Unless you’ve been hiding under a rock, you’ve probably heard about cryptocurrencies. The meteoric (and overinflated) rise of Bitcoin has firmly planted the disruptive technology in the minds of everyday consumers. And as a result, many companies looking to raise money for their business have probably asked themselves whether they should be running an ‘Initial Coin Offering’, or ICO for short.
So, what exactly is an ICO and is it a good way to raise money for your business?
An ICO is a way of raising funds that directly converts fiat currencies or other cryptocurrencies into a new token that you’ve created for your platform. There are two types of ICO: Utility Tokens and Security Tokens.
A utility token is one that exists simply to perform a useful task on your platform, akin to buying a painting to adorn an office wall (also think cars, stamps, jewellery or labour). In this instance a platform user won’t simply buy the tokens and sit on them (like a more traditional equity investment) – they will use them as part of their experience of your platform.
These exist purely for speculators who hope to see a return on their investment, which is like someone buying an artwork from an artist because they’re betting on the value increasing (also think oil trading, rare stamps, precious metals or buying shares).
Obviously, there are grey areas – the painting on the office wall bought to beautify the space can increase in value if the artist suddenly became popular. Equally, the art bought for speculation was still originally created to be admired, interpreted and enjoyed, so the owner can argue that it has a function or utility. In other words, the ‘art token’ could be seen as both ‘utility’ and ‘security’. This is important to understand as the regulations surrounding each are different. So, whether you’re looking to build something that capitalises on the revolutionary factors of blockchain to improve the world, or building something that investors are expecting to rise in value simply by existing, I suggest you get a lawyer and professional help to ensure you remain compliant to your local financial regulations.
Why might I choose a utility token?
Based on existing regulations, an ICO is best suited for a company that has a clear utility need for blockchain. This list is by no means exhaustive, but these are the main reasons why you might need a utility token to support your technology:
- You require complete transparency in the way you operate (i.e. a charity / a financial institution / a political institution / someone who handles multiple payments or acts as an intermediary)
- You are an organisation that creates or requires regular contracts between two parties where the terms are incredibly clear, and you only want the transaction to take place once the terms have been met (aka a smart contract)
- You have many digital assets and you want to give them real world, tangible properties, or so you know without doubt which one is the original
Is it right for me?
If you have not immediately recognised one of the attributes listed above in your own technology – then an ICO is probably not right for you. Even if you do think your solution has a need for underlying blockchain technology, it still might not mean you need to complete an ICO. There are many disadvantages to running an ICO over a traditional fundraise, not least because of the cost and regulatory concerns involved.
Of course, there are advantages as well. It’s a highly speculative and risky market for investors, but there’s a wild west, winner-takes-all feel to it at the moment. We’re in the midst of a dot.com 2.0 bubble and the next Googles and Amazons are likely hidden amongst the companies coming through. And there are a lot of investors who made a tonne of money in the cryptocurrency inflation now looking to diversify their rewards across a multitude of emerging blockchain innovations. So, even with the recent drop in market value, there’s still a lot of liquidity in the market. Some ICOs are raking-in huge sums of investment as a result.
In my experience, the founders who have the tenacity to succeed and an all-or-nothing mentality might want to consider an ICO. It will eat months of your life where you think of nothing but your venture for 20 hours a day, and will probably cause you to use up all your savings in the process. You also probably want to genuinely change the world and make transactions and interactions between companies and businesses more transparent.
If you fear this new world or are wary of risking losing anything, then a traditional funding raise is probably better for you.
ABOUT THE AUTHOR
John Auckland is a crowdfunding specialist and founder of TribeFirst, a global crowdfunding communications agency that has helped raise in excess of £5m for over 30 companies on platforms such as Crowdcube, Seedrs, Indiegogo and Kickstarter – with a greater than 85% success rate. TribeFirst is the world’s first dedicated marketing communications agency to support equity crowdfunding campaigns and the first in the UK to provide PR and Marketing campaigns on a mainly risk/reward basis. John is also Virgin StartUp’s crowdfunding trainer and consultant, helping them to run branded workshops, webinars and programmes on crowdfunding. John is passionate about working with start-ups and sees crowdfunding as more than just raising funds; it’s an opportunity to build a loyal tribe of lifelong customers.