What is the future of Token Sales (formerly called ICOs) and are we in a bubble?
In my previous article (https://medium.com/@TenX/raising-money-from-vcs-vs-doing-a-token-sale-a-quick-guide-to-best-practices-e38e7645727b ) I have laid out why token sales actually exist and how to analyze them for various companies. In today’s post I want to look ahead and try to envision the future of token sales.
Token sales seem to be a very easy way to raise money. Some companies raise 10s of millions solely based on an idea. This might remind us of the 90s where tech companies with literally no product or service also had huge valuations… just to blow up during the dotcom crash at the beginning of the new millennium.
One question I get asked a lot, is whether what we are seeing today isn’t a dangerous sign and whether an ICO bubble might exist just like a stock bubble back then just waiting to explode. Here is my take on it: Just like with anything new, it will have to be tested over time. Many companies have raised money without any actual substance and time will tell who are the good and who are the bad ones. I would not necessarily say we are in a bubble, but I am quite sure we will see the same failure rates as we always see with start-ups: Less than 1% survive. That is a fact. So, out of 1,000 ICOs, only 10 companies will actually make it over the long haul. If that surprises you, then ask yourself this: “Why should funding from an ICO promise any higher success rates than from traditional VC funding?” — You are right, it shouldn’t, it is just a different approach. The reward however is, that these successful companies can create 1000x and offset the losses on the others. So, are we in an ICO bubble? No, it is the same as with any other funding system, just more public and that is why we are more aware of it. Ask any VC out there — most of his/her investments in startups blow up. That’s just how it is.
The next question this last statement leads into, is whether such public token sales will actually replace traditional VC funding after all and cause venture capital funds to disappear. As I described in the article before, both ways serve a different purpose and if used right, they each allow you to play their strength. One challenge I see right now, however, is that too few funds are actually capable of harnessing this opportunity, as their focus and mindest is still stuck in the traditional equity venture financing world. Would such funds see the upsides of also doing ICOs, they could bring a lot higher returns to their fund investors while bringing more credibility with due diligence to the ICO sector. Some funds have already started to utilize this potential, but only when it becomes mainstream, will we see proper regulations of such ICOs. Maybe explain a bit more how it connect to regulations in the last sentence
This brings me to my third and last point: The regulation of ICOs. Such regulations could mean for example how many % have to be sold to the public, how much can be owned by the founders or what the money has to be used for. Whether such regulations should exist or not, is up for debate. My opinion is that even if no government steps in to set rules and boundaries, the market will find its own equilibrium. Some countries such as China have announced legal guidelines for ICOs (http://insidebitcoins.com/news/chinas-central-bank-will-soon-regulate-icos/53594 ), which can be a good thing, but I predict that the average investor will get a fast feel for when a token sale is fishy and when it is a true opportunity. The same has happened to crowd funding campaigns such as Kickstarter or Indiegogo over time as well.
If both startups and investors learn more about this new vehicle called ICOs or token sales, the standards of execution will rise and eventually it will be a WIN WIN WIN for all participating parties. Some might say, a party that is worth dancing on while it lasts.
- if you are a potential investor reading this, go back to one of my earlier articles and read about how I learned to evaluate ICOs successfully,
- if you are a business, learn how to structure ICOs in a proper and safe way, to use it as a a great new vehicle to raise funds,
- and if you are a VC, structure a fund around ICOs. It will help to regulate the market and you will make good returns to your investors if you learn how to play this market right.
To answer the question at the very beginning: Are we in an ICO bubble? Yes AND No. Yes, meaning that we will see most companies fail, just like any startup. No, that this is some extraordinary bubble that is going to endanger someone. As long as you play it smart and understand what you are getting yourself into, you will love the ride.
The author Dr. Julian Hosp is the co-founder and CVO of TenX.
TenX (www.tenx.tech) is a Singapore based financial service that makes any Blockchain asset spendable instantly by offering a debit card payment system to its users on the frontend and by connecting any Blockchain at the backend.