Initial Coin Offerings (ICOs) have become a billion-dollar business model. They offer a fast onramp into the market for fledgling companies, with a route to investor capital that can move at the speed of social media.
For entrepreneurs, the ICO means no longer having to wait for the grinding process of an Initial Public Offering (IPO) or going hat-in-hand to individual investors. It means keeping control over your entire firm rather than parceling out equity before even getting off the ground. It also means creating an early buzz around your product that can prove invaluable down the road.
In the words of Olga Feldmeier, CEO of Smart Valor in Switzerland and an expert in blockchain innovation, the ICO model combines some of the best features of early-stage investing, crowdsales, and the IPO.
As the model matures, analysts like Feldmeier have learned a lot about what makes an ICO succeed. Here are a few practices common to the very best projects.
Focus On Your Community
“Traditional crowdfunding works on momentum. If you are launching a new project on Kickstarter, for example, and you have not raised at least a third of your goal within the first day or two, investors will shy away. We are herd animals, and we follow each other; no one wants to be the first to invest.”
How can you avoid this pitfall? Launch your project with a solid community already in place. Before offering the first token, have a group of investors lined up and excited to get in on the ground floor. This is known as the “soft circle,” and it can be absolutely critical to getting momentum out of the gate.
“Companies invariably only get one shot at an ICO, so it is important to get off to a strong start by establishing a presence and generating a network of supporters and followers before embarking on a campaign.”
Engage with followers online. Network with influencers. Talk to the media and appear at any events and conferences you can find. It will all build the buzz, and then don’t let that community go. Your community will be essential not only to the launch of your ICO but also to the success of your blockchain project.
It’s called the network effect. For any project that depends on connectivity among users to generate value, network effects cause value to grow geometrically as users join the network. It also falls at a similar rate. Consider the rapid expansion and implosions of Facebook and MySpace respectively. These were network effects at work; each new user added to the value of the network and made it more likely that others would follow them.
Network effects can define a project’s value, and your community will build it long after the ICO money has been spent. Hoard those contacts.
Develop a Complete Business Plan
Your whitepaper is not enough.
“A whitepaper is a technical document that explains how your blockchain will work, but a business plan gives investors the rigor and analysis that they should require of any investment. This needs to include market analysis, product roadmap, detailed financials, and your user adoption strategy. The blockchain is ultimately about people: it’s only useful if you have people using it. How will you get people to use your blockchain?”
Publish details about the business behind your product. Address your go to market strategy and potential competition. Be upfront about your potential weaknesses and liabilities.
Along with this, be certain to establish clear financial governance. Trust is essential to the development of the blockchain industry, and developing it should be among your top priorities. Don’t wait for third parties to establish the rules that you already know an elite business should follow. Create guidelines for clear and transparent financial governance and publish them in your business plan.
Own the operations of the company you want to start, because that is what your investors are actually buying into. The blockchain is a marvelous piece of technology, but technology is only what your company does. Your business plan needs to describe what your company is and how it works, and it needs to do so as transparently as possible.
After all, trust is earned.
Think Traditional (In the Ways That Help)
While the ICO has created a brand new business model, there are still rules from traditional investing that have served firms well for a very long time.
Lock in your founding team, for example. This is a common practice for executives among major firms because it builds stability. You want your principals around for the years it will take to get your product established in the marketplace. You can do that with vesting periods, and by tying their salaries and bonuses to performance milestones.
Track your money carefully as well.
The nature of blockchain’s culture and technology make this particularly important. Follow Know Your Customer and anti-money laundering laws with precision, and hire third-party firms or auditors to help you get it right. As the money comes in, both fiat and token, it’s critical to make sure that all of your investors are legitimate and trustworthy. It’s arguably even more critical to make sure you have evidence of due diligence in these matters.
Finally, issue an ICO prospectus. Feldmeier notes:
“Our experience is that investors view ICOs as similar to an IPO, and buying tokens as similar to buying stock. It is helpful, then, to issue a term sheet, like a traditional prospectus, that includes a description of the company’s business, audited financial statements, biographies of company officers, and any other material information. This will build trust in the offering, and in the blockchain ecosystem.”
In the world of investment, trust is earned. A prospectus will show the investors that you have taken your business and their money seriously. Moreover, this is the kind of document which professionals expect. As you launch your company, a prospectus will bring in the kind of serious money that can make funding much easier now and tomorrow.
The blockchain industry is maturing. It has left the garages and computer labs and has begun launching products that will change the world. These best practices will help you join that movement.
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