Initial Coin Offering is the amalgamation of blockchain and the crowdsourcing. A start-up from anywhere on this planet can raise money from the pool of small investors without selling the stake in the company via ICO.
There is a reason start-ups in India are concentrated in the big cities like Bangalore and Hyderabad as many venture capitalists and angel investors are operating in these cities and it is easy to find the investors there. The funding cycle of start-up goes like ideation, seed funding, Venture capital funding and finally the Initial public offering. At each stage the founder has to present the promising business model in front of Investors and if the investors like the Idea then founder has to dilute its stake or the ownership of the company and give it to the investor in return of funds it gets. This process of fundraising is cumbersome and many times by the aggressive fundraisings the founder loses the controlling stake in his own company.
The other way a start-up can raise money is via crowdfunding where the start-up promises to provide early and free or discounted access to the product or service they will develop in the future. There are many crowdfunding platforms available on the Internet, and you may have acquainted with one of them in your life. Crowd funding platforms are not localised and evade the problem of location and ownership dilution. A start-up from anywhere on this planet can raise money from the pool of small investors without selling the stake in the company and with the promise that it will provide extra benefits to the investors compared to the future users.
Initial Coin Offerings (ICOs)
ICOs can give huge return opportunity. The second largest ICO of all time, Ethereum, gave return of 4,50,000% in 4 years of launch.
We can say ICOs as modified version of the crowd funding from the pool of investors. It is the amalgamation of blockchain and the crowdsourcing. A start-up which plans to launch its ICOs in the market will launch its own blockchain coins, just like bitcoins, and instead of giving early or discounted access to the investors it will give them its coins which can be redeemed in future to get the product or services the start-up will develop. In exchange of coins the investors will provide either other cryptocurrency like Bitcoin or Ethereum, or the fiat money for the development of the product or the service of the start-up.
To get more idea about it, suppose my website shivamnag.com plans to launch an investment software which will revolutionize the way people invest in the stock market and for development I need funds. As a founder I do not want to go to Bangalore or any other city, meet an investor and dilute my ownership. So, to raise funds, I will launch my website’s coin, say Nag coins, based on blockchain and say, one Nag coin will equal to Rs. 1000. I want to raise Rs. 20 lakhs for the development of the software. Therefore, I will offer 2000 Nag coins to the investors and if they like my idea then they will buy Nag coins from me. In future they can buy my investment software from the Nag coins at discount. Additional benefits of blockchain coins over the traditional crowdfunding are that the investors can buy them anonymously and there will be a secondary market where these coins can be traded.
From past few years many start-ups are raising funds through the route of ICOs, especially the start-ups working in blockchain space. World’s first ICOs was launched in 2013 by a blockchain asset building start-up Omni then known as Master Coin. Ethereum, a cryptocurrency, followed the suit and launched the second most successful ICOs of all time, leaded by NEO, also known as the Chinese Ethereum. At the launch of Ethereum ICO one token cost $0.31 and at the highest in 2018 it was trading at $1391. That is whopping 4,50,000% return on investment.
In India ICOs are not popular because of the stringent stance taken by the Reserve bank of India to ban cryptocurrency trading in India, which was later lifted off by the orders of Supreme Court. Still, there were few Indian origin start-ups which chose the route of ICOs to raise funds. These are Drivezy, WandX, Nucleas Vision and a few more. Drivezy’s first ICO was launched in Japan to raise $5 million, and it was subscribed in just 50 seconds.
ICOs Vs IPOs
ICOs differ greatly from the traditional Initial Public Offering (IPOs). When an investor buys a company’s IPO, he buys the claim over the company’s assets and profits. With a substantial stake buying of an IPO, an investor can sit on the board of the company to govern the day-to-day activity of that company. While when an Investor buys an ICO of a company he does not get any claim on the company’s assets or the profit rather he gets the share of money stream that company generate. Like with Drivezy, a car rental service, its 1 rental coin gives the investor the benefit of renting out the car or he receives the pay-outs each time that car is rented out to someone.
The traditional IPO route involves lots of regulations, requirements, and paper works. The IPO process is cumbersome and before IPO a start-up must have to raise a significant amount of funding from private investors. IPO is a last step in funding saga and cannot be exploited when the start-up needs initial funding. Whereas ICOs do not require any regulations and can be offered by just a web page and little knowledge of blockchain and that too at the initial stage.
With no regulations and easiness to offer an ICOs, many are offered every day on the web out of which 80% are fraudulent or do not reap to anything at all for the investors. Though ICOs provide far superior returns than any asset class, they are riskier too. Investor must do due diligent research before investing in any ICO.
ICO’s Future
In my opinion, blockchain is the future of transaction. Eventually people and government will adopt it and then ICOs will be in the mainstream of funding. China is racing ahead in the blockchain space by launching its first blockchain currency, E-renminbi, and E-wallet which I covered in one of my previous articles. (To Read that article Click Here). With more and more start-up raising funds by ICOs route, government around the world will come with rules and regulations which will protect investors from the ICOs scam and at the same time let the start-ups raise funds.
ICOs can also bring back system like the barter one where we can exchange a token of one company to another in an exchange of services from one another and that too without any fiat currency. Governments will not like this as this will take away a good taxing opportunity from it.
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Disclaimer : Investing is tedious task and it becomes more when you deal with cryptocurrency. There are lots scams going on, so please be aware before investing. This article is only for educational purpose. I am no one to suggest you any investing ideas. Please do your due diligent research or ask your financial advisor before investing in asset class. You can find sources of this article on my linkedIn profile. Feel free to DM me.
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