“They that will not be counseled cannot be helped. If you do not hear reason, she will rap you on the knuckles.”–Benjamin Franklin
One of the best actions any entrepreneur can take is to recognize areas where his or her expertise is lagging and find others who are willing to provide advice and guidance.
In the ICO world, any proposal that is to be taken seriously likely needs an advisory team. Typically financial professionals or experts in the field the ICO will address, these advisors theoretically provide the intellectual underpinnings to help the ICO’s management team successfully launch the ICO, start the business, and stay ahead of compliance regulations.
However, this raises some interesting questions. Can an ICO be vetted by its choice of advisors? For what should you as an investor be looking when evaluating an ICO’s board of advisors?
What is an ICO Advisor?
Think of an ICO advisor as a guide of sorts. A good advisor can take an ICO, which tends to be no more than a vague idea at the beginning, and help build a roadmap for the ICO, the proof-of-concept, and actual production. This may entail soliciting the help of someone savvy in the technology needed to make the ICO work or finding accountants and lawyers that can help manage Know Your Customers (KYC) compliance issues.
To evaluate an ICO’s advisors, the first step is to try to make sense of the ICO’s advising strategy. Ask yourself: “If I were starting this ICO with this management team, would these be the advisors I would choose?”
Many ICOs offer significant bonuses to advisors. This has spawned a market for “off-the-shelf” advisors, where ICOs lacking the time or experience to form an advisory team on their own can sign up with a third-party advisory provider. Among these companies are the Aragon Group and the Vanbex Group.
While going this way is not necessarily bad and is significantly better than having no advisors at all, use of these services suggest that there was no existing relationship between the advisory board and the management board before starting the ICO planning and that the advisors may have no true stake in the ICO beyond the advisor/client relationship.
How to Vet an Advisory Board
When looking at the advisory board of an ICO, one should:
- Google the advisors and check their LinkedIn pages. An advisor should have work experience and education commensurate with the advisory role expected of him or her.
- Check the companies for which the advisors currently work. Do they have a financial or ownership stake in the ICO’s intellectual property? Do the advisors work for consultancy groups? If so, do the consultancy groups have a good track record?
- Find out how many times the advisor in question has advised ICOs in the past. You may have reason to be concerned about an advisor’s freshman effort, but an advisor that has a long ICO advisory resume may be a hired gun.
- Consider whether the advisory board makes sense. If an ICO managed by recent college graduates, for example, only has technical advisors, you may be justified in asking where the managing board is getting its leadership or legal advice. Likewise, a lack of technical advisors may show an overconfidence in the management team’s capabilities.
- Ask “Is this ICO using advisors to cover for a bad idea?” Similar to the notion that an elaborate story typically covers a lie, a large and impressive-looking advisory board may be distracting from structural failings in the ICO’s concept, management, or intentions. The reality is that most ICOs use advisors to give their projects more recognition and to improve their positions when the ICO begins. It is important to recognize when an advisor is just a prop.
Three Examples that Prove Advisors Matter
While developing a vetting strategy, it makes sense to look at how several failed ICOs handled their advisory requirements.
- Inchain. Inchain, an insurance-based bonds investment platform, ran its ICO from October 26 to November 26, 2016, raising 57.972 BTC. Failing to raise its minimum funding target, it was forced to refund monies to all ICO participants and cancel the ICO. The proposal behind the ICO showed significant problems, including no proof-of-concept for an unfamiliar concept, no investor protections, and limited management experience. Inchain listed two business advisors on its whitepaper: the founder of an investment solutions provider and the head of the finance team for an insurance firm. There was nothing to suggest that Inchain or its team had enough knowledge to successfully manage the ICO or the resulting business. This oversight did not escape the notice of the ICO community.
- ARK. When ARK was first announced, it produced a lot of positive buzz. An arching protocol to interconnect blockchains and allow for services that use non-native tokens bore the potential of completely rewriting what an altcoin is. Imagine an altcoin that is directly exchangeable for another the way fiat currencies are or an Ethereum dapp that can access the Bitcoin blockchain. This could have changed the economic reality of the world. However, with no clear proof-of-concept, unready technical claims, and lopsided early participation bonuses, ARK was able to raise 6,034,853 LSKs, but only 132 BTCs. ARK’s use of co-founders and developers as advisors formed a closed circle, where no new ideas could come in and where there was no real sense of debate and discussion which could have yielded a more positive result.
- Kibo Lottery. Allegations of the management and advisory teams being involved in previous scams sunk Kibo Lottery, a decentralized lottery without the government-sharing scheme state-based lotteries have. Even though Kibo Lottery raised 290,000 ETH, questions of whether the team even understood the randomization technology that is the heart of their platform eventually painted the ICO as a likely scam.
Andrew W. Houston, the founder of Dropbox, once said:
“No one is born a CEO, but no one tells you that. The magazine stories make it sound like Mark Zuckerberg woke up one day and wanted to redefine how the world communicates [by creating] a billion-dollar company. He didn’t.”
The reality is that between idea and production, there is a lot of work and a little luck. The unsettling truth is that most ICOs today will fail; from July 1st to September 25th, 2017, 59 percent of ICOs failed to meet their funding goals.
For an ICO to be successful, it must have the right people either running it, advising it, or preferably, both. Taking the time to research who will be giving the advice may give you insight into whether the ICO will succeed or whether it is an unsustainable promise. While it is impossible to know with 100 percent certainty if an ICO will fail or succeed, paying attention to the red flags may help you to safeguard your investments and reduce your risk.