How Can You Raise Capital with an Initial Coin Offering?

How Can You Raise Capital with an Initial Coin Offering

Through an ICO, you can secure funding for your startup seamlessly using cryptocurrency. 

For a startup to thrive, capital is crucial. Typically, to raise capital, startups can choose various routes, such as participating in investor rounds (including seed rounds and series rounds), crowdfunding, bootstrapping and more. Now, there’s a new option rooted in cryptocurrency: Initial Coin Offering (ICO).

What is an ICO?

An ICO is a way for startups to raise money, much like they would in an Initial Public Offering (IPO). In an ICO, companies raise capital by selling cryptocurrency. They create digital tokens, like Bitcoin, and sell that token or coin to investors in exchange for goods, services or money. With these coins, buyers get exclusive benefits, like discounts, offers or even shares of the company. Like in an IPO, a company aspires to raise a certain amount of money in a stipulated time. If it fails to do so, the ICO is considered a failure and the value of the token falls. 

Additionally, different countries have different stances on ICOs. While China has banned ICOs and dubbed it “illegal fundraising”, countries like Singapore and Switzerland encourage ICOs and support startups with a conducive environment for success. 

Types of tokens you can offer in an ICO

There are two main types of tokens you can offer in an ICO: utility tokens and security tokens. Utility tokens, or “user tokens”, give users future access to your product or service, akin to pre-orders. On the other hand, security tokens represent the shares of the company and are subject to legal regulations. The value of security tokens is dependent on external events, such as economic conditions and the company’s sales. Bear in mind that the tokens will become worthless if the company fails or people don’t deem it worthy. 

The perks of raising capital through cryptocurrency

At the outset, cryptocurrency tokens are very easy to set up. Using less than 100 lines of code, you can set up your own token. Plus, an ICO helps you understand how well your company will do once introduced to your target audience. An assistant professor at MIT Sloan, Christian Catalini, says, “By issuing a token that starts at zero value, market forces can drive the price up if people are confident about the ability of a specific team to successfully build the platform they’re promising they’ll build.” Through this, you can modify your offering to suit market needs.

In addition to that, with an ICO, your startup has the potential to attract high returns. The value of the token will rise significantly as the company grows and becomes more successful. The year 2017 witnessed over 400 successful ICOs. Each of them raised an average of nearly US$13 million, with the total funds raised amounting to US$5.6 billion. What’s more? Investors received nearly 13 times the amount of their initial investment in return. Evidently, an ICO doesn’t just benefit you but also your investors.

The downsides

Due to the lack of regulation characteristic to cryptocurrency, you may be subject to scams and frauds by investors. In fact, investors also worry about being duped. They worry that the funds lost may never be recovered. On optimally using ICOs, Catalini adds, “There’s a delicate balancing act between allowing the technology to flourish and allowing experimentation to take place, and on the other hand making sure that we protect investors and consumers from exposure to assets that are volatile, risky, or straight up frauds and scams.”

Departing from traditional—and, often, cumbersome—methods of securing funding, ICOs give entrepreneurs the opportunity to gain capital quickly. This way, you can kick off new and ambitious projects without worrying about them becoming outdated.

Header Image by Flickr

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