The following is a guest post by Nick Rojas. Nick combines 20 years of experience working with and consulting for small to medium businesses and a passion for journalism to help readers grow.
Cryptocurrency like Bitcoin has become a mainstream currency for many businesses. As Bitcoin and other digital currencies continue to increase in popularity and value, startup founders and investors are taking notice. In fact, many startups are utilizing Initial Coin Offerings (ICOs) for funding.
Startup founders and investors are leveraging Initial Coin Offerings for a number of benefits. It allows founders and investors to create and sell their own cryptocurrency, instead of selling off equity to fund their startup ventures.
What are ICOs?
Similar to crowdfunding or IPOs, ICOs began as a way for startup founders and investors to raise cryptocurrency backing for tech projects that couldn’t be launched with an IPO.
One of the most famous ICOs was software startup Block.one, which raised over $700 million dollars. “So far, it has extracted $700 million in real money from the global public by selling tokens, called EOS, in an initial coin offering. It is by far the largest ICO ever,” Business Insider noted.
The ICO for Block.one is not a rarity. In fact, 93 percent of ICOs are funded with most netting tens of millions of dollars. One draw to ICOs for startup founders and investors is that funding can be easily achieved with a simple concept and white paper.
Should Founders Use ICOs in Funding Strategies?
It is challenging for founders to raise funding they need to move startups forward. ICOs could help founders overcome those initial challenges. But, maybe ICOs are not the best early stage funding strategy.
Avoiding ICOs in early funding could help founders avoid issues with investors down the road. The ROI and timeline of recouping investment could cause problems. Early stage funding could be better left to traditional angel investments and seed rounds. This can help startup founders find their market before issuing an ICO for additional funding.
For example, traditional angel investors could facilitate funding for series A and series B to mitigate risk for ICO investors in later stages. Founders also need to understand what it really means to launch an ICO. For example, understanding the difference between an ICO and a Token Sale.
- Taken Sale: Token Sales are the creation of a Utility Token that has specific use guidelines within the ecosystem of the startup.
- ICO: An initial coin offering is a security based on the company. It comes with way stricter regulations than that of a Token Sale.
If you’re thinking ICO to fund your next startup venture, it may be best to research the regulations involved. But despite the potential pitfalls, investors are jumping at ICO opportunities.
Investors Becoming Increasingly Interested in ICOs
ICO funding does seem to be at a slower pace than before, but this is not decreasing investor interest. In fact, as more highly reputable investment firms adopt cryptocurrency, confidence to invest in ICOs will increase.
There are also a number of online platforms supporting businesses in their transition to cryptocurrencies. For example, Uphold, a digital wallet and payment platform allows businesses large and small to utilize cryptocurrency and the blockchain for everyday business processes.
Blockchain applications are streamlining how businesses make and receive payments, secure customer data, verify identities, and more. It is also more cost-effective than using traditional financial systems due to cutting out the middleman.
JP Morgan and CME Group launched a Bitcoin Futures investment product. There are more than 125 cryptocurrency hedge funds, and leading venture capital firms like Andreessen Horowitz and Sequoia Capital are investing in ICOs.
The ICOs and digital currency investment strategies of 2017 may potentially evolve to a leaner and more profitable opportunity for startups. In fact, many investment authorities believe that those $10 million dollar ICO cryptocurrency investments will skyrocket to hundreds of millions.
Can an ICO Fit into your Funding Mix?
There is definitely room for growth and unprecedented investment opportunities when it comes to ICOs and cryptocurrency. There is one major theme that continues to pop up for founders and investors. Proving your worth with traditional investment first can make the difference.