The Problems of ICOs: Company Evaluation
Since a few months, ICOs or Initial Coin Offerings are the hottest and most discussed topic in the area of investment and blockchain technology. An ICO is basically a crypto and blockchain based Initial Public Offering. You can refer to ICOs also as IPCOs – Initial Public Coin Offerings.
In the recent weeks, companies were able to raise as much as 100 million dollars worth of cryptocurrency within just a few hours. An unbelievable deal which is impossible in traditional business angel or venture capital financing. An ICO became the easiest way today to raise outside funding by selling equity.
Complete Lack of Company Valuation and Evaluation
Many say that the biggest problem of an ICO is the lack of regulation. In fact, ICOs are basically completely unregulated. However, the lack of regulation might not be the largest problem. The problem is rather the lack of company valuations and evaluation. Tiny teams of as much as two or three founders are able to raise millions of dollars worth of cryptocurrencies within a few hours without showing any prototype, real product, market validation, great team, nor knowledge.
Most ICOs are solely based on a white paper – which is a technical scientific paper describing the underlying technology of the product. The White Paper is basically the business plan or business model canvas for crypto startups. These white papers are highly technical. I highly doubt that all investors or speculators understand them. As a result, speculators invest into companies without a prior evaluation, without a working product, without an established team, without even understanding the technology behind it.
ICOs are the current Penny Stocks
ICO investment scenarios are comparable to penny stock speculations. Investors try their luck by betting smaller or larger amounts on stocks which are worth only a few pennies. If these stocks dip below $0 they lost their whole investment. If they suddenly rise from $0.20 to $1.80, they realized a 900% return on investment.
Currently, I would categorize ICOs into the same category. Exactly like penny stocks, most ICOs are pure speculation. Speculators try to buy equity from companies for as low as a few cent per share and they hope that the company will succeed and that they realize an ROI of several thousand percents on their investment/speculation.
ICO Startups and their Teams: Hackers versus Entrepreneurs
The second problem I see with ICOs is the lack of real entrepreneurship. Yes, the blockchain technology is a great and disrupting technology. But this doesn’t mean that a crypto startup which builds the Uber or WeChat on a blockchain will automatically succeed.
It is easy to write a short white paper describing the technology. This happens in every university daily. But does it guarantee the success of a team? No.
The hardest part is not to write a technical white paper or even a prototype. The hard thing is actually bringing the product to the market. During this process, many teams mess up and as a result, whole startups fail. And don’t forget: after the product has been built, it needs to be sold and marketed.
So does a $100 million crypto funding and a group of smart hackers ensure that a product is properly sold and marketed? No.
As it is true with regular companies, the founders and the team are the most important assets of the company. Without great leadership and a talented team, every company will fail. Venture capitalists take a lot of time to examine the founding team of a startup. This process is always described as more important than the actual idea or product. This point is getting lost completely when it comes to current ICOs. Currently, the focus is solely on the solid white paper rather than how great the team is working together.
We can definitely say that when a hacker – which understands cryptography and the blockchain technology perfectly – raises several millions of dollars with their ICO, it doesn’t mean that his company will succeed. The lack of leadership qualities, the lack of a talented team, and an overall lack of product-market-fit will burn every satoshi of even the highest ICO.
Venture Crypto Capitalists need to Form
As a result, we will see many ICOs fail dramatically. Many investors (or more appropriate: speculators) will lose their money. Only when the market realizes that nearly all startups going for an ICO are completely overvalued, more professional funds and venture crypto-capitalists will form. Only then will cryptocurrencies and ICO companies become a more stable investment opportunity for investors.