In the wake of the Bitcoin explosion, the next hot topic in the world of cryptocurrency is the initial coin offering, better known as an ICO in blockchain-based business circles. While the end goal of an ICO is more-or-less the same as a traditional IPO in that it is a way for startups to raise capital, that’s where the similarities end. ICOs ultimately boil down to nothing more than a sophisticated type of crowdfunding (think Kickstarter or GoFundMe) whereby investors purchase coins with the hope that these startups will become successful and the coins will increase in value as people flock to their products and services.
The idea originated out of frustration with the traditional venture capital (VC) system. According to Alex Hern at The Guardian, “It’s no wonder Initial Public Offerings are being rethought. They’re too bound up in regulation, too late in a company’s life-cycle and too expensive to pull off to be really useful for a startup. They’re a great way of returning capital to investors, but not for funding your blockchain-based business idea.”
Unlike the traditional VC system where a startup can easily lose a year (or more) fundraising through investors who are much more interested in their ROI than they are in the actual success of any given business, with an ICO (or any crowdfunding platform), investors not only become your financial backers but they also become your early adopters, since the investment coin’s long term value is in future products or services.
But ICOs certainly aren’t without risk. Unlike IPOs and traditional VC systems, there is virtually no regulation behind ICOs, so investors really have no protections. And on the business side, while ICOs may provide a more efficient way to tap into the funding market and get a startup off the ground, if your business thrives and you’re interested in tapping into more traditional financial markets in the future, you may run into some trouble, as SEC regulators may frown upon any previous selling of unlicensed securities (coins).
Cryptocurrency has never been for the risk adverse, but that element of uncertainty is what makes this alternative marketplace so appealing to some. Would you ever consider funding a startup with or investing in a business through an ICO?