Initial Coin Offerings (ICOs) can be a great option for companies under certain circumstances. However, they can be problematic if the sole purpose is to gain capital. Experts say it is also imperative that the business model supports it otherwise it will fail.
Dynamic Business spoke with experts to find out when an ICO is a good fit for a company, and when it isn’t?
David Jackson, CEO of Blockchain Australia, said:
ICOs are a great option for companies under certain circumstances: 1) companies wanting to gain business process efficiency via smart contracts in areas such as supply chain, legal, or leasing, 2) those looking at a trustless ecosystem via mechanisms like crowdfunding or fintech solutions, and 3) those wanting immutability of records, including health records, art registers, media, or credit reporting as several examples.
ICOs are less of a good fit when the sole purpose of the raise is to gain capital with no real use case, when there is no need for a blockchain solution for the product offering, and when the token economics do not align to the vision of the company, such as companies who have a high percentage of spend on only marketing as one examples.
Anthony Stevens, CEO, Digital Asset Ventures:
An ICO means issuing a token representing either the use of a service or an underlying product. It only makes sense to do this if using blockchain is necessary and advantageous – for example, where control needs to be decentralised, or there is a need for tokens to be immutable. The value created by the company must also directly link to the value of the token. For example, if a token is the only means with which a product or service may be accessed or purchased, then the value created will be linked to the value of the token, speculation aside.
Darren Sommers, Principal Solicitor, KHQ Lawyers:
Short answer – when the business model supports it. Many ICOs fail because the ICO adds no value from a customer or investor perspective. A failed ICO can be costly to the company undertaking it as well as initial investors and supporters.
Important questions to ask are:
Can the product or service be delivered without a token model? Is it really necessary?
Is there a natural economic model for investors who participate in the ICO to generate a return?
Is there real utility to the token being issued?
Will the funds raised be sufficient to fund the business model and deliver the product or service?
Does it stack up legally? For example is the token a security or financial product?
The current crypto climate is no longer a positive one with major assets dropping in value. Therefore it is important to ensure your model allows you to stand out from the crowd.