Raise Money for Your Startup: Should You Use An ICO to Raise Capital?
The initial coin offering (ICO) revolution is gaining momentum in 2018 and many entrepreneurs are now shifting their focus from using traditional means of raising capital towards using ICOs. So let’s look at what’s leading them to this sudden transition and assess if ICOs can be suitable for every type of business.
How companies are using ICO for their business funding
Until recently, venture capitalists were the major source of funding for most startups, but the scenario seems to be changing now, with most of them favoring ICOs. In 2017, ICOs were successful in raising digital tokens worth approximately $3.6 billion, which is more than any other means of early-stage venture capital sourcing.
Here are a few companies that launched successful ICOs in 2017:
- Storj Labs, a market leader in providing decentralized cloud storage solutions, launched STORJ and raised money through an ICO on May 19th. Within 6 hours of their books opening, their ICO hit the $20 million mark.
- Blockchain Capital, an investment firm that mainly invests in blockchain companies, closed at $10 million in approximately 6 hours on May 10th.
- Brave, a web browser that was founded by Mozilla’s co-founder, launched its BAT ICO on May 31st and generated approximately $35 million, selling out in under 30 seconds. The majority of the sales were made via tokens, with Ethereum used as the mode of payment.
What are the key benefits of raising funds through an ICO route?
An ICO mainly allows companies to fund the development of blockchain-related services through the sale of tokens, which enables coin holders the right to participate in and gain benefits from blockchain. The price of the tokens is based on the market supply and demand for the specific cryptocurrency, and is free-floating, with their value being determined by the network of key participants and cryptocurrencies, not having any intrinsic value, nor existing in physical form.
Tokens do not offer any ownership rights to the investor, nor claims on any asset. Instead, they provide user rights related to specific projects.
An ICO provides a decentralized investment opportunity to a large market by offering the company’s tokens to a large base of diverse investors. There is also greater liquidity for the token holders, as investors are allowed to trade their tokens for similar projects after the completion of a brief lock-in-period.
In a nutshell
It’s important to remember that ICOs may not be appropriate for all kinds of businesses, and if it is used as just a currency to trade on the exchange, it may soon crash. Thus, companies that do not find any value by using blockchain solutions and that do not rely on this technology to solve problems, may not find ICOs to be a useful funding route.
The key question that every company considering an ICO needs to know is: can it be integrated into their business model in a meaningful manner? There are many blockchain startups that may not have fully-developed products, yet are now creating their own tokens and may be able to see some great results. For example, Friendz, which has been operating in Italy, decided to work with blockchain solutions and has now launched its own ICO.
Similarly, industries such as banking, retail, real estate, healthcare, security, ride-sharing startups, along with government and education sectors, can reap the benefits of using blockchain solutions.