ICOs have raised over $1.75 billion for blockchain startups in 2017 alone. That's more than 5 times the total in 2016. The ICO (or Initial Coin Offering) is a new paradigm that can accelerate companies and teams in the development of valuable services, technologies and products. Traditional VCs who are stuck in pre-2017 business models are rapidly being left behind with disclosed funding of less than $400 million in 2017 -- currently less than 20% of the total funding activity. In 2015, VCs controlled over 96% of the funding. Times are changing - and with break-neck speed. There are a variety of reasons traditional VCs are being rapidly disintermediated, but that's probably best saved for another article all together.
ICOs are going into uncharted territory, day by day, week by week. An increasing number of ICOs are being designed from the onset as scams. Others may have good intentions, but their efforts will fail dismally and investors' money will be lost. The SEC is struggling to keep up and determine how to define and regulate ICOs to help protect investors. Meanwhile, it's the "wild west."
The list may not be complete, but I've counted at least 20 new ICOs launching tomorrow - September 1st. Yes, that's 20 new ICOs in a single day - more financing deals than were disclosed by traditional VCs in Q2 2017.
The ideas being put forth that you can "invest" in tomorrow range from a Russian real estate developer who wants to use your funds to build residential apartments and heat them using cryptocurrency miners, to a Japanese blockchain-based social media network similar to Steemit, to a company that wants to offer "Reverse Merchant Services." What does that even mean, you ask? Instead of a merchant paying VISA or American Express a percentage to process transactions, this company wants to pay merchants a percentage above and beyond the sale to accept their cryptocurrency to clear transactions and accelerate mass adoption. Interesting. But is it sustainable? The list goes on. There's even a new company that can help you launch your own ICO in 2 weeks. And, guess what? You can even buy tokens for it to have voting powers and reap the rewards of future ICOs for yourself with deep pre-ICO discounts! The possibilities are endless. In a separate article I'll share some of the more interesting and unusual ICOs underway.
But for now - here are 7 key factors to consider if you're thinking about jumping in to these waters:
What is the utility of the token? Does it do something that really requires a token or is it just a means to take money from you?
Are investor funds securely escrowed and governed by a smart contract?
What are the economics of the cryptocurrency that will determine it's value?
What are the qualifications and credentials of the founders? How transparent and accessible are they?
Is there a minimum viable product, and has the code been published?
Has the code be validated by an unbiased source such as ICO Monitor?
Is there a reasonable vesting period for the founders and advisers?
There are plenty more factors to consider to conduct proper due diligence on an ICO. What are your thoughts about how investors can further protect themselves when investing in ICOs?