Any type of organization, be it an established business or a small startup would have to undergo a tough time to get funds on a timely basis. ICO (Initial Coin Offering) has proved to be a relief as startups can sell their tokens to interested investors and raise funds cost-effectively. It is quite a simple method without any cumbersome guidelines. However, it does require a bit of community building, technical expertise, and knowledge about regulatory compliance for raising funds for your business via ICO.
There are different ways for a business to receive the necessary amount of funds. They are
- Loan – The traditional methods include approaching a well-known financial institution for a loan. It requires preparation of the relevant documents such as credit guarantee and proof of previous cash flow. Most of the startups get only a small loan since they lack a solid cashflow. Hence their founders fund the operations by taking out personal loans. While bootstrapping is not wrong, it could be risky as the assets of the founder can be seized if he assumes personal liability for the company’s success.
- Venture capital – Another popular method of funding startups is through venture capital. An interested private investor will invest a majority of funds depending on the viability and potential of your business idea. However, it takes a lot of time and effort to meet the investors and pitch your idea. Investors will look to gain control of the company by investing in equity. Hence, there has to be some sacrifice in ownership of the firm.
- Business Development Companies – While venture capital is individual-oriented, several business development companies make investments in small or medium-sized private companies. Since they make small investments in several companies, startups cannot be expected to receive large payouts.
- Partnership – A business firm can consider teaming up with another existing company which maybe their competitor to implement its idea. A contract needs to be signed. Do not give them enough details as the potential partner could steal your idea and use it in their operations. Consider the availability of infrastructure, capital holding, and cash flow before choosing a reliable partner.
- Crowdfunding – It involves utilizing platforms such as Kickstarter, Indiegogo that support creative projects spearheaded by entrepreneurs. Apart from the funding provided, it will help the firms to get a great audience who are interested in the firm’s operations right from Day 1. Perks and rewards will have to be given to those contributors who help a firm to raise funds.
While the above methods represent the traditional form of fundraising, it involves preparing a lot of paperwork and approaching numerous financial institutions. Most of the institutions reject ideas that have a certain risk element attached to it. This leads to a lack of new and different ideas coming to the mainstream. The ICO is a viable alternative as it not only helps to raise a significant amount of capital, it builds a community that supports an idea whole-heartedly and automatically rewards backers of a project.
How an ICO Operates
Tokens are sold to the interested participants in exchange for the leading cryptocurrencies. In case the company fails to raise the minimum amount of funds required, it has no option but to return the funds to the respective participants.
The token that has been created has to possess some utility. The participant who purchases the token should be able to use it for buying products and gaining access to exclusive features. It cannot be shared with others. No equity will be granted for the holders of the tokens. Blockchain technology is beneficial while raising funds through an ICO as it helps in preventing incidents of forgery and double-spending. The tokens are mostly listed on the leading cryptocurrency exchanges by companies. This creates more demand for the tokens, increases its value and helps in selling the product that the company is building. A certain amount of tokens would be set aside for the founders and other team members.
Limitations of ICO
Though it has raised funds amounting to billions of dollars, there are some shortcomings while receiving funds by launching an ICO. Some of them are
- Technical expertise – Executing a successful ICO requires significant technical prowess. The developers need to be well equipped in setting up a blockchain network and program the rules for accepting cryptocurrencies, calculating the total funds received and distributing the token once the fundraising goal has been achieved. Hence, the amount of knowledge required is quite limited among the developer community who can execute a safe ICO.
- Risk perception – Since the investors are contributing funds for a project where the actual product does not exist, it is considered to be a risky proposition. While participants are expected to do sincere due diligence before investing, many do not undertake any research and it leads to a lot of scams in the industry. Hence, it depends on the intention of the company that is going to execute the ICO.
- Economic downturn – Since the market is subject to frequent fluctuations, it affects the value of the token which has a bearing on the process of raising funds for your business via ICO.
- Regulatory challenges – Securities regulators are beginning to crack down on ICO’s due to the increase in the number of scam tokens, incidents of frauds and the volatile market conditions. Regulation is needed for increasing the legitimacy and credibility of ICO’s as a fundraising mechanism. There needs to be a clear differentiation made between tokens and securities to eliminate any ambiguity.
Hence, every firm aspiring to execute a successful ICO needs to have a detailed roadmap. A professional whitepaper needs to be prepared. PR and advertising activities need to be carried out on a large scale to popularize the ICO. Hire an experienced developer for building your ICO from scratch. Get your token listed on a leading cryptocurrency exchange. Manage the technical aspects of your ICO for building a strong foundation for future growth. While every company may not require an ICO to raise funds, it is still an effective way to get funding for those new businesses or startups in need.