While we are hearing more and more about the ICO, this way of raising money in cryptocurrencies can still seem nebulous and uncertain. This is because anything remotely linked to virtual currencies is subject to rather polarising debate. Will the ICO become a real way for companies to raise funds ?
Raising equity in the digital era
The Initial Coin Offering (ICO) is an alternative financing method which involves raising funds in digital currency in the startup phase of a company. Specifically, the company issues chips (i.e. digital assets known as tokens) on a dedicated platform and, in exchange, receives an amount in a cryptocurrency, whether this be Bitcoins, Ethereum or any other altcoin (the name given to the hundreds of cryptocurrencies in existence). The whole transaction is therefore based on blockchain technology.
Similar to crowdfunding
Comparable to an IPO (Initial Public Offering) - the operation which allows a company to list its shares on a stock exchange - the ICO is more similar to fundraising via a crowdfunding platform. In effect, it can be accessed by anyone who holds virtual currency and requires neither shares to be issued nor a stake to be acquired. This means that the investor is not subject to any potential dilution of the capital. The crypto investor therefore bets on a specific project and, in exchange, receives digital assets, access and use of the service being offered, plus part of the profits generated by the company.
Is it reserved for blockchain companies?
The phenomenon of raising funds via an ICO is taking on considerable proportions (in 2017, more than 4 billion dollars are believed to have been raised via ICO worldwide), but it is still primarily reserved for companies which have built a link to a blockchain technology into their project. This is because the operation tends to be quick, flexible and simple, requires no intermediary and, above all, is unregulated. This type of financing therefore primarily attracts blockchain startups looking for significant funds... From the crypto investor side, while some cryptocurrency billionaires say that they want to support blockchain projects, there is no doubt that their interest is based partly on the significant liquidity of the ICO, as well as on the quick returns on their investment, which are the result of the considerable price volatility.
Communicate well for a successful consultation
In most cases, this starts with the drafting of a white paper (equivalent to the prospectus for an IPO) in which the framework of the project, especially the underlying technology, is laid out in order to arouse market interest. Generally, the company puts forward its own cryptocurrency, then sets the terms of the ICO (duration etc.) and the value of its tokens - which will be purchased, for example, with Bitcoins or Ethereum - according to the amount required to complete its project. What follows is often a huge surge...within only a few minutes!
12.5 million dollars in 15 minutes (for the decentralised predictive markets platform Gnosis in the Netherlands), 36 million dollars in 1 minute (for the startup Brave which is developing a new generation of web browser), 250 million dollars for Filecoin (the American company which offers a data storage solution based on blockchain)... There are tons of crazy fundraising examples. At the start of 2018, the encrypted messaging service Telegram reported that it wanted to create its own blockchain technology to house decentralised services, via the most significant ICO to date: over one billion dollars. "Old hands" are also embarking on the adventure: Kodak, for example, who announced a project to develop a blockchain specially dedicated to managing copyright.
What does the future hold for the ICO?
Clearly, the world of cryptocurrency must often navigate greed, excess and speculation. In this sense, both for companies and for crypto investors, the ICO does not just present advantages. Potential hazards include the lack of guarantees of the relevance, seriousness and quality of a project, and also the huge volatility of virtual currency prices. Many experts are also predicting that it will create a bubble which will indeed burst one day. But when ? It's too early to say! As with the dot-com bubble at the start of the century, this might give us a clearer picture and allow us to clean up the world of digital currencies. In any case, there is no doubt that the question of regulation and the framing of this kind of financing will also be one of the main challenges facing the ICO in future...
Crowdsourcing: the basics
Are you undecided about the various ways of increasing your offering? Has R&D encountered a technical problem? Perhaps your clients know more.
The concept of crowdsourcing is simple: you call for the contribution of your customers and/or the general public. An approach which is gaining popularity worldwide even though it is not actually new. As far back as 1714 crowdsourcing by the British government led to the invention of the chronometer and therefore a reliable method of calculating longitudinal position at sea.
Three hundred years later the basic principles remain the same: in crowdsourcing you work with a network of individuals and communities within and largely outside the company. They make a contribution in the form of ideas, time, expertise or financial support. This enables new solutions to be accessed and makes realisation of joint projects and optimisation of tasks possible while keeping down costs.
This system is based on exchange, transparency and communication. It also works for all sectors and at all management levels. You should be able to engage a community of designers for your product development for example and choose the best proposal together with the public. Then you will bring it onto the market, possibly even financed via crowdfunding.
The crowd is ready for this
This is certainly no science fiction, as proven by the growing success of the system. It is also the ideal time to get involved with crowdsourcing:
- communicating with the crowd is easier than ever before thanks to technological development, the social media boom and the development of online communities;
- the crowd is straining at the leash: a joint survey by several European universities showed that 54% of Europeans would like to support projects by companies and private individuals creatively and/or financially;
- co-creation, or developing a project together, is hot. The crowd can join in with a project for a whole host of reasons: the necessity for a creative outlet, commercial motives, dedication to society or just for a sense of honour or fun;
- the economy urgently needs sources of financing and innovative projects in order to achieve new growth and to increase competitiveness.
It will definitely take some getting used to as such a system radically changes the way in which a company gathers information, carries out research, produces and even finances projects. At the same time relationships with clients or users change as they evolve into potential colleagues, financiers and ambassadors.
But this does not have to be a threat. On the contrary, crowdsourcing provides you with a unique opportunity to relinquish your traditional methods. You can now look externally for ideas, get feedback from the crowd on ideas developed internally or even combine both approaches. The possibilities are endless.
The dos & don’ts of crowdsourcing
A good crowdsourcing project creates a win-win situation where the initiator and the crowd feel that they are achieving something together. How do you approach that?
In crowdsourcing the 'crowd' component is at least as important as the 'sourcing' component. In order to be successful you must build up this community and win it over. This is where the challenge lies: the crowd is not an anonymous, homogeneous mass but a collection of individuals and sub-groups. You need to seek out and mobilise each one separately. 5 tips for a powerful crowd dynamic:
Take care of the presentation of your project
Your project must appeal. Present it with photos, short films or a clear presentation – vague sketches or a half-baked concept are inadequate. Keep your explanation as simple as possible. After all not every potential funder is a specialist or an engineer.
Also, don't forget to keep your target amount as realistic as possible. Above all do not create the impression that the campaign is an excuse for personal enrichment or that you will channel the money off into other, existing projects. If you work with rewards, ensure that they are original and attractive, divided up into transparent and attainable blocks of financing.
Build your crowd
Look for the suitable crowd and get these people right behind your project. Approach them via all possible channels and assign them various roles: creative or technical input, critical analysis, ambassadorial, ... When doing so keep the threshold as low as possible, within your company as well. It is recommended that you bring as many of your people as possible into contact with the crowd in order to ensure healthy cross-pollination.
Live your project
A project without animation has little chance of success. So be motivated and keep motivating others. Respond to queries, take comments into consideration and intervene where necessary. Remember that participants cannot be squeezed to produce viable ideas. They too must go through a creative process in which they can gradually shape their input. So ensure that they continue to be involved. For this purpose it is necessary to approach each sub-group differently: encourage, win over (again), congratulate, permanently challenge, ...
Keep your campaign exciting
Keep communicating, even if some of the messages may be negative. The greater the involvement you demonstrate, the greater the loyalty of the funders and the greater their willingness to accept delays or problems.
A good dosage is important here. Ensure that news is provided at regular intervals to keep the crowd involved so the attention on your campaign does not fade away.
Your project, your rules
The principle: you decide where you want to go with your campaign while being open to suggestions from the crowd. So you lead the crowd to the desired end product rather than the other way round. Otherwise the outcome may be rather different to what you had hoped. A few examples of how not to do it are the recent – and hastily cancelled – campaigns which resulted in the product name iSnack 2.0’, a chocolate bar filled with mince, or a washing-up liquid with a scent of roast chicken...
Crowdfunding: financing with extras
Are you looking to finance a new project which has some risk attached to it? Present your plans to the crowd and discover how quickly small acorns can become mighty oaks.
Crowdfunding or participative financing involves looking for a (large) number of potential moneylenders. These may be professional investors or co-entrepreneurs or equally your clients or the general public. They will finance your project or company on a quid pro quo basis.
This specific form of crowdsourcing is centuries old. Just think about the construction of the Sagrada Família (Gaudi cathedral) in Barcelona or the plinth for the Statue of Liberty in New York. The way in which it happens is rather different today: via online payment or online platforms, often with lots of publicity on social media. The emergence of social media is undoubtedly one of the reasons for the increasing popularity of crowdfunding, together with the search for alternative sources of financing as a result of the crisis.
Much more than just a source of financing
While crowdfunding focused on cultural or humanitarian initiatives for a long time, its emphasis has recently shifted to commercial projects and even the financing of start-ups and small and medium sized companies. The advantages are clear:
- companies can meet the cost of – mainly innovative – projects which are less suitable for (complete) financing via a bank loan, business angels or a private equity partner. This may be because they have considerable risk attached or demonstrate too little concrete potential for growth, the required amount is too low or the company does not want to have an external party join in with the company capital.
- Financing is just one part of the story; creating sufficient 'buzz' and a community around your project will make you much more visible. Simultaneously, you carry out market research. Is there a call for your product or service? Is the design suitable? And are you bringing it onto the market in the right way? Thanks to this interaction you can also make adjustments to the product during the design phase, thereby reducing the risk of an unsuccessful launch.
- By taking the input of the crowd into consideration you will create a much closer bond with your target market, with clients developing into co-designers, fans and ambassadors.
The many forms of crowdfunding
There are several types of crowdfunding and each has its own way of working, providers and regulations.
Generally speaking we can see four different major types which each attract a different type of funder.
Reward based: crowdfunding with reward system
This formula is the quickest growing crowdfunding segment and it is specifically focused on creative projects by private individuals or small companies. It often involves a form of advanced sale whereby a producer or designer tries to gather the necessary funds to bring a new product onto the market. In exchange for their contribution, funders are entitled to rewards which mainly increase as more capital is collected. These rewards may be additional or exclusive options or perhaps signed copies, a more attractive price or even delivery of the product months before it becomes available to non-participants. Tangible or not, all these rewards have one common feature: they add value for the funder. The big players in this market are American platforms such as Kickstarter and IndieGogo or Hello crowd!Ulule.
Debt/Lending based: crowdfunding via loans
This type of crowdfunding is primarily intended for start-ups or companies which want to set up a new project. They borrow the necessary funds for this from a number of funders. The precise repayment modalities for the loan areset in conjunction with the financiers. This may occur with monthly sums for example, on one occasion at the end of the term – with annual payment of interest – or via a formula whereby both the capital and the interest are repaid at the end of the term.
Examples of providers include Lending Club (USA), Babyloan (FR) or Belgian platforms such as CroFun and Look&Fin. In Flanders this form of financing can also occur in the form of a Winwinlening (win-win loan) which provides the funder with additional tax benefits.
Equity based: crowdfunding through share participation
Large projects or companies which wish to collect a substantial amount are best advised to make use of this formula. In concrete terms the funders or investors form a cooperative which receives a share in the company concerned. In this way they invest directly in the equity capital of the company and have the prospect of a financial return if the project turns out to be successful.
An additional form is crowdfunding via profit sharing where funders invest a previously stated amount in a new company project. In return they receive a payment which is calculated on the basis of the growth in turnover or profit which the project achieves.
In our country MyMicroInvest and Angel.me provide crowdfunding services of this nature.
Donation based: crowdfunding via gift
With this type of crowdfunding, which is actually a form of philanthropy or patronage, funders do not expect any reward or yield for their contribution. The return is purely an emotional one. The beneficiaries are generally 'good causes' in the broadest sense, ranging from gymnastics clubs looking for sponsorship for new apparatus to initiatives for socially vulnerable groups. The Belgian organisation SoCrowd is an example of a donation based platform.
Intermediate forms An innovative form of financing like crowdfunding can of course not be shackled. This is why more and more hybrid types are cropping up. A company can set up a system, for instance, where they contribute 1 euro for each euro which is contributed by private funders. Another intermediate form is an interest free loan to a non-profit making organisation, a sort of combination of donation and loan.
Crowdfunding is also very frequently combined with other forms of financing such as bank loans or contributions by business angels or venture capitalists.