The dawn of the Initial Coin Offering was one of the greatest disruptions to business financing since the creation of shares. But here’s the thing – as with the creation of shares and the stock market, the majority of the first wave of ICOs were terrible from inception through to execution. The market needs to be reconsidered and a new order needs to prevail. Our CEO, Paul Cliffe explains further.

I’ve been reviewing ICOs recently. Yep, I’ve become one of ‘them'. It started with ICO Bench – after being accepted as an ‘expert’ (I use that title as that’s how I’m described on their platform, I personally don’t think there are any experts in the blockchain economy, it’s too young), I began sifting through many of the ICOs that open themselves up to scrutiny by listing on there. I’m a harsh judge. My average score is standing at 2.9 out of 5 at the moment. We, as in BVP, have also started to assess ICOs on demand for our clients. This allows us to deep dive and see what we think of the ICO from many different angles, before giving a verdict of whether or not it is a viable investment opportunity.

The overwhelming majority of projects we’ve been asked to assess have all fallen foul of being investable. They pose too great a risk due to a number of factors.

Let me tell you a story to better your understanding of what we see:

A 22 year old walked up to me in Starbucks yesterday. He told me about this idea he had that would change the world. Not only would it change the world, but there would be such a demand for the service that this idea created that the special tokens he’d create for people to pay him for this service would be worth 1000 times more than they’re worth now. ‘Wow’ I thought, ‘So, how many people use the service at the moment?’. ‘None, but I think everyone in this city will use it next year!!’, came the reply. ‘Okay, well what does the User Interface look like then?’ ‘Oh it’s amazing, so user friendly, intuitive. Anyone can use it. All you do is change your dollars for tokens at the point of service and away you go.’, ‘Great, can I have a try?’ I excitedly asked, thinking I was looking at the next big thing whilst finishing my americano. ‘Well, I’ve not built anything yet. But when I do it’ll be sooo amazing!!’ ‘Hmmmmm, okay. So, you’re building it at the moment?’, ‘Well, no. I’m selling the tokens now and I’m using the proceeds of this to create a minimum viable product.’ ‘Really. How much do you need to make the idea a reality?’ ‘$1million, but I want to raise $100million, y’know, cos the demand will be immense!!! Will you back me for, say, $10million and I’ll give you 14 million tokens. That’s a 40% bonus and they’re gonna be worth loads more once I launch this amazing idea.’ ‘What happens to the other $90million????’ ‘………Marketing?’ ‘Get out.’

Nobody would put up with this nonsense in Starbucks, but promote it on bitcointalk and Reddit instead and all of a sudden the idea is the greatest thing since sliced bread. Pay a few thousand people in these tokens to promote your ICO and then suddenly everyone has heard of the project. Hey presto, what was a fruit loop disturbing my coffee in the real world is now a millionaire due to the internet. But here’s the real lunacy of it all – the tokens you got in return for your real world money don’t give you anything until the idea is built. Furthermore, the 22 year old is under no pressure at all to deliver. He doesn’t answer to investors. He doesn’t even have to produce anything, keep anyone updated. Instead, he can just disappear with your money.

We’ve all heard the joke about the teenager who buys the dead donkey haven’t we? For the uninitiated:

A teenager, looking for a donkey to help on his parents’ farm, responds to an advert on Craigslist for ‘1 donkey, used, $50 ONO.’ After buying the donkey, it dies on the walk home, so he complains to the seller. ‘Sold as seen’ the seller responds and refuses to refund. Two weeks later, the seller sees the teenager he ripped off parking a Bentley outside the local store. In a state of shock, he asks the teen , ‘How come you were buying a cheap donkey a fortnight ago but now you’ve got a Bentley???’ ‘Well, after you refused to refund me, I came up with an idea. I created a raffle for a talking donkey. It went viral and I sold 2 million tickets at $10 a pop.’ ‘Surely you had to give all the money back!!?? How many people complained?’ ‘Just the winner.’ ‘Surely he tried to sue you?’ ‘Nope, I just apologised and refunded his ticket.’

This joke, as funny as it seems, isn’t too far away from how ICOs have ended up working. Maybe the team didn’t mean to rip people off at first, maybe their hearts were in the right place and they had the best intentions of using the money raised to complete the project. But what’s easier – complete the project and try to make a success of the developed platform, spending every last cent on promotion and development, or don’t try and walk away a multi-millionaire?

Human nature is to take the path of least resistance, and with nobody holding any rights to demand results from you, why wouldn’t a young project team take the latter route? Yes, it’s fraud by false deception, but a fugitive with means is very difficult to catch and law enforcement agencies have bigger fish to fry. Even if you are caught, if your accountant is creative enough and you’re in a zero percent tax jurisdiction, it was your salary for the year and the project couldn’t be completed with the money that was left.

This is a cynical take, admittedly, but with failure rates as high as 95% within 12 months of ICO end dates, it may not be too far from the truth.

So, it’s fair to say that the majority of ICOs are junk. So what can we do about it?

We need to find a way to create a more level playing field for both founders and funders in the ICO market.

Block Venture Project have launched a service to create trust between projects and the funds they need to succeed.

INTRODUCING BVP ESCROW

We have introduced an escrow service that creates a new level of trust for project backers. No longer do people investing in projects using our services have to worry about their funds being misappropriated or stolen by the project team. As an example, if one of our clients decide to back a project to the tune of $10million, a roadmap with costs associated for every stage would be agreed between the funder and the project team. At each step on the roadmap, the funds would be paid to the project team on a monthly basis, and if the project team do not deliver on their promises, or disappear, then the remaining funds would be safe. See the simplified example below:

This is just one way in which we help to mitigate risk for our clients, whilst making projects a more viable investment for them. It also helps project teams to raise funds as there is now a layer of trust built in to any transaction for our clients.

But what of the market as a whole? How do we consider projects and how can we judge their potential?

Well, we have developed a framework here at Block Venture Project to help our clients see what could be a potentially good investment at ICO.

A simplified version is as so:

Tier 1 ICO – already a functioning business with healthy revenues pivoting to blockchain technology. Perfect use case for tokens and seemless sales funnel for purchasing tokens to use on the platform. The tokens create an ‘insular economic model’ for the platform and all users must pay in tokens o use the service. Funds raised will be used to expand the service further, perhaps to market or develop the platform further.

Tier 2 ICO – created a blockchain based product which has beta users testing it. Perfect use case for tokens, created an ‘insular economic model’ for the platform. Funds raised will help the platform scale up and be marketed to create a greater demand.

Tier 3 ICO – MVP available, good use case for blockchain and tokens create ‘insular economic model’ with platform only accepting tokens. Funds raised will develop full platform, market platform to create greater demand and money aside for legal, operational and platform evolution costs in future.

Junk ICO – a whitepaper, no MVP. Good use case for blockchain and tokens. The majority of ICOs from the last 18 months have fallen into this category, some have been a massive success too.

For more details on our framework and how we work with ICO projects to create a better investment opportunity for our clients, please get in touch through our website.

Further to our framework, we have also created a concept called the ‘ICO backstop’, helping to mitigate investment risk for our clients. More on that next week however.