The most important elements from the view of the investor
So, I was talking with a group that was planning an ICO recently. They had good ideas and a good service but there were still critical things wrong about the ICO concept. The things I call wrong are by definition, things that would make me skeptical to put my money in such an ICO. My perspective of business most of the time is the perspective of the investor. Plus, I don’t deceive myself. If I won’t be interested, I figured out a handful of smart people won’t be interested because they’ll see what I see.
This is not everything needed for an ICO to succeed but this is on the right path. My focus is not on platform projects like Ethereum, EOS, Lisk or 3rd generation projects like Icon, Aion or Wanchain. The focus here is about a business with a product or service outside the blockchain world that wants to become tokenized.
The obvious call is to become a tokenized security. But at the moment, that is difficult. Plus, many of these businesses do not really want that. While a tokenized security is the appropriate option for some companies, there are other ways to be tokenized without being a security.
Here is the analogy. If you have a shoe company, instead of offering a share of your company to the public to raise money, you can create your own ecosystem of money. Create a policy whereby your shoes can only be bought by your tokens. Or this; at least 50% of the cost of your shoe will be in your token. So if someone comes to buy a shoe with just cash, 50% of the cash will be spent to buy the tokens on the exchange by the cashier. The shoes doesn’t need to have a varying price. For example, if a shoe is $300, and the buyer comes with all cash, the cashier buys tokens worth $150 at market price at that instant for the company. This means buyers have the opportunity to make great deals by owning tokens. The company can pay a percentage of staff salaries in the token to hold up the supply side, and liquidate some of their reserves gently like once a year (according to market sentiment). This is simplified of course.
Having this at the back of the mind, we can go into some of the key elements that makes a good ICO. They are:
1. Sustainable Demand
There must be a clear pattern that show sustainable demand for the token. Without this, the token is at the mercy of the bulls and bears. That is unhealthy. There must be a sustainable demand for the token. Like in the above example, 50% of the price of the shoe has to be in token. As long as they make good shoes and people love them and buy them, the token will always be alive and well.
2. Token scarcity
This is very important but many seem not to pay attention to it. As much as it is good to have a good supply, people want to own a rarity as an investment. I would be more lured to participate in an ICO with 50 million total supply of tokens with $1 per token at ICO, than 1 billion total supply with $0.05 per token (all other things being equal). Token scarcity is important to lure people to buy into the ICO, especially when all other areas are solid. Most smart people care about the math before they care about the sciences (of what the company is all about). If you don’t get your math right, your sciences will be awkward regardless of how awesome it sounds.
3. A Fail-safe
What if things don’t go the way you plan? What if you did not reach your hard cap? Your approach if all these things happen must be stated out. Don’t hope everything will be fine. This is a bad world, one little thing from somewhere can just make a substantial damage. What would you do if it comes to that? I am not saying you should start anticipating what could go wrong and start fortifying your plans. No! I am saying you ought to have a fail-safe that can be triggered. People would be more willing to commit funds to a project when they see a fail-safe, even though the token is not a security.
Fail-safe is not a guarantee that people cannot lose their money but it is a show of responsibility and stewardship over funds. For example, with the shoe company, they can say that in any advent of events that kills sustainable demand and threatens absolute tokens obscurity, the token system will be offered for take over by any company with a similar product or service (for the same or similar token purpose). Those with tokens above a certain number will vote which company eventually takes it over from all the companies that show interest.
4. Short Whitepaper
Whitepapers above 30 pages makes me have a first-impression negative sentiment. The best whitepaper I have seen in my opinion so far was that of 0x. Short, concise and straight to the point. And yes, no fancy graphics. If it is hard to explain, it will most likely be hard to implement. If it is hard to implement, you should probably have VCs, not token holders.
I am aware some have lightpapers, but they are summaries of the whitepaper and often do not touch the details that one would like to see in a whitepaper. So, if you have a long story, here is what I recommend. A normal whitepaper: short, no fancy graphics and straight to the point; no repetition, no jargon. Then a longpaper, where all the long story is at. I won’t be reading the long paper though, except if I am in the mood to read a novel and I want something a bit serious and technical.
5. Percentage of token for crowdsale
Less than 50% of total supply of tokens in crowdsale is terrible practice. 50% might be okay. But I think it should be more than 50%. Remember, the ICO participants are those who will eventually determine the market price on exchanges. Plus, no one likes to see an infographic that shows that some people are positioned to dump on them.
Making tokens locked doesn’t really solve the problem. Someone once mentioned on twitter that the longer the locked period, the greater the dump. I cannot prove this, but it carries a bit of truth. Personally, I don’t like the idea of locked tokens. If you really want to decentralize, just do it.
This is all I can think of for now. Maybe I will make a sequel soon. However, I hope this helps someone or an organization or company. I am not a “financial advisor”, just an investor who knows what he is doing. You may get in touch if you feel I can help with insights on your project.
Let us not forget the main purpose of crypto; more economic options
Cheers!