Not your father’s IPO: How to hold a successful ICO
Cryptocurrencies like Bitcoin and fundraising rounds called Initial Coin Offerings (ICOs) have generated a lot of buzz this year, but what are they and how can you take advantage of them to fund your startup?
Let’s start with the basics: Bitcoin is a digital currency that was launched in 2009 and introduced the decentralized, public ledger known as blockchain. ICOs are a new way for entrepreneurs to raise capital directly from investors through the issuance of a proprietary cryptocurrency that can act as a utility token or a store of value (coin). These innovations have disintermediated the financial industry and started an upheaval in how many people view money and investing.
If you believe everything you read in the news, holding a successful ICO is easier than an Initial Public Offering (IPO). Making that assumption isn’t entirely wrong but ICOs still involve a lot of hard work.
Before even considering asking the public for money, a startup needs to publish a whitepaper detailing what their ICO will fund, what use the token or coin will have and what the path to profitability is. These whitepapers often resemble a combined offering memorandum and business plan and are essential to any successful fundraise. A bad whitepaper will result in a poor ICO.
Assuming your ICO whitepaper is published to your startup’s website, it’s time to start the ICO. These offerings usually have multiple rounds including a pre-sale and a general public on-sale but most are majority subscribed to during the pre-sale, and often those pre-sales are bought up by crypto-focused hedge funds or friends and family. Regardless of who takes part in the ICO, all transactions are carried out using smart contracts that are immutable on the blockchain and can be continuously updated as necessary.
If successful, an ICO can achieve many of the same results as an IPO, but there is a major difference, appealing directly to investors cuts out the middlemen: investment bankers, lawyers, regulators and exchanges are removed from the equation along with their added costs (which can be upwards of 15% of the total fundraise) and bureaucracy. This makes ICOs more cost effective and quicker to market. If current trends continue, ICOs could put a major dent in traditional banking revenues often derived from IPOs.
Though ICO activity has cooled off a bit since the summer, when some companies earned hundreds of millions of dollars virtually overnight, these are still an effective way to quickly raise capital on the cheap. But doing so still requires due diligence, documentation and a business plan.
A cottage industry has sprouted up to help the many entrepreneurs who are considering ICOs, but may not know how to chart a course through this still-evolving process, especially as regulators begin to more closely scrutinize the offerings. These firms are often able to prepare all documentation for less than $30,000, a steep discount to the 15-20% of an IPO often paid out to the more traditional players in an equity offering.
“This year has seen an explosion of interest in ICOs,” said Prospectus.com Senior Strategy Advisor Evan Fisher, a former sell-side investment banking veteran now consulting fintech firms on ICO best practices. “Having the proper documentation in place for both investors and regulators is the most important part of any successful ICO.”
Fisher is experienced in helping startups frame their value proposition within the context of properly-constructed information memorandums and investor deck tear sheets and stresses “…the help founders need to ensure that when regulators start to take a closer look at ICOs and cryptocurrencies, it pays to be as transparent as possible.”
“ICOs are a more modern way for innovative startups to raise capital,” Fisher said, adding “but the penalties for fraud remain the same as they ever have. Make sure you are ready should the need ever arise.”
Ryan Gorman is an independent media strategy consultant with experience managing and executing B2B and B2C communications and marketing programs across a broad range of financial firms including ETF and mutual fund issuers, hedge funds, fintech startups and ICO issuers, a boutique investment bank and more during stints at two top PR firms.