Hey there, as an entrepreneur you’re almost always interested in money. After all, without capital your chances of succeeding are sorely limited. You need it to pay employees, build prototypes, run marketing campaigns and occasionally go to Walmart for Doritos and Red Bull. (No self respecting bootstrapping entrepreneur goes to Whole Foods.)
But what is money?
For the sake of this post I’d like to challenge your preconceptions. Money is not dollars, it’s not scraps of green paper and it’s not what’s on the inside of your Venmo account.
Money is a symbol of power. It grants the possessor the ability to shape the world around her. In its purest sense, money is a mutually agreed upon mechanism for interchanging power (or energy) between two people or organizations. I give you X amount of money and you give me 8 hours of your time, for example.
So, what makes money valuable?
Only one simple factor — trust. As long as both sides of the transaction believe in the value of money, then business can be made. However, if the trust fails, no amount of money will convince the seller to part with his or her goods or services.
For centuries governments have been the guarantors behind money. At first, they promised to maintain a store of hard assets (gold, silver, land…) to back their currencies. And later, they switched to backing the value of their currencies solely with their names. Have you ever heard the phrase, “backed with the full faith and credit of the United States”?
Today in the United States, money is not even issued by the government. Reach in your pocket and pull out a dollar bill. You will quickly see that it is in fact a “Federal Reserve Note”. In the United States, money is created by private banks who act as its guarantor.
Cryptocurrencies are a new type of money.
Instead of basing their value on a promise, they are backed by mathematics. In 2009, an anonymous computer scientist known as Satoshi Nakamoto created the world’s first cryptocurrency called BitCoin. At the time they were worthless. Their purpose was to prove the concept that digital currencies could be created and exchanged.
Today each BitCoin is worth more than $9,000.
There are also now more than 8,000 cryptocurrencies on the market. Over the last 8 years, an entire worldwide community has blossomed around the idea of creating money that doesn’t depend on any third party institution or entity.
That market is now worth almost $200 billion and is growing at a furious pace.
In my opinion, there are three fundamental reasons behind the growing influence of cryptocurrencies. First and foremost, because for over fifty years governments have been using the current system to scam the public at large. Once there was no hard asset backing the currency, governments around the world learned that increasing the supply of money in the market was a powerful way of manipulating the economy without people noticing. Sure, if there’s more money in circulation each note is worth less, but almost nobody who’s not an economist actually thinks about this.
Second, those who do understand the game are making a killing. Has each BitCoin increased in value from zero to $9,000 because the bits in a computer are suddenly more valuable? Of course not. Primarily, it’s because the value of the currency on the other side has plummeted. Compared to the U.S. dollar, the supply of BitCoins grows almost imperceptibly.
Third, by definition cryptocurrencies are anonymous and stateless. They can freely move from hand to hand without being encumbered by governments and banks. You can literally move a fortune in BitCoins from one place to another on a scrap of paper. This, of course, worries government agencies to no end.
As an entrepreneur you might be asking yourself, “what does all this have to do with me?” And the answer is funding.
An Initial Coin Offering, or ICO, is when an individual or organization creates a new cryptocurrency and offers it for sale to the public at large. This year alone, over $2.27 billion has been raised to finance new projects through this method. For the first time ever, in the second quarter of 2017, ICO fundraising overtook early-stage VC fundraising.
This new method of financing startups has taken the Wall St. crowd by storm. Dedicated hedge funds are popping up and big-name venture capitalist companies are entering the market left, right and center. Perusing the major finance sites like Bloomberg, Forbes and Reuters will give you an idea of how prominent these blockchain initiatives are becoming.
Until now, the majority of these projects have been focused on technology. They have mostly been financing infrastructure companies whose major purpose has been to create the underlying technological architecture necessary to create a viable cryptocurrency ecosphere. But this is quickly changing.
As cryptocurrencies become more universally understood, the opportunities for all types of projects will grow exponentially. Already ICOs have been used to finance everything from video games to movies to real estate initiatives. As we’ll see, the upsides of using an ICO to fund your project make this pathway an increasingly realistic alternative for all types of startup projects.
But how does all this work? What do you need to do to run an ICO and what are the risks involved?
Obviously, I’m no lawyer and I would never pretend to give anyone legal advice. While the sector is still under-regulated, both the IRS and the SEC have given guidance about what is and isn’t acceptable.
From a tax point of view, the IRS has stated that digital currencies should be considered as property. They are assets that can be purchased and sold, and are subject to capital gains taxes. In the United States they are not considered to be actual currency.
Also, the SEC has stated that there are two types of cryptocurrencies or tokens. First, there are utility tokens that exist to serve a specific purpose within the context of a specific use case. For example, a token that can be redeemed for a product or service at certain websites or a token that has a specific purpose within an application. Utility tokens according to the SEC are not securities and are not subject to the rules and regulations regarding securities.
Second, are tokens whose purpose is purely speculative. These are tokens that promise a return on investment or payout dividends. These tokens are considered securities and must meet all of the compliance requirements required by securities law.
For most startups, offering a security token is beyond their scope. To be fully compliant you will need to carefully navigate a complex legal landscape rightfully designed to protect investors from hucksters and scammers. So, unless you are fully prepared to carefully meet all of these requirements, my advice would be to only consider launching a clearly defined utility token.
In either case, be sure to seek professional legal counsel.
With that out of the way, how does an ICO work?
Basically it is a hybrid between a traditional crowdfunding campaign (think Kickstarter or Indiegogo) and an IPO. Your goal is to build a community of people who believe in the intrinsic value of your project and who are willing to purchase your tokens.
It’s important to note that in most cases the participants of your token sale will not be buying shares in your company. They do not have voting rights and they do not participate in the profits you generate (all of these would clearly put your token into the securities side).
Instead, you are offering them a stake in the intrinsic value of the token. They are evaluating the utility of how the token will be used and will decide for themselves if they believe that this value will increase in value over time.
To make all of this happen you will need to put in place an entire process. You will need to write a white paper that explains in detail your project. You will need to create a website and establish messaging channels that foster conversation and engagement with your future buyers. And finally, you will need to convince them that your project is serious, credible and capable of executing your vision.
To help in this process, I’ve created an extensive planning guide that you can download for free here.
Setting up and running an ICO is no small task. You will need to design, implement and execute an entire project that requires many moving pieces. To give you an idea of the scope of the project, here is a short list of some of the tasks you’ll need to carry out:
In general, my experience says that you’ll need to plan on investing between $40,000 to $80,000 in initial seed funding to accomplish all of these tasks.
You also need to be prepared to start the planning process three to four months in advance of your ICO launch date. Running an ICO requires making sure that many separate areas of action are correctly coordinated and executed in the right order.
The upside, however is enormous.
How much money can you expect to raise? Obviously, this will depend on your project and how convincing it is to your audience. The Civic ICO raised $33 million, the MobileGo ICO raised $53 million and the Bancor ICO raised $152 million and these are just a few examples.
My recommendation is to focus on your project more than the money. What are the problems that your project solves? How important are they to your audience? What expertise and know how do you bring to the table? These are the factors that will make or break your ICO. Then ask yourself a few simple questions. How much do you realistically need? Can you present a clear and credible plan that shows how you’ll leverage these funds?
Remember, the goal of the ICO is to enable you to convert the vision of your project into reality. You need to transmit a passion for solving a real and pressing problem and then convince your audience that you’re the team that can solve the problem.
By using an ICO you are not giving away the farm. You will be free to employ the funds you raise as best you see fit and will retain complete control over the project. This, however, does not mean you can then ignore your audience. For your project to succeed, you will also need to have a clear plan for what happens AFTER the ICO.
Where will your tokens be traded? How and when will buyers be able to use them? How will you keep your audience engaged and enthusiastic?
If, from the very beginning, you approach your ICO as a holistic long-term project, your chances of success will be much greater. The people who you’re asking to purchase your tokens are not stupid. They have well calibrated BS detectors and are understandably wary of where they spend their money. Remember to always treat them with respect and nurture a true relationship with them.
One of the biggest advantages of using an ICO to finance your project is that even if you fail, you will have won.
Imagine the worst case scenario. You raise far less than you were expecting and find yourself severely limited with the amount of money you’ve raised. Not a pretty sight for sure.
However, not all is lost. If you’ve run your ICO correctly, you now have assets that most startup companies can only dream about. You will have built an audience of people who have heard about your project. They will have challenged your ideas and vetted your plans.
You will have a substantial email list of people interested in a solution to the problem you’re facing. You will have an online community where you can discuss changes and new strategies. You will have a much larger social media presence and will be recognized as “an important player” in your space.
You will also have raised some money.
Maybe you’ll need to go out and find some more traditional financing to complete your vision. Perhaps, you’ll need to offer some equity to an angel investor or VC firm.
But now your chances of success are much greater.
Running an ICO is no longer just for obscure, abstract blockchain initiatives. It is not limited to high tech endeavors, nor is it blocked in by national boundaries or languages.
The cryptocurrency community is a vibrant, growing and diverse cross section of talented people around the globe.
As the regulations mature, using ICOs as a means of financing promising startup projects can only become more and more mainstream. Of course you need to be careful. You must plan, study and execute your project carefully.
However, with this in mind, there is no single better way of securing the funds to make your dream a reality.
Want to discuss your idea with someone who understands the landscape of how to run a successful ICO? Click here to schedule an appointment.
Dennis H. Lewis is our CEO and is a serial entrepreneur and self-proclaimed digital storyteller. An author of three books, he has an uncanny knack of being able to distill complex technologies and explain them in ways that are fun and approachable. Over his extensive career he has lead startups both in Europe and the United States and currently runs a successful digital marketing firm in Orlando, FL. He has been featured on mainstream media outlets like The New York Times, Good Morning America and the BBC.