Raising Capital through an ICO (Initial Coin Offering)

A friend of mine kept nagging me to buy Bitcoin when it was around $900. Honestly, the whole concept of cryptocurrency seemed a little wanky. For those of you that don’t know, Bitcoin is the first cryptocurrency enabled by blockchain technology which debuted in 2009.

The founder(s) of Bitcoin remains unknown to this day and is only known by the pseudonym, Satoshi Nakamoto. Anyway, I finally caved in and started buying Bitcoin when it hit $1300 and at the time of this writing it’s valued at more than $7,200 (which really makes me wish I bought more).

In 2010, if you bought $100 worth of Bitcoin, it would be worth more than $1 M today (the highest value of Bitcoin in 2010 was 39 cents).   The staggering rise of Bitcoin has led to the rise of countless cryptocurrencies.  In fact, Coin Market Cap currently lists over 1000 cryptocurrencies.

Similar to an IPO (Initial Public Offering), a cryptocurrency will have an ICO (Initial Coin Offering).  For example, Ethereum debuted at 40 cents and has a value over $300 at the time of this writing.

While I was covering TechCrunch Disrupt 2017, I witnessed the ICO of SparkleCoin, a cryptocurrency backed by diamonds, which had a countdown punctuated with a confetti canon (I always enjoy a good party).

Initially, when I heard the concept of ICO, I shrugged thinking that it’s another cryptocurrency in a crowded market.  Why would I speculate on another cryptocurrency?   However, ICOs have evolved beyond cryptocurrency -it’s been a way for startups to raise capital.  A startup can assign an amount of equity per coin in a similar way that equity is assigned to stock in a publicly traded company. With blockchain technology, a company’s coin can easily be traded on various exchanges (CryptoCoinCharts lists over 100 coin exchanges).

I talked to an angel investor and she said that she preferred to invest in companies that have done an ICO.  One of the reasons is that she can cash out a lot earlier in an exchange whereas with a traditional investment in a startup, she may never have the option to cash out.

For a startup to raise money through an ICO, they should expect to pay for about $500 K in legal fees (this is cheap compared to an IPO which may cost north of $5 M – typically it’s about 7% of the revenue generated).

iComplyICO, a Vancouver BC based startup, aims to drastically reduce the cost of an ICO  by streamlining the legal, compliance, and due diligence procedures that traditional IPOs must go through today. iComplyICO CEO, Matthew Unger, said that his goal is to reduce the cost of a legally compliant ICO to below $100 K.

Here are examples of some successful ICOs for this year:

  • Filecoin ($257 M): A blockchain-based storage network and cryptocurrency
  • Tezos($232 M): new decentralized blockchain that governs itself by establishing a true digital commonwealth.
  • EOS($185 M): a blockchain architecture designed to enable vertical and horizontal scaling of decentralized applications
  • Bancor($153 M): enables built-in price discovery and a liquidity mechanism for tokens on smart contract blockchains.
  • Status($90 M):  an interface to access Ethereum, built for Android & iOS.

As you can see, it’s possible to raise a tremendous amount of capital through an ICO at the fraction of the cost of an IPO.  With that said, the SEC has declared that some ICO’s are actually securities and subject to regulations.

Recently, the SEC charged two companies, REIcoin Group Foundation and DRC World, of defrauding investors with their ICOs.  In these case, the two companies claimed to have cryptocurrencies backed by Real Estate and Diamonds respectively (and it turns out they didn’t). So investors, beware!

For startups, an ICO can be an amazing vehicle to raise money; there’s less red tape and the costs are a fraction of going public. If you are thinking of raising capital through an ICO, you need to consult with legal counsel that’s well versed in this field.

Personally, I foresee that once the regulations and procedures for raising capital through are fully established, IPOs will go the way of the dinosaur and be replaced by the more agile and leaner ICO.

 

By Rich Foreman, CEO / Apptology and Director of Startup Grind Sacramento. Rich co-authored the book Tap into the Mobile Economy and his blog has been listed in the Top 20 Mobile Marketing Blogs of 2014.  Follow Rich on Twitter at@ApptologyCEO or attend a Startup Grind Sacramento Event.

 

 

The $400 K Exercise

The idea of creating a SaaS based project management platform for the construction industry came from Todd Robertti while speaking to his father, an industry veteran.  Todd who is also well versed in the construction industry, as well as in software development, knew there was a lot of potential for improvement.

In developing Linkd, Todd and his team had a goal of completing their MVP in time to demo it at the Startup Grind SOCAL Regional Conference.  Although they got accepted into the conference, they did not make the top 20 startups which had the opportunity to pitch to investors.

However, Derek Anderson, Startup Grind CEO, liked their product and offered to put the WireFlare team in front of investors if they could get 5 potential customers to write $5k checks each for future services (the checks could be voided and were only to prove market validation).   A funny thing happened during this exercise; the potential customers actually offered to invest in WireFlare and they inadvertently raised $400 k.

Since then, WireFlare has hired 5 developers, was accepted to the IBM Global Entrepreneur Program, Oracle’s Velocity Program, and Amazon Activate.  In addition, WireFlare was one of the top 50 companies to present, and pitch to investors, at Startup Grind Global 2017.  In May of 2017, WireFlare raised another round of money, expanded their relationship with IBM and introduced plans for incorporating AI through the use of Watson. WireFlare’s platform, called “Linkd”, will be released this September.

The take away from this tale is that ideas, help and guidance come in all forms.  Listen to those around you that want to help, and believe in your product.  More importantly, listen to those who criticize, accept setbacks and be ready to pivot.  Validate, understand and thoroughly research your market. If you build something with expertise and true demand you might even get your potential clientele to invest in your ideas.

 

By Rich Foreman, CEO / Apptology and Director of Startup Grind Sacramento. Rich co-authored the book Tap into the Mobile Economy and his blog has been listed in the Top 20 Mobile Marketing Blogs of 2014.  Follow Rich on Twitter at@ApptologyCEO or attend a Startup Grind Sacramento Event.