Dec. 5, 2016
What exactly are initial coin offerings?

By Tim Zagar and Jani Valjavec

Initial coin offering is the commonly used method for many virtual currency- and blockchain-related funding campaigns. In an ICO, investors get coins or tokens that represent shares of the company on a blockchain.

The classic ICO recipe is as follows:

1. The team announces an ICO with a presentation of the concept for the service, product or solution, which usually solves a problem, addresses a need, or is perceived to be valuable in some fashion. The usual way to present the idea is through a whitepaper. Instead of in-depth technical or academic research writing, ICO whitepapers tend to be simplified executive summaries, heavy on marketing jargon and promises.

2. The team outlines how much capital it needs to raise to realize the idea. If this minimum amount is not reached, the ICO is unsuccessful, and the funds are usually returned to the investors. Some projects also specify a maximum cap to prevent overcapitalization.

3. The mix ratio is another important part of the ICO. It explains how much of the money raised the founders will keep for themselves (usually 5 to 20 percent). The remaining tokens will be proportionally distributed between the crowdfunding participants.

4. The team specifies how long the ICO will be open – how long they will collect funds. Most ICOs choose around 30 days.

5. The ICO opens and the collection of the funds begins. Some ICOs only accept cryptocurrencies, while others welcome fiat money as well. To accelerate the crowdfunding process, some ICOs award bonuses to early investors (5 to 15 percent on top of their investments) or use various affiliate schemes (called bounties) to spread the word.

6. ICO campaigns rely heavily on their communities. Modern communications channels are used for interaction, such as forums like Reddit, Slack, Telegram and social media like Facebook, Twitter etc.

7. When the time is up, or if the ICO reaches its maximum funding cap, it closes.

8. The team issues tokens representing shares in the organization. While this can be a coin on a new blockchain, we have recently seen that more teams issue their own app tokens on top of existing platforms, such an Ethereum.

Sooner or later the tokens get listed on exchanges. Early investors can cash out and interested people who missed the ICO can then join as investors.

We have witnessed many ICOs performed this way recently. While some of them turned out to be scams, we have seen plenty of very legitimate and successful projects as well.

The difference between ICO crowdfunding and venture capital funding is staggering. Startups looking for VC money have a more difficult job. Only the best startups get VC funding, and yet it is commonly known that 90 percent of them still fail.

Tim Zagar and Jani Valjavec are co-founders of Iconomi, a Slovenia-based fund management platform for blockchains and virtual currencies.

Jani ValjavecTim Zagar


Topics: Blockchain, Cryptocurrency, Venture Capital

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