Initial coin offerings (ICOs) are now a very popular way for blockchain and cryptocurrency projects to raise funds for their operations. It is a similar idea to an initial public offering (IPO) in which a company goes public by issuing shares in return for a monetary investment.
Blockchain and cryptocurrency projects were struggling to raise sufficient funds on good terms through traditional methods such as from venture capital firms. Therefore, they had to look for an alternative method to get investment. ICOs issue tokens in return for a monetary investment.
These tokens usually are tradable and usually will serve some purpose in the platform or system within the given project.
It was in 2017 during the cryptocurrency boom that ICOs began to garner a lot of attention. Their popularity grew further in the early months of 2018 thank to an influx of institutional investors. The messaging app Telegram for example raised nearly $2 billion through their ICO for their new blockchain related project.
However, large numbers of these ICOs fail. When they get their funds, they struggle to hit the lofty milestones they have set out and do not reach the promises which they made to investors. A study looking at 4,000 ICOs showed that more than half of these projects end up failing within the first four months after holding their token sale.
This article looks at some of the most common reasons why these projects end up failing.
A lot of those companies holding ICOs often made lofty promises about what they were going to deliver on a given timeline. They presumed the best case scenario for every aspect of their business and did not account for potential failings they would have.
Some thought they would be able to create quality platforms or systems for their projects. However, a lot of the time this was not possible.
Others spent too much money on marketing their token sales and on the likes of design rather than putting this money into building their given platform. Others went through typical startup behavior when they got funding and spent their funds on new cars and took holidays etc.
They thought that having raised the money that they could relax and enjoy the fruits of these funds. They did not consider that the hard work was only beginning when they secured investment.
While the lofty objectives and timelines look good to potential investors, it is disastrous when they end up failing to reach these milestones. This often spells the end for the project as reputation is everything in the investing space. They no longer have the funds to continue developing and no more investors will be willing to get on board.
Most ICOs will fail within the first few months because their product or service does not have enough demand or provide enough value for the given market. Therefore, it is vital that before starting an ICO that the company does their market research to ensure that there is a sufficient demand for what they are planning.
After receiving this market research, they may decide to go down a different route or pivot the plans lightly to capture more of the market. When an ICO launches and they soon find out that there is not enough demand for their goods or service, then there is not much they can do but shut up shop.
A lot of those starting ICOs will have a background in the technology and development side of things. They are not always going to have much experience when it comes to starting and operating a business.
Inevitably, this will end up causing trouble at some stage down the line. A lot of people with little to no business experience operate these ICOs and do not understand the requirement for there to be regular reporting, measurements and auditing.
They were oblivious to the needs of the investor to be kept in the loop, as well as failing to meet the standards needed when raising money from investors. A lot of ICOs ultimately end up in front of a regulatory body for failing to meet their compliance requirements.
The likes of the Securities and Exchange Commission (SEC) in the US has shut down numerous ICOs for failing to meet securities laws for example with their issued tokens. This is why it is vital that ICOs have experienced professionals in the business side of the offering to ensure that these requirements are being met.
As mentioned, a lot of those people holding ICOs were from more of a development and technology background rather than having much experience in business. Therefore, they did not really understand the importance of things like brand identity.
They skimped on design and marking campaigns to keep people in the loop and excited about a project. It was not uncommon for an ICO to not issue any communication for weeks at a time.
Naturally, this is not going to stand well with investors or potential customers. You can have the best product or service in the world, but if it is not being seen by anyone, it is going to be useless. Therefore, a lot of ICOs ended up failing because they were not good enough in communicating with investors and customers.
At the end of the day, an ICO needs to tick all of the boxes in order to survive. There is so much competition out there and a lot more expectation now that the ICO sector is a couple of years older. The authorities are keeping a closer eye to ensure that compliance standards are being met and there is a general hesitancy by a lot of people to invest in the ICO space at the moment.