Why is an ICO a Better Option for Startups to Raise Funds?
Startups are the symbol of innovation and lifeblood of an economy, and funding is the lifeblood of any startup. In traditional practices, entrepreneurs usually finance their product idea from their own pocket, family borrowings, bank loans, or VC funds. In most of the engagement models, the investors or lenders had to be given a certain share in equity and startups had to comply with a tough set of terms and conditions.
With the rise of alternative funding mechanisms like crowdfunding and ICOs, many analysts believe that startups have found what they needed the most – an investment pledge without any sacrifice of equity, decision-making power, and space.
This is the reason startups are rushing towards ICOs like never before. If we look at the recent past, a number of startups raised a sizeable amount of funding through ICOs. Here are some examples of the largest: Filecoin raised $257 million, Tezos raised $232 million, Status $90 million, and Bancor raised $153 million through ICO. In total, businesses raised more than a cumulative amount of $3.8 billion (from ICOs) in 2017.
What is an ICO?
Many people perceived ICOs as another form of cryptocurrency, but it’s much more than that. The basic concept of an ICO is very much similar to that of an IPO. In one common example of a coin offering, a startup assigns a particular amount of equity per coin in the same way that equity is assigned to stocks in the IPO. Those coins (read stocks) can be traded on over 100 cryptocurrency-exchanges worldwide.
Why is an ICO a Better Option?
Interestingly, it’s not just the startups who take ICOs as a better option. Investors are also listing a number of exciting reasons for preferring Initial Coin Offerings. Their primary reasons are extremely strong growth prospects as well as the innovative model of the listing.
In addition to this, investment in ICO is a lot less-risky as compared to angel investments. An investor can easily cash out in coin exchanges, while in the typical circumstances, the cash out option is not available immediately if you use traditional methods to invest in startups.
For startups, an ICO is nothing less than a blessing. In the traditional Venture Capitalist funding model, a VC company investing into a business gets a director level position on the board. They’re also expected to be given certain types of privileges like preferred shares and due space in decision-making.
Conversely, ICOs do not typically require anything like this. If an investor buys a token, it doesn’t give her/him any position or similar advantage (with some exceptions). There are real events when a company went through an ICO and disappeared the next day without informing the investors. In these cases, the startups are likely to attract the attention of regulatory bodies which may fine them heavily. This is one of the main reasons we strongly recommend each one of our clients to follow the latest regulatory guidelines as if their ICO was labeled as a security. As in, providing investor protections, limiting the amount raised, and by having a minimum, which if not met, the startup would return all of the investments.
In addition to this, startups will find ICOs as much faster and low-cost method of fundraising. Since they’re done online, the settlement and PR costs are equally lower as compared to the traditional offline settlements. Moreover, a lower number of stakeholders/players involved will increase the profitability and chances of ‘real income’ for the businesses.
Having said that, it’s not necessary that every coin offering goes successful and raises the desired amount of money. Startups, if not advised by expert ICO consultants, may lead to spending more but getting nothing in return.
In order to make your ICO a big hit, we recommend following the best practices to release an ICO. Stay tuned tomorrow for a primer guide on best practices for launching your own ICO. In the meantime, check out this guide our founder, Jonathan Chester, wrote for Forbes titled: Your Guide to Running an ICO, for Better or Worse