ICO fundraising has changed dramatically during 2018, due to the major bear market which has been setting its dominance on all crypto assets with no differentiation since the beginning of the year. The first quarter of 2018 has raised more money than the entire second half of the same year, which is a clear indicator that with the crypto price meltdown investors are becoming more conservative towards the crypto markets.
Entrepreneurs started to realize gradually that retail investors are not the mainstream of funds for blockchain startups anymore. There was the only way for them to survive during this year-long bear market, the founders have to approach Venture Capitals, Angel Investors, Family Offices and the like. Such professional investors demand a totally different approach than retail investors who seem to navigate through the surface rather than running comprehensive due diligence on the project. Let’s cover the main elements for ICOs, which intend to raise funds through professional investors. These elements need to be considered to meet the strict and thorough due diligence checks of VCs.
5 elements to a successful ICO from a VC perspective
1. The Team
It is very important to include the founders, CxOs, Advisors and developers in your project. Many ICOs don’t present a development team as they believe that they will hire such a team once the funds are raised. However, the reality is that it is very difficult to find experienced team members around the world even if the funds are available. This is mainly due to the thousands of ICOs which have been taking place globally since 2017. Venture Capitals will be verifying each and every team member, so if a co-founder is appointed as a CEO the VC wants to see that this individual has successfully lead other startups or at least big scale projects which demand similar skills. The same applies to the advisors. Unfortunately, the market is full of self-proclaimed advisors with zero real-life experience, or those who just provide their names and photos to the ICOs, but never engage with the projects they are assigned to. VCs will make sure that each member is actively involved in the project, fulfilling their duties depending on their assigned title and speciality. In case some of the team members don’t have the minimum needed experience, not actively involved in the project, or the worst is not linking their LinkedIn profile at all to the project, this could lose the trust of a VC in a startup.
2. The Project Idea
The project idea should be very clearly explained and projected in a whitepaper, one pager, website and an investor deck. All those different sources will be needed by different people who may show interest in the project. VCs will focus not only on the idea itself, but also on value proposition and key business differentiators of the project, so to see that:
the team have already invested the needed effort & money (MVP or prototype is needed here);
how the team will be able to successful rollout the project (business plan is needed here);
penetrate the market (marketing plan is needed here);
snatch a reasonable market share, through the unique value proposition and key business differentiators;
and most importantly, how to scale up the project over time (expansion plan is needed here).
A great project idea is one which can create unique value, has a high market demand, strategically positioned in the market and most importantly scalable at a cost efficient way into a continuously growing market.
3. The Token Economy
Each ICO must provide clear explanation of how blockchain technology will make their project better and that it is actually needed. In addition, the token distribution among the different project activities must be explained in great details. The big mistake from most of the ICOs is that they just provide a pie chart with the numbers without any explanation of how those numbers were reached.
The founders should avoid giving away too many tokens to marketing campaigns, bounty programs, etc. Such groups will have very high incentives to sell the token at any price on the same day it gets listed, also no major discounts should be given even during the private sale. Some projects give as much as 90% discount on the token to private investors. Such insane discounts will definitely meltdown the price of the token within the same day or week it is listed on an exchange.
Lastly but not least, the ICO should incentivize its users and investors to either transact on the platform in order to earn loyalty points for example, or to hold on the tokens for long periods in order to receive a share of revenue or have access to certain features. There are other incentives and factors which could assure the price appreciation of the token like, buy-back of the token and token burning. If the token economy does not incentivize the token holders to hold on their tokens rather than exchanging them to fiat currency, the chances are that the token will highly depreciate over time.
4. The Marketing Campaign
Any project without a strong marketing campaign will face one clear destiny, which is failure. Running a comprehensive marketing campaign is extremely important to the overall success of the project. ICOs should allocate a 6 digit number for their marketing campaigns in order to succeed in this fierce and highly competitive area, specially after a year-long bear market. A strong marketing campaign will attract investors and will eventually generate demand and organic growth for the ecosystem. Many entrepreneurs try to cut corners by running the marketing themselves or hiring inexperienced students. The bad news are, such practices has proved to fail over and over again, specially with the increased competition and decreased liquidity. Nowadays, only high quality projects get funded mainly by professional investors and funds.
5. The Legal Framework
Missing a fully legally compliant framework for the ICO is surely a deal breaker for all professional investors. No venture capital will take the smallest risk to engage into illegal activity, this means that if your ICO must file for a security token instead of a utility one, then you should do this immediately. This applies especially to ICOs raised in the U.S. Also you should at least make sure that Know Your Customer (KYC) and Anti Money Laundering (AML) processes are implemented in order to comply with as many jurisdictions as possible.
Some entrepreneurs believe that if they run an ICO from a certain jurisdiction, lets say Malta as an example, then the Maltese law will only apply. The truth is that if in the U.S. your ICO is considered as an STO, but you have not filed with the SEC, you will end up in trouble selling to U.S. citizens. Before approaching any market make sure that your ICO does comply with the local regulations over there, otherwise indicate clearly in the disclaimer that this ICO is restricted for certain regions. An experienced lawyer is needed here to advise you on the best way which suits your project needs in particular.
As we can see, entrepreneurs have to put so much effort into running a successful ICO compared to what it used to be a year ago. The costs and efforts to run an ICO are getting so close to running a traditional start-up and eventually announce an IPO. There are a lot of projects which run only the private sale to professional investors, while skipping the whole public sale of the ICO. During this period the founders give up on quite a bit of equity, just like how traditional start-ups do it. With the increasing regulatory requirements and VC demand, ICOs should rethink whether going on a public sale is of a big added value, or they can survive based only on private sale, preferably to accredited investors towards whom regulation is much more friendly