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Vlas Lezin

Curious FinTech Professional | Former Goldman Sachs Vice President |Advisor to Boomstarter.Network

Three Questions to Ask before Supporting an ICO 29 Aug 2018

Three Questions to Ask before Supporting an ICO

«ICO market is dead» — this was the most common phrase I've heard on the BlockShow Las Vegas last week. Yet there were more than 1,500 attendees discussing various projects and seeking backers for them. It was quite obvious that the whole community is faced with the dilemma of finding a right method to value a given ICO.

This sentiment is echoed by several recent articles published on the Bench providing an excellent guide on how to find a right project to support. I will try to add another dimension to the solution by providing three questions that every intelligent ICO supporter should ask before committing to a project.

In a nutshell, one should remember that ICO is not about technology or hype, it is about the business. This is a hard lesson learned during the dot-com era and it is in a heart of Wall Street when it comes to working with innovative companies.

This lesson could be transformed into the following questions:

 

Are you betting on the horse or on the jockey?

Typical M&A question that gets a different interpretation in the crypto world: are you excited about the token or the business behind it? Remember, that despite funding a particular idea you are not getting any equity or say in the business development. A business that you are about to support will be entirely driven by its own benefit, not the benefit of the token owners. The best scenario for a startup is to be bought by a larger player, leaving ICO supporters in the questionable state at best.


A sound supporter should rather analyze the long-term value of the token:
1. What is the projected supply/demand? Hint: don't underestimate the hype.
2. Is this coin, or crypto in general, is essential to the project's well-being?
3. Is projected growth driven by something else than adopting the crypto?

 

Is the business model meant for the retail or commercial customers?

Understanding the key beneficiaries of the project will allow ICO supporters to understand where they will end up in the food chain. Imagine a situation where one of the key commercial customers offers to ditch the token in favor of fiat payments. From the business development standpoint, a company should take an offer and not risk losing one of the major revenue streams. In other words, the bigger key customers are, the more bargaining power they will have over retail ICO supporters.

 

Are you funding a business or a project?

Compare the complexity of creating a brand new operational company versus expanding an already working business into the new geographical region. While both entail certain difficulties, building something from the ground up will require much more capital, effort and time. In other words, the more you have to create, these higher are the risks.


A sound supporter should analyze the ICO from the business development scenarios:
1. Best. Existing business expanding into the crypto world.
Take an example of certain FinTech company adopting the crypto as a mean of expanding their business. Not only the team clearly know the space, but they have a profitable business with alternative sources of income to support the development. In other words, the ICO-raised dollar will take such team much closer to the delivery of the fully working solution.

2. Good. Very strong team with relevant experience and track record.
Having seasoned professionals behind the project is, in my opinion, the best proxy for the success. In my experience running various Wall Street projects, there is an incredibly long and treacherous way between MVP and the final commercial solutions. Unless the team has succeeded in the relevant space before, they will certainly miss certain key points that can ruin the project.

3. Worst. Fresh team with no relevant experience.
One can certainly risk and support such project if the overall idea seems worthy, but possible return should be lucrative enough to cover all of the risks.

 

To summarize, a sound ICO supporter should ask these and other questions to properly estimate the associated risk. However, one should remember that a risk is not a bad thing by default. As long as risk is balanced by proper possible return there are no bad decisions to make.

 

Furher reading on ICO evaluation:

10 Insights From Investors About How They Evaluate ICO Projects

How to evaluate an ICO project to invest, Part 1

How to evaluate an ICO project to invest, Part 2

Cryptocurrency and ICO Scams, How you can Identify

 

ICO Valuation
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