It’s no secret that running an Initial Coin Offer (ICO) on the part of startups has become an attractive method, motivated by the ease of getting immediate and global investments.
It has come to the point where ICOs were carried out with the sole purpose of carrying out frauds, damaging other projects and reputable teams that used the same technique to obtain funds. This fact motivated a discussion not only regarding the frauds applied in ICOs, but it was also not possible to ignore the prominence for the question: how to proceed to another approach, an evolution of ICO thinking about real companies that need investments to start a business. Therefore, this article intends to address the problems of an ICO under another vision and to discuss a new cause, the NoICO.
In the period from 2016 to 2017 several ICOs were carried out, which when added together, resulted in billions of dollars. But incredible as it may seem, even if a project has leveraged millions, it may not be enough to build it and make it a success. This is because the money received at ICO can guide and limit the development of the project. In other words, there is a discrepancy between the value vision and the money raised in one single event. To demonstrate that this thought is valid, imagine if Uber had performed an ICO?
In 2016, Uber received a capital contribution of $3.5 billion and up until the publication of this article, the business may not have reached the apex desired by the company and its investors. So if Uber had made an ICO early in its conception, it could have raised “only” 10 million dollars. This could be reported by the media as a successful ICO. So it seems doubtful whether Uber would be able to meet the extensive roadmap proposal with only that amount or it would limit itself to the money received and only part of the proposed business would be built. Obviously it would not be the same as Uber today!
Anticipating situations like in the previous example is complex, laborious and costly. After all, this is the purpose of investment groups. However, for entrepreneurs who adopt an evolutionary model, based on proof of value, performing an ICO can be a serious problem.
The motivation for the emergence of NoICO
In early 2017, we developed a whitepaper and a strategy to conduct an ICO for the purpose of raising funds to build a shared-economy marketplace: the emergence of the startup, Letsfair. We were, in fact, ready to use the standard technique and raise the funds to start our project. When we looked for some ICO-related companies and consultancies, we were surprised by behaviors that were, at a minimum, quite divergent from any form of serious and real entrepreneurship.
One of the companies contacted was a “supposed” accelerator of blockchain projects. Early on, we were dismissed and they showed no interest because our goal for ICO was lower than desired by them, since a large part of the tokens should be reserved for them.
In contact with another company that has an ICO management platform, we asked what the rules were. Their response was simply: “We only do ICOs that aim to raise at least $30 million.” We got such a bad impression that we decided to totally forget the idea of ICO. This has motivated us to think differently about how to obtain investments.
Problems of an ICO
The weight of the lack of freedom
In an ICO, the money invested appears long before the value of the idea is proven, and this fatally is used for future results charges.
Once the sale of tokens and the receipt of money has been consummated, the community of crypto investors understands that the idea needs to go through to the end. Often, any change other than what was promised at the outset is already a bad sign and may intensify speculation. Changing the full course of business (pivoting) is an affront to investors.
At any moment, the company will feel the weight of the lack of freedom, totally contrary to the real model of entrepreneurship, which is oriented to respond to changes in an agile way.
Impossibility of new investment rounds
Supposing the company no longer has cash balance to continue the project and decides on a strategy to generate new tokens. By announcing the sale of the new tokens without any justification, it will also cause discomfort in the investor community.
The initial investors will feel disadvantaged because they do not have a real idea of the problem faced by the company, and do not know for sure if this result was due to mismanagement of the capital received in the ICO, or if there was in fact a financial planning problem, aligned with the original purpose or scope.
In the future, several projects that have performed an ICO and have not proven their worth may break down because they do not have a chance to evolve the idea correctly and naturally.
A significant portion of tokens in the hands of speculators from the start
The sale of a large volume of tokens at the beginning of the project affects the visibility of the evolution of the idea. This creates the false sense of success presented by high token prices, when in fact it is only the parallel market of future speculation and not the company’s ability to produce the proposed results.
There is no direct, clear and guaranteed commitment that the company’s results are directly related to the value of its tokens, whether understood as assets or not.
Disconnection of the company’s real value and market value of the tokens
The next day after its ICO, a company may have no real and practical results as a deliverable product, as it produced absolutely nothing but a promising campaign. Therefore, the added value of their tokens, may be multiplied several times on account of speculation and euphoria. Over time, this discrepancy between the actual value of the company versus the value of its tokens may be more pronounced.
A reference model for NoICO
The smart contract implemented by Letsfair for the creation of its own tokens served as a reference for the design of the NoICO model and has only two additional features in addition to the adopted ERC20 standard, which are:
- Finite number of tokens not released at once;
- A way to gradually release the tokens over a given period (Letsfair adopted the five-year time limit and considered this time frame suitable for its project to reach maturity).
With these two features and responsible business conduct, you can reduce the problems presented above.
The gradual release and sale of tokens allows entrepreneurs a real world orientation that is indeed full of change because it goes against the model of following the plan to the end and ending with a lack of freedom, since the investment is directed to the adaptations that the company needs. With this, the company can receive investments continuously as it shows the solution of problems with real results, always allowing new rounds of sales of tokens. Initially, since there is no ICO, the tokens are held by the company itself and this avoids the early speculation of its value, in fact associating the real value of the company with the market value of the tokens.
It is important to emphasize that the contract for a NoICO project can be put into production once the entrepreneur or team starts its work, or from the conception of the idea as a way to obtain its first investments and to make the work feasible. Finally, it is necessary to clarify that the NoICO model does not present or propose how the sale of tokens will be achieved, nor how to approach investors so that the continuous sale is promoted. This strategy is the entrepreneur’s mission.
Therefore, using a NoICO model, on the part of the startup, demonstrates that it wants to take the path of real, serious, normal and evolutionary entrepreneurship, outlining principles such as: seriousness and honesty of purpose and business growth directed to the proof of value.
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The tiger is a reference to economic planning that allowed the rapid growth of the so-called Asian Tiger countries: Hong Kong, South Korea, Singapore and Taiwan