ICOs Explained

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Typically, a startup is a small organization looking for a stable and scalable business model. Though small in scale, these blossoming businesses have a big impact on the economy. In fact, research published by the Ewing Marion Kauffman Foundation states that startups alone account for as many as 50% of new jobs created in the U.S.

However, without the vital funds to seed and nourish them, most startups vanish on the vine. Fortunately, many funding alternatives are available with ICO events being the most recent addition. These ICOs are increasingly gaining popularity as an alternative to sluggish traditional models of startup investment and capital expansion.

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Traditionally, the typical way for startups to raise/expand capital was either from private investors or through an Initial Public Offering (IPO). Then, methods of raising capital started to change, adding institutional investors and crowdfunding to the mix. This was before the birth of blockchain technology.

When the Ethereum blockchain launched, it became possible for companies to issue their own cryptocurrency tokens and quickly became an effective method of raising capital quickly. The ICO was born.

ICOs are a type of crowdfunding. Contributors are prompted to buy the startup’s token for cryptocurrency or fiat money. Collected funds are typically locked in an escrow using a self-executing smart contract.

IPOs and ICOs serve to fund a project, but they are fundamentally different. In IPOs, the company offers investors participation in the ownership of the company and all the rights associated with ownership. In ICOs, tokens don’t refer to equity shares, and unlike IPOs, are not required to have a prototype product or service available.

Generally, all entrepreneurs need to start an ICO is a whitepaper, a marketing document that explains how they intend to utilize blockchain technology.

The chart below summarizes ICO fundraising results as of Q4/2017.

Funds raised through ICO from 2014 to 2017 – Source: Elementus

Through November 2017, the total number of ICOs has risen fivefold to 228, and the total amount of capital raised has leaped to $6.4 billion.

Such crowdsourcing is typically selected to provide much-needed funds, accelerate innovation, and achieve scalability.

Through donations and sponsorships from online investors and the public, and despite the risks involved in this burgeoning ecosystem, startups typically choose ICOs for the following reasons:

• Grant access to a wider pool of potential investors than the traditional venture-capital process.
• Ensure complete transparency, and decentralization.
• Mitigate equity anchored traditional investment.
• Optimize long processing times traditionally encountered in traditional startups funding.
• Engage a diverse community.

Whether you view ICOs as some kind of Wild West or whether you view them as a way of bringing investment opportunities to the masses is entirely up to you. With regulations incoming, ICOs will likely be forced to change, however, it is unlikely that they will be going anywhere anytime soon.

Fell down the rabbit hole two years ago. Time to write about it.

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