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E&Y Report: Only 29% of 2017 ICOs have delivered a product

Ernst & Young ICO report ‘The Class of 2017 – one year later’ profiles the performance and evolving business models of last year’s leading ICOs.

Unveiled on October 19, the report is a follow up to a December 2017 report, which compiled data on 372 of the leading projects in the ICO sector. However, due to the volume in proceeds amassed by the top 110 projects, the survey focused on the higher netting projects.

The research for the survey was conducted in conjunction with a cybersecurity solutions provider named Group-IB and used data provided by the projects as well as other available sources online.

The December report found that the ICO sector was fraught with high fraud risk and theft. Additionally, startups embarking on ICOs were found to be providing would-be investors with inaccurate information about their project to boost investments.

Considerable losses

Not surprisingly the new E&Y report finds that market conditions in the ICO sector have worsened since the end of 2017 and those who had invested money in ICOs are likely grappling with losses at this stage.

The report found that an ICO portfolio acquired at the beginning of the year would have lost over half of its value. "An investor purchasing a portfolio of The Class of 2017 ICOs on 1 January 2018 would most likely have lost 66% of their investment."

In another worrying development, the report found that most ICOs had fallen to a price lower than their initial listing prices. A whopping 86% of the class of 2017 ICOs were now trading at a loss in comparison to the prices on entry into the market.

In a welcome respite for the sector, a small class of ICOs was found to be performing well and reporting profits. The gains among the Class of 2017 were concentrated in 10 ICO tokens. These include Binance, Tezos, Tron, and Basic Attention Token, amongst others. Curiously, most of the profit makers were operating in the category of blockchain infrastructure.

Ethereum continues to retain its position as the top blockchain platform for launching token sales and shows no signs of being dethroned. The Ethereum network hosted over 70% of the ICOs in the survey. The dominance of Ethereum is another pointer to the notion that projects that focus on blockchain-based infrastructure perform better than others in the long run.

Are ICO startups untrustworthy?

The ICO sector has long been considered as an ultra-high-risk asset class. A combination of little regulation and a lack of voluntary accountability from the startups has contributed to the poor outlook for the investors.

Most investments in the ICO sector have been made without a working product in sight. In fact, the largest ICO to date, EOS, raised an impressive four billion dollars without a minimum viable product (MVP).

Investors use whitepapers, as well as other technical publications, provided by the startups to make their investment decisions and projects are expected to use the funds acquired in their token sales to produce a prototype.

However, the report reveals that most of the 110 top performing ICOs of 2017 are yet to produce an MVP — finding that only around 30% of the projects have been able to release a working product. The actual number is only 29 projects. Although it is almost a year since the last report, the 30% figure represents only a 13% increase in prototype roll outs since the end of 2017.

Considering the $5.6 billion raised through ICOs last year, the lack of MVPs is a worrying trend. It raises questions about the trustworthiness of startups and whether they are incentivized to fulfill their promises to investors, given they already have the funds and are not required by law to deliver anything to those who participated in their token sales. For those calling for greater regulations for the ICO and digital currency space, this report is likely to become a much-referenced calling card.

De-emphasizing ‘utility’ tokens

Additionally, many of the startups that have developed prototypes are supporting other currencies, including fiat payments. The report found that 7 of the 25 projects do not require payments in their utility tokens alone. For investors who were betting on an increase in the value of a utility token, this is concerning as utility tokens increase in value the more they are utilized — providing more opportunity for profits from speculative trading.

While many of the startups have de-emphasized their utility tokens in order to increase stability and functionality for their products, the Ernst & Young report characterizes this action as "effectively abandoning their ICO investors."

One project which raised 3474 ETH in its Oct 2017 token sale has gone as far as to de-tokenize its entire business model. Digipulse, a service that focuses on crypto-inheritance announced its decision in August. For its investors, this would not have been the desired outcome.

The Head of Global Technology, Media & Entertainment and Telecommunications at Ernst & Young, Greg Cudahy, is of the opinion that the ICO space is ripe for the introduction of a set of standards. He explains: "It’s clear that blockchain is already having an impact on many business topics beyond cybercurrency. However, the debate remains with currency usage itself, which began with the rise of blockchain in the first place. Once new standards are in place that are accepted by all participants—allowing for improved transparency, fraud prevention, and legitimacy — the protection of investors and users alike has a greater chance of success."

Put into perspective — ICOs versus Venture Capital

When assessing the high failure rate of ICOs, the seemingly low number of startups with viable working products needs to be viewed within the context of startup investing as a whole.


In the graphic above (which represents the traditional Venture Capital sector), seed money is the funding collected from investors/venture capitalists used to start a business. This is the earliest stage of funding for a product and as with many ICO projects, the primary influencer for investors for seed funding decisions, is speculative assessments and on-paper evaluations.

Late stage funding is provided after projects have a good or service in production that is commercially available.

Since 2009, while the number of projects receiving seed funding in the US Venture Capital world increased significantly (left axis), there was little in the way of a corresponding increase in the number of projects successfully delivering a product and receiving late stage funding.

The widening gap between US VC projects receiving funding at the respective rounds, evidences the challenges of creating commercially viable endeavors with seed money and is comparable to the success rate of ICO projects in build working products. This shows that the challenge of building viable, market ready businesses is not exclusive to the blockchain ecosystem, and when comparing ICOs with Venture Capital-funded startups, the numbers are not that far off.

As reported in March, "According to Harvard professor Shikhar Ghosh, 75% of U.S. VC-funded startups fail. This rate is higher than reported by other organizations, such as the National Venture Capital Association, which estimates that only 25% to 30% of VC-backed startups fail completely. However, as Ghosh told the Wall Street Journal, VC tend to bury their dead very quietly."

Moreover, it has become an accepted rule-of-thumb that nine out of ten startups to fail within the first five years, which would suggest that the high-risk ICO market may not be that much riskier than angel investing or venture capital.


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