT save you in the future because the times are changing and the errors that people would make or have made are very different. What was right in 2017 is no longer right in 2018; what was right in 2018, is so wrong right now.
The bitter pill to swallow is this: If someone looks at those success stories for good strategies to implement, that’s not going to work. On the other hand, you can learn from past mistakes and failures but cannot expect success just by avoiding them.
As an advisor, I’ve always insisted on being able to see ALL operations for a long-term projection. Some ICOs claim that the project isn’t going to convert to fiat right after the fundraising, but I think that’s foolish. Coins are unstable but the primary reason you raise funds is to build a company. A company you have equity in. Equity is stable (in correlation to how stable the company is) but the two economies are completely different.
Rob Toth, CEO @OODIENCE and Founder @Blockchainova, once confided to me, “More and more insider stories made it evident to me that cashing in coins right away isn’t the norm. Yet that’s precisely what I’d want to do. It’s the sole reason for a fundraising — use the funds to build the company (build equity value) and you don’t risk your capital like that.”
He continued, “That ends up being a model where the corporation is making a high-risk investment. It’s comparable to a traditional company taking a bank loan or a startup grabbing millions in fundraising and then putting THEIR COMPANY’s OPERATIONS MONEY into high risk, volatile assets as investments.”
Moral lesson: You don’t use the company money to invest in other assets and companies unless you’re at that phase of company maturity and have such excess capital from REVENUES (not from investments).
You raised money for a STARTUP in order to build the COMPANY. I think it’s rookie and first-time CEOs who have greed in their eyes and think “Wow, we can keep our company money in these highly volatile digital assets, and it can make even more money for our company, while we also use that same pool of money to grow the company.”
Rob Toth had also emphatically stated, “People invested and gave their funds in hopes that you’ll utilize it to grow the operation because if you develop a strong company, THAT is how the coins they received go up in value.”
Any company founder who treats their ICO-raised token pool as an “investment fund” (into anything other than their own company’s success) is part of the rookie-hour masses who will soon see maybe slightly richer personal pockets, but a dead company on their hands. And the few case studies and examples proving the contrary are not to be modeled as that’s like raising $5M from investors and then, going to a casino wanting to triple it — a lottery mindset!
Investors do not provide millions of dollars worth of ether to projects to benefit the pockets of the founders, but to finance the blockchain networks being developed by the projects so that they can solely focus on the development side of it, not investment.
That said, the majority in the ICO/blockchain space are either engineers or get rich quick types while only a minority have experienced company development backgrounds. The market has fallen due to their uninformed, unfocused, greed driven selves — makes sense, right?
The current scenario is that companies in the crypto space now have difficulty establishing banking relationships and as a result, many hold their funds raised in cryptocurrencies (i.e., in Ether vs. $USD). When prices fall, treasuries and most important project runways suddenly become much shorter than teams previously believed.
As an example, a project that raised $10Mn late in 2017 might expend $2Mn in marketing and legal fees, and then pay year-end taxes. Consequently, after the price of Ethereum dropped 80% in 2018, their initial $10Mn could suddenly be reduced to less than $2Mn.
The high overall correlation between ICO prices and cryptocurrency prices is also troubling. In a market that is well functioning and transparent, we would expect that prices would be based more on the performance of individual projects, rather than tied to a nascent and volatile market of speculative cryptocurrencies. But in the long-run, NOT being listed on an exchange will be a huge liability for ICOs. For investors, it means there is no easy way to buy and sell your tokens.
This liquidity is extremely important. First of all, it provides an onboarding ramp for the cryptocurrency, a way for people to get their hands on what’s necessary to use a crypto-product or service. Second, it provides an exit ramp for investors in ICOs to liquidate their positions. Investors will oftentimes have locked up their capital for months in high-risk high return ICO ventures with the ultimate goal being an exchange listing.
In the case that there is no listing, it becomes much more difficult, sometimes impossible, for an investor to sell the cryptocurrency they have bought. We believe almost all legitimate projects will seek listing over time, but we cannot tell which ICO projects are making this effort alongside business growth strategies.
ICO’s now tend to focus just on crypto speculation and forget all about marketing their actual product for actual users and actual revenues.
Cryptocurrencies are a new way of organizing human activity, and as such, they require new forms of governance. Again, we have seen little farsightedness about how these networks will be governed. This reflects a lack of thoughtfulness in the current generation of projects; they have proven to be very effective at raising money, but less so at everything that comes after that.
There are two endings to your ICO — one being, under the right conditions, it can prove to be an extremely effective way to bootstrap a platform and launch an amazing product or service. The other is buried in debts, unrealized promises, and legal battles, together with many GREAT ICOs whose advisors lacked the foresight to survive the downtrend.
Depending on your preparatory steps, this past year might evolve to be cryptocurrency’s “Netscape moment” or it could simply be a rerun of the dot.com bubble. So, where your ICO will be when the dream bubble burst depends on your foresight