Historically, IPOs or VC funding has financed startups for projects and ventures. Later, the concept of crowdfunding was made popular by platforms such as Kickstarter. In 2013, Ethereum, a cryptocurrency and decentralized app platform brought ICOs into the limelight. An ICO, or Initial Coin Offering, is a crowdfunding platform where investors or contributors are offered units of a new cryptocurrency or crypto-tokens in exchange for money.
ICO vs IPO
Parallels can be drawn between ICOs and IPOs. In an IPO, the company lists its stocks or shares on a public exchange, and the funds collected from the sale of these shares provides the company with funding for their project. In an ICO, the company gives investors crypto-tokens that can be traded or sold later.
With an ICO, anyone from across the globe can invest, but IPOs usually have geographical boundaries and limitations. ICO has opened a large funding base for startups that is otherwise not available. The ICO is closed when the required funds have been obtained within a stipulated period.
With ICOs, companies save on costs and cumbersome procedures that slow the growth of startups. The issuer of the tokens in an ICO usually creates a white paper that describes the platform and use of the new currency being launched. The white paper provides an investor with all the information needed to decide about investing in the currency. ICOs have raised more in capital than traditional fundraising methods, have emerged as the ‘new vehicle for raising funds’ and are revolutionizing the process of crowdfunding.
Opportunities offered by ICOs
Since the market is mostly unregulated in India, startups can avoid the cost of regulatory compliances and intermediary costs, such as giving away large equity to VCs, or fees associated with banks and stock exchanges. The NSE charges anywhere between Rs 2.9 and 7.3 lakhs to list a company and prescribes several mandatory procedures. These costs are very high for startups. Comparatively, an ICO requires funding only to launch a website. The only drawback is that due to a regulatory grey area and absence of an overseeing body, investors are wary and skeptical about participating in an ICO.
Additionally, the ROI for investors on crypto- and ICO-related investments is much higher than on traditional investments. The average ROI on crypto-assets is about 1320%, while the global average for the stock market tends to be anywhere between 4% and 11%.
Successful ICOs focus on community building and provide ways for their investors to be in constant touch with the parent company to monitor the progress of the actual launch of the company’s platform. Most crowdfunding platforms do not usually have extensive two-way communication between the investors and the company. In a successful ICO community, however, there is constant community interaction. Most ICO teams typically have an appointed community manager who only looks after the health and growth of the community. ICOs open your project to investors globally, which gives it more chances of succeeding.
Challenges of ICOs
Although India already has about 50 lakh crypto-investors and traders, the market still has large, untapped potential for ICO funding and general utility of blockchain and cryptocurrency-based platforms. However, one of the main challenges faced by companies in India is the ambiguous stance of the government in relation to cryptocurrencies. The recent circular that was sent out by the RBI had Indian-based start-ups move their base overseas to register their companies in countries that legally allow trading in cryptocurrencies. Contrary to the RBI’s stance, industry experts believe that the future looks very promising for the cryptocurrency space in India, as even the RBI is looking into launching its own cryptocurrency.
Lack of Education
The Indian market is also in dire need of awareness and education about this new class of assets that can provide enormous returns. There is a general lack of knowledge about cryptocurrencies and blockchain technology that creates a certain degree of distrust among customers and investors. Information needs to be disseminated among people to combat their skepticism. Adam Draper, the founder and managing director of Boost VC said, “I think there will always be need of trusted voices in the investment community, but what the ICO markets are showing is that the world has incredible demand for future-looking projects!”
While a lack of education about the underlying technology exists, investors are still able to comprehend the immense potential that ICO projects have, to disrupt every industry in the world.
To sum it up, in the last few years, a host of industry analysts have predicted that cryptocurrencies are a bubble. Investors are cautiously bullish; there seems to be a consensus that the ICO method of funding will persist despite ambiguous regulations. The underlying technology - Blockchain technology, is here to stay and has already seen significant adoption even by various state governments in India.
ICO has become a tool that will continue to revolutionize not just currency and transactions, but the entire financial system. ICO tokens could become the securities and shares of tomorrow; only time will tell. For now, it's up to investors to recognize the vast potential and be early adopters in future.
The author is CEO and Founder of Panaesha Capital