The initial coin offering. The futures answer to a modern fund-raising mechanism for blockchain start-ups aspiring to launch a decentralised application.
The ICO mechanism, often confused with poorly used terminology, represents the period in which the company behind the ICO attempts to raise capital in exchange for their native crypto token. A phenomenon still in its very early days, as witnessed by the ongoing regulatory crackdowns, scams, money grabs, and overall poor product quality.
Let’s say you’re a retail investor getting started and would like to invest into an blockchain start-up through their ICO. You may even be a team getting ready to launch an ICO. Either way, you are likely overwhelmed by the hundreds of initial coin offerings on offer at any one time. These few steps I am going to give have been learned through my experience investing, consulting, and advising blockchain start-ups.
The website
When visiting the website of an ICO, you need to look for substance. Typically, but not always, the higher tier start ups have spent time and money on having a beautifully laid out site that has appealing graphic design and attention to detail. Does this mean it’s worth investing in? Absolutely not. But it means effort has put into how the product is perceived. Appearance matters.
Although commonly employed, the first thing you may see is an invitation to participate in the start-ups ICO. My advice is to look past this and to find the real substance in the form of what this start-up is doing to solve a problem and how they are going to go about implementing it over the design of the website. This information should be displayed clearly and succinctly on the home page.
The community
Just about every blockchain start-up uses social media platforms such as Twitter, Telegram, Medium, Facebook, Reddit, and perhaps even YouTube.
A quick way to verify how much support the start-up has gathered is to check these platforms. Look for numbers, and gauge sentiment. If the start-up is mid ICO and has less than 1000 followers on twitter, a few hundred in Telegram, and one blog post on Medium, then little to no effort has been put into building a community.
Is this a bad sign? Not necessarily, but it makes it hard for the investor to gauge overall sentiment towards the start-up, and does raise questions as to why no community is behind the project. Generally, the highest tier projects gather massive followings organically because of the quality of the project and the efficacy of the problem they are solving.
The Team
When looking at team members, don’t assume the bio is correct. Go to their LinkedIn profiles, check their backgrounds and don’t be swayed by impressive sounding titles like ‘CEO and CTO’. Anyone can create a business and call themselves a CEO. Also look for the number of team members and the roles. You should be looking for good sized teams with developers and engineers on staff, keeping in mind it is a start-up, so the initial team will always be a bit lean.
Look for prominent and well-respected advisors. Advisors from other top tier projects or with significant stature in the industry gain a lot of credibility for a start-up. Savvy advisors will generally only put their name to a project that has substance and quality.
ICO ratings
There currently exists many websites for rating ICO’s, however be wary. It is rumoured that some take underhand deals to increase the rating of a review. Also be wary of constant ‘5 star’ scores. Many of these sites have devised their own criteria for analysing an ICO, and it could be flawed.
To date, the best ICO rating site I have found and use myself is icorating.com. There is no incentive for me to recommend this site other than it is the best I have found yet. Its still prudent to compare ratings between several sites.
Token Distribution
When looking at the proportion of tokens distributed, you need to be wary of what percentage is distributed in the public sale and what is kept by the start up. ICO’s that only give out small percentages of the tokens are increasing the risk for investors that there will be supply issues down the track.
What does this mean? Think of is this way, if only 20% is distributed in a token sale, that means the company controls 80% of the total supply. Most tokens currently have issues with liquidity, meaning they are only traded on a few exchanges. Low liquidity combined with significant holdings of the tokens by the company can drastically control markets. A large sell order on an illiquid market could significantly lower the price of the token very quickly.
Competitors
The last 12 months has seen hundreds and hundreds of ICO’s launch, many with very similar problem-solving ideas. As time goes on, it will become more difficult for start-ups to ‘stand out’ with a unique product, idea or application.
By conducting a quick google search for the start-ups idea, followed by “ico” or “Blockchain” and you will hopefully get a list of the start-ups competitors. Other resources are blogs on the blockchain ecosystem, where you can look for similar platforms in that niche market. A good blog is blackmoon crypto, but there are more.
A point to note, competitors that had successful ICO’s early to mid-2017 are likely sitting on capital in excess of $40-80 million US dollars due to market appreciation. If the crypto market keeps appreciating, operational expenditure could continue indefinitely. A new start-up launching now could find it very difficult to compete due to this.
White paper
You might be wondering why reviewing the whitepaper is last, as it is the most important piece of information to an investor. Its because it is also the most time consuming and intensive, and sometimes complex, and an investor should be able to get the core of what the project is about from steps 1 to 6 quickly before having to read it.
Our attention spans are short, and time is precious. You need to be convinced after going through steps 1 to 6 that reading the whitepaper is worth your time. Only when quality, legitimacy, credibility and substance is gathered through these steps do I devote my time to reading a whitepaper.