Startups traditionally raise money by finding investors to bank roll their ambitions in return for equity. This can be tough on startups, and investors too. In the world of cryptocurrency however, there's another way. Say hello to the ICO.
What is an ICO?
ICO stands for Initial Coin Offering. It's a radically new way for a company to raise money without having to give away a part of its business.
A company creates a new token or currency, and they invite people to buy this currency before it's released to the general public.
Let's take you through an example.
Let there be CookieCoin
You have a great idea. You've created a payment system and platform to connect cookie makers with the cookie lovers of this world. Let's call it CookieCoin.
You could go to your nearest bank manager and ask them for a loan. Or could try investors. Instead you decide to do an ICO.
You're going to create 1,000 CookieCoins and invite cookie lovers to buy them. They can buy your CookieCoins in exchange for a cryptocurrency like Bitcoin or Ether or fiat currencies like pounds or dollars.
The idea is that people are going to love your cookie system so much, the value of those CookieCoins will go up over time.
You write out the specifics of how your CookieCoins will work - most people call this a white paper - set the date for when you'd like the sale to begin and away you go!
Benefits of ICOs
- 🚀They allow you to raise funds before a full launch
- 📈You don't have to give away equity in the business
- 🌏You can sell them internationally
- 👨👧👦You're not reliant on third parties to underwrite/take a slash of the proceeds
How do you create your own token for an ICO?
Many companies build their currencies inside others, like Ethereum.
Creating your own from scratch would be tricky and time consuming. The best way to think of it is like building an app for an app store instead of building an app store to put your app in.
Read our guide Ethereum's currencies within currencies to learn more.
How does it differ from an IPO?
There are a few key differences.
- 🍕Investing in an IPO gives you a slice of a company.
- 🎟️Investing in an ICO gives you tokens, not a slice of the company.
- 🔏An IPO has to be underwritten by an investment bank.
- 🙅♂️An ICO doesn't require an investment bank to be involved.
- 🏢An IPO is traditionally only available to companies who have been operating for several years successfully.
- ✨An ICO can be used by established companies to fund an existing product, or for entirely new ones.
Give me some examples
Below is a list of companies that have used ICOs to raise cash.
- 📁 Filecoin, cloud storage on the blockchain a.k.a. Google Drive without the Google, raised over $257 million during its September 2017 token offering.
- 💻 Tezos, a blockchain that allows the creation of smart contracts a.k.a. automatic binding contracts, raised over $232 million back in July 2017.
- 💬 Telegram, the popular encrypted messaging app raised $1.7 billion over two pre-ICO sales.
Useless Ethereum Token (UET), “The world's first 100% honest Ethereum ICO” was created by someone who called themselves, "some random person on the internet”.
Why are people worried about ICOs?
*🔥 High rate of failure - Nearly half of 2017’s ICOs failed within a few months.
*🗑️ No regulation - There have been several ICOs that have been little more than get rich quick schemes for the creators.
- 🤷 Unknown commercial viability - There are lots of questions surrounding how these projects will make money and who the winners will be in the future.
ICOs and the future
There have been several questions around how to regulate ICOs to prevent people using them as clever scams. Several countries are working on regulatory frameworks for this.
While that's happening, ICOs are helping a lot of new companies create new ideas quickly that can be scaled in record time.
It's also allowing everyone to get access to the future tech titans of tomorrow at an affordable price today. We're all tech investors now!