The regrettable under-performance of the ICO

While I remain an advocate of ICOs I can’t help but be disappointed when realizing that in its current form such a powerful instrument is merely old wine in new bottles. In fact, the difference between raising capital through an ICO is unfortunately not yet fundamentally different from the traditional raising of capital through crowdfunding, angel investors, venture capitalists or debt financing.

Certainly, the ICO cosmetics are more fashionable. The tactics are somehow newer and channels are seemingly more modern. But at the end of the day, the core is the same old one. A promising idea is developed and written down by a small group of entrepreneurs or experts, it is presented to potential investors, marketing efforts are made, enthusiasm is generated and if all goes well, an amount of capital is raised. With that capital, that same small and confined group goes to work and develops the project further, just like any other traditional project.

I firmly believe tokens allow for far more dynamic methods of raising multiple types of capital and they can do so in far more dynamic ways. Ways which can match perfectly the desires of both issuers and token-holders. For tokens are the perfect gateway to access the multifaceted dimensions of ‘capital’ — something they completely fail in doing today.

We naturally tend to think of capital as some form of money. That may have been right in 1998. but we’re in 2018 now and the new reality is that capital can take many forms. For example, it can be intellectual capital (ideas), human capital (a great team), crowd capital (the wisdom of the many) and even in its monetary form, it comes in many colors (debt, equity, hybrid capital, seed capital, growth capital, subventions etc). We must urgently start thinking of ICO’s as instruments for raising far more than just money-capital.

You’re quite right. I am just criticizing till now. Criticism is the practice of judging the merits and faults of something. Normally criticism involves a dialogue of some kind, direct or indirect, and in that sense criticism is an intrinsically social activity. And dialogue is exactly what I intend to provoke through my criticism of the current shapes and forms that ICO’s take today. So let me point out the key weaknesses of today’s ICO’s, and also suggest some very valid and candid alternatives.

Pioneer Tokens for intellectual capital and early-stage funding

First of all, long before an ICO takes place, an initial entrepreneurial or technical concept is developed, usually by a team of experts in a certain field. I’d suggest that these initial concepts could, under almost all circumstances, be enriched, enlarged, made better and optimized if submitted to the wisdom of crowds. Why should any idea, even if groundbreaking in its primary form, be kept in a proprietary circle, and be presented as a finished product right from the start? Why should it be concealed and protected? Why not let it undergo the suffering of criticism, of challenge, of optimization?

Publishing a whitepaper under the form of a pioneer whitepaper for evaluation and scrutiny by different technicians, enthusiasts and other entrepreneurs would undoubtedly open the door for fresh inputs, constructive criticism, new features, angles and unbiased innovation. Any initial concept could become so much better, richer and more innovative, as a consequence of being exposed to criticism.

And thereupon, contributors and critics could be rewarded with tokens for their input, for having helped turn a pioneer whitepaper into something more full-blown. Any tokens issued at this early stage, whether for rewarding fresh input or in exchange for early investment capital would be called ‘Pioneer tokens’.

Pioneer tokens could be held for the longer term or sold on during an ICO by the pioneer token-holders. Pioneers could as such cash in on their pioneer contributions at the early stages or benefit for the long term from an early entry at a very low price.

Pioneer tokens for human capital

The same Pioneer tokens could be a very efficient instrument for attracting human capital as well. As a project moves beyond its initial stages and begins building its core management and operational team, the prospects of sharing in the spoils of an ICO would no doubt attract formidable talent for any promising project. Tokens are, in my opinion, a sharp, comprehensive and efficient way to attract human capital which is sadly undervalued and barely recognized in today’s ICO’s.

Revenue Tokens — thinking beyond traditional equity and debt financing for projects

Equity traditionally represents a form of ownership in a project. In practice, this means that equity represents the bundling of almost all the economic aspects of a project or organization: Its revenue, cost of sales, staff costs, fiscal costs and at the end of the year, its net profit or loss. These economic aspects cover a wide area of risk and reward components, which may not actually be desired by all.

For example, an investor may well believe in the commercial potential of a project (its pure and simple capacity to generate revenue), but are not interested in its operational efficiency and financial management or having an ownership stake in the entity as a whole. For such an investor, tokens can be designed to represent a stake in just the revenue stream generated by a project. Such tokens are called revenue tokens.

Revenue tokens can be a very innovative financing instrument and a powerful alternative to debt or equity financing. Debt financing is capital acquired through the borrowing of funds to be repaid at a later date. Common types of debt financing are loans and credit. Debt financing requires the payment of interest, meaning that the total amount repaid exceeds the initial sum borrowed. Debt financing is a typically a cost-efficient financing method for any project

But put yourself for a moment in the position of the traditional debt financier who is looking for the best value for its money with the least amount of risk. The major issue with debt financing is that the financier does not get to share in the successes of a project. All it gets is its money back with interest while taking on the risk of default. The interest rate is not going to provide an impressive return by investment standards. In fact, it will most probably offer only single-digit returns.

Revenue based financing (RBF) is a form of debt financing in which repayments are based on a percentage of a project’s revenue rather than on a fixed amount. Put simply, a borrower agrees to share a percentage of future revenue with a lender in exchange for upfront capital. RBF is a highly customized form of debt or loan (actually, it’s far more like a business partnership between lender and borrower than a loan agreement), but each loan depends greatly on a project’s revenues, on the structure of the project and on the project’s potential for growth.

Tokens as an instrument to leverage traditional capital raising

The fact that a project’s initial funding has come through token issuance should not disqualify it from seeking additional finance in the ‘traditional’ world. Indeed, a successful token raise can actually be a superb lever for attracting more traditional capital. Buying pioneer tokens or tokens at ICO makes the token holders part of an initiative. Inherent within that is the prospect of transforming an innovative concept into a real-world company — ideally with traditional institutional shareholders experienced in the same industry sector as the new concept. Tokens represent real people’s perception of the potential success of a project and a successful token issuance is a solid indicator as to the potential interest of future shareholders.

Let’s assume a project has built a large and influential crowd of (pioneer) token-holders. Achieving that milestone will translate into a series of very important consequences, as the fact that a large crowd has placed its trust in a project can’t help but set a high benchmark for people’s perception of the value of the project.

That benchmark, in turn, serves as the basis for the project’s valuation by potential shareholders. Thus, the larger a token-holder crowd gets, the more valuable a project is perceived to be — and the more capital it will be able to raise. More capital means more intrinsic power and a greater likelihood of stratospheric success.

Having a large crowd of token-holders will also shift the balance of power in negotiations with potential shareholders. Rather than being an undercapitalized startup forced to go begging to venture capitalists, an organisation with a fully subscribed token issuance will instead be heard with the respect and full attention of its potential investor audience.

It will be in a position to choose its shareholders. It will be in a position to uphold its values and business principles. It will be in a position to choose the best and brightest for its team and not be forced to compromise its vision. This is the new investment landscape tokens represent — a radically reimagined view of the nature of capital and financing — empowered by the blockchain and synergized with the traditional world of companies and shareholders. 2017’s booming ICO season have sown the seeds of this vision, but the challenge for all of us now is to ensure we bring in the full harvest.

Despite their phenomenal rise, it is nonetheless arguable that today’s ICOs are greatly underperforming. Not because they are not effective in raising capital for startups and projects, but because their true potential is only fractionally used and their inherent power is only very partially harvested