Just like any other business venture, blockchain projects and startups usually face the challenge of raising seed capital.
A common way that blockchain projects raise capital is through Initial Coin Offerings (ICOs), which are the equivalent of public listing of companies in traditional money markets.
What are Initial Coin Offerings?
An Initial Coin Offering is a financing mechanism used by founders and developers of blockchain startups and projects.
In this case, the project is divided into small parts or units of ownership called tokens. Then, investors buy these tokens in an ICO to represent their share of ownership in the blockchain project or startup.
While ICOs create easy access to seed capital and additional liquidity for blockchain projects, several turns and twists sometimes put investors' capital input at risk. Below is a detailed overview of the challenges that come with raising funds for blockchain projects.
Lack of Accountability to Investors
Many investors shy away from blockchain projects because buying tokens does not necessarily make them part of the project or entitled to its share.
But, again, compared to the traditional money and capital markets, where IPO issuers are accountable to investors, ICO issuers are not responsible or accountable to those who purchase their tokens.
To an investor, failing to track how your resources are used or not having a guaranteed share of the profits is a greater risk.
Many ICOs Issued Based on the White Paper
Many blockchain projects attempt initial fundraising based only on the White Paper.
It is the ICO issuer that randomly or strategically decides which information to disclose and which to withhold.
A White Paper means that investors merely contribute to the developer's idea and not a tangible product or service.
Contributing to the idea on the White Paper does not make investors part of the project.
Furthermore, considering the developer has complete discretion of the amount and type of information to disclose, crucial information may deliberately be withheld from investors for purposes of quickly influencing their decision.
In addition to an existing project model or tangible product/service, White Papers usually have many technical and complex details that may be hard for investors to digest and make a well-informed investment decision.
Lack of Proper Regulation and Investment Protection
Investment thrives in an environment where investors are assured of the security of their investments. However, as is the case in the blockchain industry, a lack of proper regulation causes potential investors to shy away for fear of losing their money to fraud and other bad actors.
Indeed, the initial days of the blockchain industry saw many investors lose millions of dollars in several Ponzi schemes involving cryptocurrencies and other blockchain projects. In addition, the lack of a proper regulatory framework means investors are left to make their due diligence and personally make investment decisions with no promise of recovering their money if they land into bad actors.
No Control Over Proceeds from ICOs
Because buying tokens from an ICO does not make the investor an owner of a share of the project or company, investors have no say or control over how proceeds from the investment are used.
In the traditional money and capital markets, shares confer ownership and rights in the issuing company, including determining how proceeds are put to use. The ability to use shareholding to influence the company's management gives investors more control over their investment.
Conclusion
Like other startups and new projects, blockchain projects have a steep landscape when raising seed capital to start and expand. In addition, since Blockchain technology is relatively new, many are forced to learn from the good and bad along the way.
Editor’s Note: Check out this excellent song by The Beatles.