With 2017 coming to a close, many will remember the past year as the “year of the ICO.” Digital token crowdsales, commonly known as ICOs, have gained significant traction as a funding mechanism for projects harnessing blockchain technology within a variety of sectors. By June 2017, token sale monthly funding volume had surpassed VC volume within the same timeframe. Six months on, the market is continuing to expand. With around 150+ token sales active at any given time, long gone are the days of exclusivity and undivided attention. Within the space of just one year, token sales have gone from being the domain of BitcoinTalk regulars, to gaining support from mainstream social divas. The current climate indicates that token sales are here to stay, but with so many projects launching token sales and failing to meet their goal, many are asking the same question: what is it that makes a token sale successful?

Get The Basics Right

Here is the ultimate truth in token sales: there is no foolproof way to launch a token sale to guarantee it hits the cap. That being said, if you are considering a token sale to fund your project, it is essential to ask the right questions before you mobilize the resources. Going through this simple assessment will help you understand whether a token sale is, in fact, the most appropriate funding mechanism for you and whether you are prepared for such an undertaking.

1. Is your project organic to the blockchain?

Ultimately, this question addresses your ideology: are you solving a problem using blockchain technology, or do you have a solution that is in desperate need of a problem to solve? Crypto is the hottest industry sector there is at the moment and a desire to ride the wave is understandable. Successful projects do not try to piggyback a token onto a project that does not require one. Truly superstar projects represent new and innovative blockchain-based protocols and distributed applications which solve specific needs within the ecosystem and require a token to function. Disruptive potential, long-term usage, and potentially massive (trillion dollar) target markets are primary criteria that token sale investors analyze, so you need to be able articulate your vision in these terms.

2. How mature is your product?

In the current market climate, a white paper and a promise are not enough (from a practical and legal standpoint). Token sale participants, from retail through to institutional buyers have grown both discerning and somewhat jaded over the past six months. At the very least, you should have pre-existing technology that you can openly demonstrate to your token sale audience. This technology will illustrate your capacity to deliver on your token sale proposition in the long-term. Details of your project should be available on GitHub, and a technical addition to a more positioning/marketing based white paper is considered a substantial bonus in today’s crowded token sale market. From a legal perspective, if you want to release a token, you must have Day 1 utility (has to work!) at the time of the token sale — this has been communicated quite clearly by the regulators.

3. Is your team large enough and experienced enough to undertake a token sale?

A token sale is a marathon at a sprint pace, and it’s one that can make or break even the best of teams. Putting together a token sale requires that all parts of your business work in unison, all the while liaising with multiple service providers. Your team’s technical background needs to be top-notch as not only is it required to conduct a smooth token sale process and deliver the results, it will also be scrutinized publicly throughout the process. Speaking of public scrutiny, you need to make sure that at least some members of your team have a media presence and are comfortable talking to the press. Cutting through the noise is a challenge and already having thought leadership leverage is essential.

4. Are you active in the blockchain community?

Building on the previous point, you or the team technical leader need to have long-standing presence within the crypto community, since this is not a time to enter the industry by launching a token sale. Although many think that having a few blockchain superstars on their advisory board is sufficient, community engagement stretches far beyond this. A direct line of communication with your potential audience is essential, be it through conference presence, BitcoinTalk posts, Reddit comments, or all of the above. This will allow your brand to have regular visibility within an overcrowded space, and it will let you keep your finger on the pulse of public sentiment concerning your product.

5. Are you looking to raise at least $20–25 million in crypto equivalent?

At the end of the day, you have to consider the purchaser audience. Some of the smartest buyers in the space are institutional investors that purchase tokens as a way of expressing an investment thesis on a particular blockchain vertical. They typically purchase in size, and often consider the eventual development on liquidity in the token an important feature. For them to be able to purchase, hold, and add to their position, a market of a certain size and depth is helpful. Smaller offerings have a hard time getting this institutional support. If you are issuing a utility token, you should not be seeking a secondary market, but this is a consideration that might impact you nonetheless.

Consider the Real Benefits

Although the public perception of token sales is centered mainly around how easy they make access to capital, the benefits of a token sale stretch beyond financial goals. Token sales are a “trendy” funding mechanism and many praise how quick and easy they are to conduct. Those who are plugged into the market are well aware that “quick and easy” is no longer the case. So what are the real benefits?

1. It’s not (all) about the money

If you are indeed building a decentralized protocol that is organic to the blockchain ecosystem, chances are it needs numerous users (or nodes) to operate successfully. Most decentralized applications, networks, and protocols employ mechanisms in which an increase in the number of users improves the experience of each individual user. Releasing your tokens for sale to the public can automatically establish a large user base for your project, which, in turn, can create operational stability for your decentralized network. Although speculative value is still a point of consideration for certain purchasers, in today’s crypto economic market, most token sale participants are interested in the long-term success and growth of the project, rather than a quick “pump and dump.”

2. Community is key

The network participants that a decentralized project assembles throughout the token sale process are an invaluable resource for the development of this network and are just as important as the fundraising. If a token sale issuer manages to build a real, engaged community around the project, it will create a consistent testing environment for all new developments. The community will also be made up of willing network participants, who will take up vital structural positions within the network as it grows and develops.

3. Blockchain-based settlements

From a financial perspective, the token sale model has a distinct benefit that is often overshadowed by the volume of capital raised. Token sale transactions are settled through the blockchain. Technically, there are many ways to go about this, but they all require lower effort and fewer resources compared to the traditional fundraising process. Since there are no checks to clear or wire transfers to accept, the reconciliation process is usually much more straightforward (though it does require extensive preparation).

4. A way to supercharge your team

A token sale is like a crucible: all parts of your business will be put under tremendous stress; your team’s skills, durability, internal communication and capacity to deliver will repeatedly be tested in a very public environment. While many organizations crumble under the duress, those that persevere become extraordinarily equipped to deal with anything that the turbulent crypto environment throws at them. In some cases, conducting a token sale becomes the ultimate team-building exercise.

Be Very Aware of the Risks

While the benefits of conducting a token sale are considerable and have received significant praise from a variety of media outlets, many overlook the very substantial risks that issuers face. These risks stretch wider than market volatility and unclear regulatory frameworks. Consider all aspects of the impact a token sale will have on your business.

1. Your token sale will take up a monumental amount of resource

No amount of service providers will ease the tremendous workload that your team will need to undertake in the months leading up to the token sale. While good service providers can alleviate some of the burdens, many tasks will still need to be performed in-house. Consider whether you are willing and able to dedicate a significant part of your resource towards building the token sale, rather than building your project. Consider whether your team is equipped to deal with the strain, stress, and scrutiny.

2. Your project will come under tremendous scrutiny

Like it or not, a token sale is a massive and very public fundraising exercise. As such, your company, its employees, and their history will come under tremendous scrutiny. Unlike traditional fundraising, many aspects of your business will become public knowledge. You will need to release detailed plans for the projected use of funds and steps to develop your projects. While many will ask genuine questions, be it out of interest or curiosity, some will use this information for malicious intent.

3. You will be stepping into a developing area of the law

Token sales remain in the grey area of regulation in many jurisdictions. Legal frameworks are continuously extended, changed and adapted to include this new financial model and regulators are paying close attention. You will need an experienced yet flexible legal team on your side since conducting a token sale could touch upon any combination of financial regulation, securities laws, contract law, data protection, sales promotions and intellectual property. Additionally, it remains unclear how traditional VCs view this new fundraising mechanism, so you need to consider what impact it may have on your existing agreements.

4. Your token sale may not be as successful as you hope

The hard truth is that around 60–70% of all token sales do not hit their caps. The market is volatile, public opinion is continuously shifting, and many of the keen participants in early-2017 token sales are becoming jaded. You can tick all the right boxes and still come out of those grueling months with less than you anticipated. If the success and growth of your business are wholly dependent on your token sale being 100% successful, it might not be the right recipe for you.

Ways to Mitigate the Risks

Although, as we mentioned previously, it is impossible to guarantee the success of any given token sale, specific actions can put a potential token issuer in a favorable position.

Build a sturdy legal framework: bring experienced and flexible legal advisors on board. Your legal framework should suit the specificity of your project, and your legal team should be adaptable to your specific needs.

Make sure your crypto economics are spot on: the existence of a smart contract token should be embedded into the framework of your project. Alternatively, many potential contributors will see it as merely riding the hype wave.

Have a working product: having something to showcase will put you in good standing with the blockchain community and will help to create presence within an overcrowded market.

Socialize your idea in the community: remember that although your token sale audience does coincide in part with your project’s audience, you cannot equate the two.

Make sure your operational security is foolproof: token sales are prime targets for attacks and scams. Note that you are not only protecting your funds, you are also protecting your contributors and your reputation.

We will be discussing these aspects of token sale preparation in subsequent pieces. In the meantime, if you are still on the fence about a potential token sale, get in touch with the Element team. Our extensive expertise within this developing industry has shown that reaching out for advice in the early days of your planning can save significant time and expenses as your project grows and develops.

It’s a brave new world.

@TheElementGrp