Are initial coin offerings (ICOs) dead? Not quite so, with ICOs having raised more than $11 billion in 2018, nearly double the amount raised in 2017. Are they still relevant and the best funding technique in this maturing market? Probably not.
Launching an ICO has been the de facto way for blockchain startups to raise funds. Traditional funding methods such as an initial public offering (IPO) where private companies go public and sell shares to investors is a rigorous process, with corporates having to ensure that regulatory and compliance measures are met. ICOs on the other hand, provide an easier way for companies to raise funds through cryptocurrencies. They also democratise the fundraising process, enabling anyone and everyone to contribute with minimal restrictions.
However, given that ICOs are largely unregulated with many projects failing to fulfil investors’ expectations, ICOs are increasingly getting a bad rap, especially among savvy investors. Research has shown that over 81% of ICO’s were scams, being unable to complete project development duties with the raised funds. An example is OneCoin, an infamous ICO which never had a blockchain related product or solution but managed to raised over $350 million in its ICO through a widely believed Ponzi scheme.
In this ever-evolving and maturing industry with growing regulatory and institutional focuses, new forms of funding techniques and instruments have emerged such as reverse ICOs, security token offerings (STOs), initial exchange offerings (IEO) and more. These instruments help address limitations and further improve on the current ICO model in areas such as regulation, quality assurance, and community outreach.
A reverse ICO is an alternative form of ICO, in which an already established company tokenises their platform, has recently emerged with increasing institutional interest and participation. Who can forget Telegram’s oversubscribed ICO, which in the middle of the bear market raised $1.7 billion (the biggest amount of funds ever raised for an ICO) just in its presale?
The growing trend of Reverse ICOs — notable examples
Successful fundraising in the midst of the bear market: Lition
- Just last month, Lition concluded its ICO, raising $2 million in under thirty minutes
- Before Lition decided to run an ICO, they were already a licensed energy supplier with real customers and generating revenues in Germany. In April 2018, Lition launched their blockchain-based P2P energy trading app to offer clean and cost-effective energy to over 41 million German households
First high profile ICO by a mainstream company: Kin Token by Kik
- Kik, a social media app launched in 2009 with 300 million users and 15 million active users, was the first mainstream company to have transitioned to the tokenomics model
- Kik completed their ICO in September 2017, securing nearly $100 million in funding
Highest amount raised for an ICO: Telegram Open Network (TON)
- Telegram, the global instant messaging service and a popular communications channel for ICO communities with over 200 million monthly active users, launched its ICO in March 2018 — the “Telegram Open Network” (TON), a blockchain network which aims to offer superior features above that offered by Ethereum blockchain
- In two rounds of pre-sale, Telegram raised $1.7 billion from fewer than 200 investors, hitting its initial target of $1.2 billion. With the successful of its pre-sale, Telegram cancelled the public ICO sale launch
- The ICO garnered much interest from traditional venture capitals, such as well-known Silicon Valley investors Kleiner Perkins Caufield & Byers, Benchmark and Sequoia Capital
ICO riding on the name of an established company: KODAKOne
- Kodak, one of the most established and long standing companies in the camera and photorgraphy industry, partnered with RYDE Holding as its official brand licensee for the ICO of KodakOne in May 2018, a blockchain-based image rights management platform, with its own KODAKCoin cryptocurrency
- Interestingly, when KODAKOne’s platform was unveiled in January 2018, Kodak’s shares went from $3.13 per share to $12.75 in just a few hours
- Instead of a typical ICO, RYDE Holding raised funds (at least 4.1 million) via a simple agreement for future tokens (SAFT) where rights to future tokens are sold to accredited investors
ICO by acquisition: BitTorrent
- Popular file-sharing software provider BitTorrent was acquired by Tron Foundation, a blockchain startup with one of the largest blockchain protocols for decentralized applications in July 2018.
- BitTorrent completed its ICO in January, raising $7 million in 15 minutes via Binance Launchpad, a token launch platform similar to an initial exchange offering, where the ICO is held on an exchange platform
As of last month, there were over 2,500 cryptocurrencies available, with the top 10 cryptocurrencies holding over 85% of the market capitalisation, at $106.76 billion out of $125.93 billion. This highlights how majority of the tokens (also known as shit coins) are essentially worthless, holding minimal value.
Reverse ICOs, as highlighted in the examples above, with their existing user base and proven track record can help bolster investor confidence in a project by providing an alternative way to sieve out quality investments. We highlight key trends and advantages of reverse ICOs below.
Increasing corporate and institutional attention
As the market matures, we are seeing growing institutional interest and attention as established companies and big players become more aware of blockchain technology’s potential.
Yoni Assia, CEO of eToro, one of the largest trading firms in the world, tweeted on BitTorrent’s ICO back in January, highlighting how “BIG” it is with “100M users and nice concept for token economics”, while Elon Musk, CEO of Tesla shared during an interview that bitcoin’s structure “is quite brilliant” as an alternative to conventional money.
The eyes of leading companies are watching, and reverse ICOs have become a growing phenomenon as big players from traditional industries look to enter the market.
Backed by solid foundations and proven use cases
“Are you investing or speculating?” is one question every savvy investor should ask themselves when considering any investment.
Being already established, companies running reverse ICOs typically already have a working product and a proven track record, with real-world users and existing communities. Conversely, traditional ICOs typically do not have a working product at the point of the token launch, backed only by a minimum viable product and a flimsy white paper. This increases the risk to an investor which a reverse ICO model negates.
Focus on enhancement rather than adoption
Even if a startup holds a great value proposition with solid technology and use cases, all these will still amount to nothing without a community or userbase. And this is one great advantage which established companies holding reverse ICOs have over blockchain startups, with their in-built communities and ready use cases.
For example, with over 100 million of total existing users on BitTorrent peer-to-peer file sharing protocol, BitTorrent would have a ready group of loyal users for its blockchain enhanced platform, rather than having to focus on attracting and onboarding new users.
Reverse ICOs, the be-all and end-all?
The ICO model has seen various improvements and iterations over the past few years in the fast-growing and ever-changing landscape of the blockchain industry.
Reverse ICOs seem like the natural way forward; towards the mainstream adoption of blockchain technology as the industry continues to mature and more established players enter the market. Just last month, major U.S. bank JP Morgan announced its foray into the blockchain industry, rolling out of its own digital currency, the JPM Coin.
Of course, past performance is by no means a determinant of future success. And while reverse ICOs could act as an effective proxy in helping investors assess the legitimacy of a project, it is still important for investors to perform their own due diligence for each and every investment.