By Peyton Ong | Innovative ideas can be quickly harnessed through a brainstorming session or even through random ‘aha’ moments, but are soon followed by thoughts like “I don’t have initial capital” or “I failed at previous fund-raising efforts”, driving potential Founders and Entrepreneurs to give up on their ideas.
In the past, traditional methods of fundraising involved equity financing, either from venture capitalists and angel investors, or an Initial Public Offering (IPO) at a later stage of growth. But with the development of blockchain technologies, the hype surrounding the Initial Coin Offering (ICO) has skyrocketed, as ICOs bring fresh hope to Founders who previously might have abandoned their ideas.
ICO vs IPO
An ICO or token sale (a term often preferred by legal representatives) is based on blockchain decentralized technology to create tokens that represent a product, which is then put up for sale through a platform.
An IPO, on the other hand, is when startups decide to ‘go public’ by selling shares for the first time. Although both ICO and IPO seem similar in terms of selling something intangible to raise capital, they differ in financing methods and objectives.
Successful ICOs are built to accommodate tokens into their core business idea, the concept being that token buyers can trade the company’s products for their purchased tokens without Founders needing to give up equity. IPOs, however, give up part of the company’s equity to the public and are usually done when a startup has reached a maturity level that portrays substantial traction from a developed product.
Founders take on heavy burdens that can be eased if they choose to do an IPO, where underwriters make strategic
decisions on their behalf for a guaranteed capital gain. Token sales, on the other hand, require Founders to make profound decisions right from the get-go, such as conducting feasibility studies to identify objectives, deciding the token sale structure, type of tokens, execution timeline, and so forth. It is undeniably a lot of pressure.
Time and Resources
Founders should definitely consider the amount of time needed to do an IPO or token sale. An IPO generally takes 1-2 years to plan and transition into stabilization, while a token sale takes around 6 months to 1 year. Listing on an exchange is an exhausting process involving dozens of steps. Token sales are similar, yet they differ in certain ways, in particular the time commitment Founders need to take on.
Due to increasing awareness of ICO fraud and the inner mechanisms of token sales, buyers have grown more risk-averse. This means that startups need to undertake more labor when preparing the ICO, such as writing up white papers, creating a viable use for the tokens, and organizing community-building activities. This is all part of building trust with buyers. Failure to add value to their projects could result in investors dumping tokens, exchanging them for others of high potential, and causing the startup’s token value to crash.
Costs And ROI
The decision hinges on the cost. Neither avenue is inexpensive, but token sales are somewhat more of a grey area. The cost of an IPO is fairly rigid since it’s an established process. High underwriting fees are a given since the investment banks do most of the legwork when preparing to IPO. According to PricewaterhouseCoopers, an average of US$7.2 million is needed for going public.
There isn’t an established ballpark figure for the token sale process, but things like PR for pre- and post-sale, legal advisory, hiring good blockchain developers, engagement roadshows, and even technical writing assistance for the white papers are just a few of the (often costly) steps involved in an ICO. Deciding on the right token price and structure can be the crucial difference between a successful ICO and a flop.
Legal And Security
Despite developments, token sales remain risky due to their vague framework, as regulators are still trying to catch up to the pace of technology. Token sales are also prone to cybercrime due to the large amount of money that can be raised through a digitized platform. IPOs, on the other hand, are based on traditional financial regulations that offer more security.
The IPO route is secure and stable, but at the cost of a long underwriting and due diligence process. While token sales are plagued by uncertainty, initiatives to improve the token sale ecosystem have been implemented. More industry leaders are building best practices for the blockchain community, and scam identifiers such as TruStory and MetaCert are creating systems to eliminate ICO scams.
Token sales and IPOs have their respective strengths and weaknesses, but it’s up to the startups to decide which method of capital raising puts them on the right track to move forward.
About The Author
Peyton Ong is an innovator and design strategist in Kuala Lumpur who is enthusiastic about rethinking and redesigning the different things that matter with lasting and thoughtful new experiences. In addition to working with the SuperCharger FinTech accelerator and leading the KL FinTech Academy, she is a Journalist in Residence for Jumpstart magazine whose writing is inspired by her interest in technology research and background in leading digital transformation projects.