ICOs — Removing the Pain of Fundraising and Simplifying Investment

At this point, there seems to be no better way of securing funds while aligning incentives with an initial community than through an ICO, owing largely to the global investor pool curious to experiment in this new and exciting market. In fact, blockchain ICO projects have raised more than $7 Billion in the first half of 2018 and the number of ICO launches is growing at an astounding rate.

To investors, ICOs seem like a clear win: both the time-to-liquidity and above average returns are a significant and non-trivial improvement compared to conventional investing. When you can make an investment in a *solid* project at their ICO, and within 6 months receive an average of 2–3x return and liquidity, one can make few compelling arguments against such investments.

The Golden ICO Rule: Solid team, Ambitious Tech, Modest Caps

I stumbled upon Bitcoin and the blockchain space in 2013, and figured early that the fastest way of gaining an in-depth overview, was by putting skin in the game, and starting to work on some of the problems I was seeing. Thus, in 2014 I joined the NEM core team, led the business, community, and marketing efforts, and helped bootstrap the project from a mere bitcointalk post, to a global platform.

After leaving NEM, much of my focus shifted on supporting some of the world’s most ambitious blockchain teams through capital, connection and expertise — sharing some of the useful stuff I have learned at NEM. Each of these startups has brought home a valuable and sometimes painful lesson that had to be learned, yet a critical puzzle has been revealed in the process.

To the best of my knowledge, there are three things every ICO project needs to get right in order to successfully bootstrap. Bootstrapping however does not mean that it has succeeded, but rather that it has taken the first important step in the right direction. The three things are

gather the right team

build an ambitious technology people need

raise a modest cap compared to your perceived value

The first two points are crucial and their importance cannot be overstated. Everything else depends on them. But the third one is new and counter-intuitive, hence much less appreciated. Overly large caps are perhaps the most common mistakes ICOs do, and it’s a worrying trend we’re seeing among ambitious ICO projects.

Beware of Perverse Incentives and Broken Token Economics

A useful way of viewing ICOs is as a first exercise in community acquisition. Thus the ideal ICO will set things up in such a way so as to attract a critical mass of its target audience.

Given the above incentives, ICOs are a potent force enabling more rapid and frictionless startup iterations. Yet one of the core premises of a high potential ICO is based on sound incentives and token economics. Should these be compromised, the ICO implodes, likely backfiring on investors.

Modest Caps: No Distractions

Large raises correlate strongly with market correction, and perhaps an even higher failure rate in the long term. Historically, the top performing blockchain startups have had modest ICO caps. Conversely, almost all large ICOs have undergone significant corrections once listed on exchanges. Usually, the larger the ICO, the larger the correction, a few going so far as to correct 90% of the price paid in the ICO.

One of the most important assets behind startups is their focus. When ICOs raise too much money from day one, much of the team’s focus can suddenly shift or simply be stolen away from building the product, to managing and reinvesting large amounts of raised capital, and losing the hunger for execution according the initial vision.

A useful heuristic would therefore be to not maximize the project value at the ICO, but rather intentionally limit the offer, filter for strategic and resourceful partners, and position it for significant long term growth.

Elrond, a Pragmatic Approach to Hypergrowth