Keeping up with the latest technological innovations, one of the breakthroughs is the rapid adoption of Blockchain to ensure transparency and integrity between different data records. If you are a startup founder looking to raise funds, it’s time you adopted the ICO method for fundraising.
So, What Is An ICO?
Conventionally, we have IPO which stands for Initial Public Offering (IPO) where a privately held firm goes public with the help of an investment bank. Through a ICO platform, startups have the ability to launch Initial Coin Offering (ICO) and get funding via cryptocurrency and smart contracts.
What is the benefit of ICO over IPO you may ask? Initial Coin Offering has the same specifics like IPO but with 3 key differences that are:
- The investor has no stake/share in a future company.
- Literally, anyone with cryptocurrency can invest in your startup.
- There are no ifs and buts, if you have an innovative product, there are no formalities which will delay your launch!
The Tokenomic Model
In IPO, we have the concept of shares in a company which is determined by an investment bank based on value and propositions. In the ICO side, we have the tokenomic system which aims to divide the company into a set of distributed records (shares). A person can invest in this startup and then there is a guarantee that the investor will get a return from the transactions that startup will make. This is explained in detail further below in the article too.
So what you need to understand that within a specific blockchain application or startup, tokens will act as your currency to purchase products or services provided by that startup. Tokens work the same way as stock but the investor gets no managing rights so essentially you are in control of your startup.
Let us take a look at two types of tokens that are currently available in the market.
Utility Token is more or less created for crowdfunding purposes and the person that has purchased the utility token can later avail a service or redeem a particular good from the same company. A blockchain startup would essentially be nothing without utility tokens. Usually, startup founders incentivize investors by offering these tokens at a discount price to raise capital for their product.
A very basic example of Utility Token is Basic Attention Token (BAT) which currently retails for $1.43 and has an enormous market cap of $458,561,991 USD. This token has been created for those who participate in the Brave ecosystem. Those who purchase this token can purchase ads on publisher platforms and the publishers are then compensated through this or equivalent of the token in USD or bitcoin.
Filecoin is another notable example of utility token which has a record $257 million in ICO. It currently trades just above $163.94 on the coinmarket and has a 24h volume of more than $2,802,554,910.
Utility Token is pretty much like a stock which may increase or decrease in value so most people who are purchasing these tokens are in the hopes that the value increases over time based on the blockchain company’s performance. The biggest difference between utility tokens and security tokens, which we will discuss below, is that utility tokens don’t grant the investor any ownership rights which is beneficial for the startup founder since he can make decisions without consulting anyone.
These tokens derive their value from an external asset that can be traded. Since these are publically traded, they are subject to federal laws and regulations. One of the biggest advantages here now is that security tokens represent a share in a company trading it, hence you get ownership rights.
How does this ownership process work now? By deploying blockchain and the process of smart contracts, there will be a voting system where each investor will have a percentage majority based on his or her’s shares. Now each investor can vote in every decision of the startup no matter how big or small it is.
Since the startup is being watched over by federal laws, if they don’t comply with the investor demands and regulations set, they will be penalized and this can result in serious blowback to the project they are doing.
Ethereum is generally deployed to create utility tokens but for security tokens, there are different standards. Polymath’s T20 is a security token which takes into account regulatory requirements whereas tZERO is another one which ensures that token holders are given quarterly dividends from the profits generated through their platform.
Let us see how you can use both these tokens as a startup founder or an investor:
If you are working on a startup, your highest priority has to be the core working of the product you are working on. An ICO platform will allow you to deploy your product on Ethereum or any other crypto and once you have completed it, you can move to the next step of obtaining funds through ICO.
To understand this in a better way, let’s consider you are working on an E-Commerce Pet Shop. Once you have finished deploying your store on Ethereum on our platform, the next step is to attain funding. In traditional IPO, this is a complicated and expensive process because you need funds to reach suitable investors. In ICO however, the game is simplified due to tokens!
Like explained above already, Tokens are to your store or company what shares are to a public company but the advantage is there, that the investor gets no stake in your company in ICO. In exchange for these tokens, you get funding in any cryptocurrency and you will instead be obligated to provide services from your company, in this case, the investor may be able to purchase pet accessories and items using those very tokens.
The biggest advantage of ICO is that there is no board of directors on your head, you are just liable to provide services to your investor as per the smart contract you have signed but you are the majority stake-holder of your company and that means you don’t have to “consult” anyone the next time you are going to make an important decision.
Now you might be wondering, how do we reach investors without any marketing? For that, you create a million tokens and you sell them off on an early bird rate. Those investors who buy these tokens will have priority above all others and may be incentivized in a different way.
One of the primary concerns of every investor is: “What’s in it for me?” If an investor is going put in his cryptocurrency coins which can be Bitcoin, Ethereum, Monero or so forth, he would want assurances that the services will be provided. The ICO platform should ensure this through smart contracts and securities.
Smart Contracts are lines of code which digitally enforce and verify a negotiation, agreement or a contract between a buyer and seller through a distributed blockchain network. If we consider the same example above of the E-Commerce Pet Shop, if an investor has spent some amount of Bitcoins in exchange for 3 pet accessories, the investor will receive a digital receipt which will contain an entry key. There will be a due date before which the seller is obligated to provide that specific service. During this time, the payment is in the blockchain network. If the seller doesn’t comply within the specified time and date, the payment is refunded back to the investor or buyer. Hence there is no chance for fraud here.
The ICO platform should provide audited smart contracts which meet the latest security under the OpenZeppelin standards and have been tested by multiple organizations. Plus you can use any cryptocurrency to buy tokens in a blockchain startup without worrying for legalities because that is handled by us.
So what are you waiting for? Launch your first-ever ICO!