Should I ICO My Startup?

A seed stage startup point of view

After some research, we decided not to do an ICO from the beginning because we asked ourselves.

Metamesh is currently bootstrapping its development to create a minimum viable product (bootstrapping is not easy to do). We have decided to put off fundraising until we can prove our idea of a product sharing app for the cryptocurrency community. Fundraising a seed round with an ICO is a hit or miss.

Several great projects started off as ICOs. For example, Ethereum, IOTA, and EOS where all ICOs and they are all promising technologies. However, they are technologies not startups. Startups rely on revenue where technologies do not. These blockchain technologies rely on their use and application.

Startups have business models that leverage technologies to earn revenue. So if you decide to do an ICO you better tie your token in your business model. You also better earn dollars and not Satoshis because dollars are required for wages and expenses. Then you have another dilemma.

So if someone invests in a token, they don’t get a share of the company, they gain future usage of your token. If someone invests in your equity, they don’t gain usage of your token or platform, they gain future profits of your company. Sure, you can package a equity/token deal with investors but they’re still both investors. Then you have to balance your token valuation vs equity valuation and why one is higher than the other. While you’re juggling with that, you need to focus on creating a product that you promised to build. Too bad if you anger one of your token/equity investors on why one valuation is higher than the other, be prepared for a lawsuit. This all sounds like a headache to begin with so why even do it?

The good thing about ICOs is that anyone can participate. You can have foreign investors from countries you have never heard about and they truly care for the product you are building. Most startup funding is concentrated in the San Francisco/Bay Area and you need to be approved by these investors to receive funding rounds. I went to eMerge Americas 2018 this past April and VCs are looking at the cryptocurrency space with complete skepticism. So ICOs do decentralize investment opportunities allowing more than just VCs and angel investors to be able to participate on these opportunities. Kantian Fairness aside, you need to focus on one thing. Your product!

Is money important? Yes. Is investment all that matters? No.

As a startup you need to remember that you are creating a product that solves a problem for specific individuals. If you do an ICO and launch your platform with a token business model and you have low users you will have to pivot so hard you will likely change what your token does and anger your token investors. You need to build something great, and your first version will not be. You have to talk to your users and figure out what is working and what isn’t to get the right product for the right users.

In the beginning stages you need to think all about your product and the problem your users have. You shouldn’t think about the fundraising opportunity first. If you somehow get to the conclusion that you need to use a blockchain for your data infrastructure — which I’ll tell you, “Why not SQL?” — then you should start to think about tokenized business models and so on.

Well right now, there is so much chaos in regulating cryptocurrency and we don’t know the future of it. For instance, look at Tezos and their ICO issue with the SEC. Tezos was claimed to be a security by the SEC and then couldn’t accept any US investors and required to start KYC for their investors that made them lose half their community. This is an example of headaches that we didn’t want to deal with. We want to focus on creating a product for the right users, not have to answer to the SEC about our fundraising strategy.

We also believe that investors provide more than just money. Your investors are on your team and have a stake in your company. That means if you fail, they fail. Investors allow you to leverage their networks, meet people you wouldn’t normally meet and give you guidance with industry expertise. When you ICO, essentially you go public. You get any investor in the world that wants to bet on your token and only cares about why the token isn’t listed on an exchange so they can make a return. As a startup, you don’t want to let just anyone in your organization/community. You should aim to have your values aligned with individuals to have a company culture that will sustain your journey as a startup, not money hungry individuals.

ICOs can be seen as a crowdfunding mechanism but couldn’t you just have used Kickstarter? Even, Indiegogo allows you to do an equity crowdsale but you will have to do some additional work for that. Right now cryptocurrency is filled with hopeful hype and everyone wants to be the next Satoshi Nakamoto with their top of the line cryptocurrency. But if you’re going to create a digital asset, you better give that digital asset some use besides speculative value. I think a great example of a useful cryptocurrency that isn’t required is Binance Coin (BNB). You could replace the coin with a subscription model but I think BNB fundraised to the right people and the right time.

I am sure we will see security tokens begin to matter in the coming years allowing your token to be part of a share of your company giving investors governance and granting investors shareholder rights like exit and dividend participation, liquidation preferences, pro-rata follow-on rights, reporting rights, voting rights, etc. For now, that isn’t a thing, but if it makes it easier and cheaper for VCs and angels to invest in startups I’m sure it will lead to some form of usage. If you do decide to do an ICO I wish you the best luck in this wild wild west industry.

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