Investing in an ICO can be compared to investing in a traditional startup on a crowd-funding platform, but without a platform, which just means more risk. Investing in a crowd-funding platform itself comes with a lot of risks. All you have is a business plan, some designs, models and a lot of ideas from the founders. All you can research is the history of the founders, their qualifications, past business successes and finally, you have to go with your intuition. The advantage with traditional crowd-funding is that the platform validates the founders are real, does some review of the business plans and designs. In case of the ICO’s you are pretty much on your own. Thanks to platforms like ICObench.com, you at least have some reviews from industry experts.
ICO’s peaked in 2017 but started getting less popular compared to STOs (Security Tokens, typically SEC compliant offering) or ETOs (Equity Tokens or basically tokenized company stock) from 2nd or 3rd quarter of 2018 after the whole SEC crackdown on fraudulent ICOs. When you compare ICO, STO and ETO, ETO is the closest to a traditional crowd-funding which makes it the easiest to evaluate the current valuation.
If you look at most early-stage startups, the typical valuation is between US $10 million to $30 million. The valuation should not be more than $30 million unless the startup is building say “a backpack that can help you fly or a rocket better than SpaceX”. Seriously, it has to be an out of this world idea with validated models for any seasoned investor to value it any more. Or the startup has to be generating revenue already. No, it can’t be the next best exchange or the next best whatever. So that means, if it’s an early stage startup, their Market Cap shouldn’t be more than $30 million and their hard cap should be under $15 million (assuming they are at least holding 50% of the startup after the crowd sale).
As an investor, I personally like the movement away from pure Utility Tokens to a more Equity Backed token that could still be used as a utility on the platform, aka the Equity Token. This also makes it easier to evaluate if the token is over-priced. Although the current valuation is not the only factor in the success of a startup, it should help you weed out the obvious bad investments. Just like investing in any startup, do your research about the founders, the team, read the whitepaper, follow them on social media, and finally understand the risk involved. Happy investing!