ICOs have completely democratized how companies raise funding.
For the first time ever, people around the world have been given the opportunity to become their own venture capital firms, identifying blockchain businesses with great potential and investing in exchange for tokens, which accrue in value as their blockchain network grows.
Despite the bear market we’re currently experiencing, there is a long list of ICOs that are still hoping to make a mark by revolutionizing their respective industries through blockchain technology. If you’re thinking of launching an ICO, here are 10 common mistakes to avoid.
- Lack of regulatory compliance
Many ICOs fail to comply with local and international regulations, particularly when it comes to registering their tokens as a security. Most tokens function as a utility which means that primarily they are used to pay for goods and services within their blockchain ecosystem. However, they can also be considered a security. Security tokens more closely resemble traditional stocks that pay dividends and require companies to register with the SEC before issuing them.
Securities are legally classified by the SEC under the ‘Howey Test’.
The Howey test evaluates whether an asset is a security based on the following criteria:
- It is an investment of money
- There is an expectation of profits from the investment
- The money invested is in a common enterprise
- Any profit comes from the efforts of a promoter of a third party
To avoid being considered a security, the asset has to reliably fail at least 1 of the 4 criteria. Today, most tokens that are released are technically considered securities.
During your ICO, you must make sure you avoid providing access to tokens in countries where the regulations are uncertain or less favorable to token sales (like the USA or China). You should also consider restructuring your token sales under a SAFT (simple agreement for future tokens) agreement, which is a legal template that helps blockchain businesses to launch and issue tokens in a far more regulatory compliant manner.
However, perhaps most significant is the understanding that blockchain companies that wish to avoid being labeled securities by the SEC must develop a more decentralized, community-driven structure like Bitcoin or Ethereum.
“Bitcoin is not a security because it is decentralized: there is no central party whose efforts are a key determining factor in the enterprise. In addition, Ether is also not a security because the Ethereum network is also decentralized. – Says William Hinman, head of the Division of Corporation Finance at the SEC.
From the perspective of the SEC, it seems like a decentralized, community-driven structure demonstrates a stronger commitment to creating real value as opposed to seeking short-term profit, which implies that fewer fraudulent actors would be involved in the project.
- Inability to differentiate
Launching an ICO in 20182019- you must find a way to stand out by offering unique solutions to fundamental problems that require decentralization to work. At the very least, you must also have an MVP developed, an organically built community of early supporters, and a series of legitimate partnerships and LOI’s from reputable institutions. All these factors will help you establish credibility in the currently over-saturated market.
- Lack of business model
We’re already seeing nearly 50% of the ICOs from 2017 fail due to the lack of a sound business model to propel them through the bottom end of the hype cycle. Simply relying on funds raised from selling tokens is not going to be enough to maintain a globally distributed business operation. The most successful blockchain companies understand that disrupting major industries is going to take more than disruptive technology. Partnerships are being forged, and high-level business executives are being recruited to help these companies create sophisticated revenue strategies, particularly for tokenized Dapps where the traditional rules of supply and demand require re-examination.
- Lack of technical knowledge
Blockchain companies differ from your typical consumer app business in that founders must have a strong grounding in the technical aspects of the business. With apps, founders can typically get away with just being good at sales or marketing. However, blockchain integrates technology into all aspects of a company’s operations, so it is very important that you build your knowledge of the various consensus protocols, have a basic understanding of smart contract coding languages like Solidity and are also able to recruit and communicate effectively with qualified developers to build your Dapp.
- Poor value proposition (does it really need a blockchain?)
‘Blockchain’ and ‘decentralization’ have become 2018’s buzzwords, yet that doesn’t justify you using them to raise money for your business if you don’t actually know why they’re necessary. Before launching an ICO, you must first ask yourself; does my business idea really need blockchain technology to work? Could it be more effective with a standard app that is centralized? Do I need tokens for any other reason besides raising money? Do my tokens have some sort of utility? Answering these questions honestly will help you clarify whether what you’re building actually needs blockchain technology to work.
- Poor marketing/community building
Blockchains are all about community, and you need several developers to work on your project long before it proves its value. If you’re building your own blockchain network, you need people operating nodes so they can verify transactions. Perhaps more importantly, you need participants to promote the project across social media and help recruit more members. Blockchain companies typically use their tokens as an incentive mechanism to motivate people to perform all of these tasks. However, if the value proposition of the blockchain application is not compelling enough, the token incentive models will not be enough to motivate people to promote the project. Over time, the true value (or lack of value) of your tokens will be revealed, and new members will either flock or flee based on how others perceive your project.
- Poor Token incentive schemes
Launching a successful token requires more than just code and a good marketing plan. You also need a strong understanding of how economies function so that you can organize your Blockchain ecosystem around the right kind of incentive schemes that enables value to be exchanged between participants in a self-sustaining way. In addition, knowing how to price your token, how many you’re going to produce, and whether they will be mined or minted is crucial before you launch an ICO.
Bad token economics is another common mistake, particularly with regards to projects that raise too high a market cap ($100m or more) for their ICOs without having a clear approach to what they plan to do with the funds or how it will serve to grow their blockchain network.
- Bad team and advisor makeup
Today the most important indicator of a successful ICO is the team. Investors need to see a team of talented and experienced developers who know the blockchain space very well and have been involved in a handful of high profile blockchain projects that have also launched an ICO. The same rules apply when it comes to advisors. You’re looking to bring on board highly experienced people who understand the blockchain space and are also knowledgeable about fundraising. The more you embed your project in a network of successful entrepreneurs and advisors, the more valuable your project will appear to investors.
- Poor communication
ICO investors are not shareholders in a public company. They don’t get the same rights to quarterly reports or access to business performance information. Therefore, the only thing they can rely on is you being as open as possible regarding any progress you’re making with the project. This is important before you launch your ICO, but even more critical after you’ve raised your funding. Always communicate to the public via Telegram, Twitter, YouTube, Reddit or your company website or blog. You should be sharing updates at least once a week or every 2 weeks. Often the bad news is more important to disclose than the good, as it will let people know that they can trust you even when things aren’t going well.
- Developing an MVP and raising prior funding
Let’s face it, the days of launching an ICO with nothing but a business idea and a white paper are long gone. Too many people lost money on scams and premature business concepts for the market to risk investing in those kinds of projects anymore. Outside of the team, one of the biggest positive indicators of a promising ICO is whether they’ve already developed a minimum viable product (MVP), whether they’ve secured funding from prior investors (this is important because of validation from ‘experts’), and whether their MVP has some type of user traction (also important because of validation). Just because investors are interested in buying into projects early, does not mean they are willing to buy in first. Validation from sophisticated investors and from users is crucial to get the public on board to support your project.
Launching an ICO is an incredibly challenging task that requires multiple diverse skill sets from a talented and experienced team. Yet even with all of these components, mistakes can still be made. The best advice is to seek mentorship and guidance from those who have launched previous ICOs. Exchange ideas with them and learn about the intricacies of selling tokens, building a community, and transitioning from an early stage project into a well-funded startup. If you follow these guidelines and absorb as much information as possible from previous successful ICOs, your company should be in a good position to raise lots of money, even in this current crypto bear market.