How ICO market must be structured
Recently we found that the market around blockchain startups dramatically emerged and became more transparent for structuring and systematization. ICO market is vague and suffers the lack of governmental regulation - on the one hand, it tangles any systematization, on the other hand, this market is turning a new niche for risky investors searching for opportunities with high returns. This article aims to structure the ICO market, outline the main players, uncover some major trends and understand the main reasons for arranging an ICO campaign.
The crucial step in our analysis is to derive all blockchain startups raising funds into 3 main tiers.
|3rd TIER||2nd TIER||1st TIER|
- Traditional IT startups.
- Tokens issuing here usually represent vouchers for future products or API key to access
- Kickstarter-like campaigns
- “ICOs” that have nothing familiar with ICOs
- Traditional IT startups implementing token/smart-contract/blockchain for a list of rational and non-rational purposes in traditional industries.||
- Infrastructural blockchain projects upgrading the blockchain industry itself|
- Business models are innovative and the blockchain technology helps to build up core processes
|Blockchain significance and role||
- raising funds
- upgrading operational and economic models
- reaching decentralization
- the blockchain is an integral and crucial part in the business model
- a project cannot operate without the blockchain
|Core investors||Minor investors||Minor investors and few business angels||Funds and professional business angels|
|Purpose of the ICO fundraising campaign||
- raising funds
- increasing sales
- raising funds
- building a community
- raising funds
- finding valuable strategic partners
- building up a community
- facilitating high ROI for early investors
|Criteria for success in fundraising||Marketing||Marketing, Hype||Product, technology, terms for investors, team, an additional value of blockchain implemented|
|Team||Specialist of traditional industries, lack of experienced IT staff||Experienced business and financial staff with poor IT||IT geeks and experts|
Please note, that tiers do not represent the quality of the projects. This concept aims to structure the market and not to determine the best area of investing.
The tiers’ features above are do not perfectly fit the projects in these tiers. The prior criteria for distinguishing a right tier for a project is 1) its industry and 2) whether the blockchain technology implemented has rational grounds.
Examples below will help to understand better this classification. Please note, that all features in the table above do not perfectly fit the projects below but demonstrate their core differences. Then, we will try to explain our view on every tier separately by dedicating stand-alone chapters to them.
The third tier - those who do not need ICO
We will go through this structure starting from the least attractive tier - the 3rd one. Such projects use ICO as a means of fundraising. Blockchain in their model do not adds value, and token emission appears to be the least costly way of fundraising with the lower responsibility to investors. Their tokens are usually either vouchers or security tokens with extremely high risk.
Sometimes investors do not pursue the goal to receive high returns from an investment - it may be a desire to support a project. In this case and some others, an ICO campaign fundamentally is close to a crowdfunding campaign like those taking place on Kickstarter.
An investor must take into account, that these projects have the highest risks. Here are some of them listed:
- they are vulnerable to non-blockchain competitors which prefered a strong business development to useless token issuing and fundraising campaign
- token is likely to be useless that may lead to its deterioration in value
- dramatic pivots without considering investors’ opinion
- the team may have no motivation in the price increase
- final product price may be significantly lower than initially expected
- no direct correlation between a company performance and token price
The 3rd tier projects often blame and lambaste banks and other sorts of financial institutions for being unfair to them. One must consider and remember, that the ignorance of banks, VCs, angels and etc. is always rational and indicates the lowest level of a project’s attractiveness. It is also clear that 3rd tiers projects are highly likely to turn scam. Also, 3rd tier projects often turn out to be ponzi-schemes and scam. Fortunately, we see the general trend of decreasing the number of such projects with the simultaneous rise of the financial literacy among crypto community members.
The positive thing we hope to see in the future is stricter government regulation and more equity tokens issuing - minor investors will get an opportunity to participate in IPO-like campaigns with fewer entry barriers, being protected by the government from scam and fraud.
The second tier – the heart of the market
The second tier of ICO projects may be represented as the core part of the market. The main reason is that such projects are responsible for the most part of the total funds raised on the market - about 80%, according to the ICOSCORING recent in-house research. We split this tier into two groups relative to the blockchain technology involved in a business model: “Relevant Implementation” and “Doubtful Implementation” that will be described later.
Dollar representation of ICO funds raised cannot be an object of the exact calculations due to the volatile currency rates and some artificial numbers indicated by teams to manipulate demand. So this slide aims to demonstrate only trends and proportions we witnessed through the year of our activity. 2nd tier share is still dominant but slightly decreasing.
4Q 2017 faced the dramatic increase in 3rd tier projects raising funds. That was the peak of the ICO hype for newcomers - both investors and issuers. The second ones got inspired by success stories of raising funds on ICO market that made them desire to repeat it for their often-crazy ideas with no rational grounds for ICO itself.
The other trend existing is the higher share of 1st tier projects taking place. We see the reason 1) in higher financial literacy among investors and 2) in shifting the hype to this tier. Investors learnt to identify potentially detrimental projects and potentially promising ones that have demonstrated high returns in the past. The bottom line is that 2nd tier is still dominant and “ICO” as a phenomenon is usually associated with this tier.
As you could notice from the table opening the article, we define 2nd tier projects as those who take an idea in an existing industry and find the implementation of the blockchain technology. This story looks comprehensible for investors and explains its popularity. The blockchain implementation may either be a good fit or turn the bad one. This is the reason we structured this tier as well.
The blockchain technology (in its general definition) may be used in 3 main forms:
1) tokens, 2) smart-contracts, 3) advanced blockchain functions (distributed ledger, “chain of blocks” and etc.).
As an example, a project may issue a token and integrate it into its business model, but avoid applying smart-contracts and the wide range of blockchain functions (e.g. proven and trustworthy history of transactions).
Before going further, let’s take a look at these functions and how they are used in our two groups of 2nd tier projects.
“Relevant Implementation” group
The projects from this group still implement the blockchain technology in the traditional industries but do it well. As the result of this structuring, they widely use the blockchain technology in its all functions. Here are some popular industries: logistics, document flow, cloud computing, cloud storage, energy distribution, fintech and some others. But it must be noted, that having blockchain applied does not guarantee any significant edge on competitors.
We see some clear trends in recent months of raising lots of cloud computing projects promising decentralized cloud computing with high TPS. Some of them are Ankr, Solana, DeepCloud AI, HyperNet, Uranus, Covalent, Hadron, Perlin, Oasis Labs, Cartesi, Dfinity, Amino.
If a project implements the blockchain technology in the relevant way it is likely to attract large funds in the fundraising process. Moreover, in this case, no significant marketing costs will be needed to finish the fundraising. As the result, such projects may be quite similar to 1st tier projects in terms of fundraising process and hype around a campaign, but our formal approach distinguishes them in the special group.
“Doubtful Implementation” group
The projects here use blockchain but it is not rational. It must be noted, that they are quite good in applying smart-contracts in comparison to the projects from “Relevant implementation” group. The reason is that smart-contracts make processes automated that looks game-changing in comparison to the similar projects avoiding blockchain. It usually attracts investors and turns a forefront for marketing campaigns.
In fact, traditional IT infrastructure allows doing the same with the same effect with no blockchain applied. The same issue is related to the blockchain and own tokens applied here: all they may be replaced with no problem. The staff like that only aims to raise the hype around a project and highlight it in a list of the similar projects from the traditional industries.
This group of projects is likely to face up to strong token value deterioration. The reason is that either a project or its ecosystem make token useless. It may be a result of a bad initial ecosystem design or failed team performance.
Let’s take a look at Rentberry. TThey raised 30M USD in March 2018 and had an experienced team, working product, good marketing campaign. But BERRY tokens issued appeared to be useless, and the team did not make tokens be accepted in renting accommodation. Moreover, if BERRY tokens turn accepted in accommodation renting, their price will hardly be around the ICO price.
In the case of BERRY token even being equal to 0 USD, Rentberry business will not stop operating as the core processes will not be damaged. As the result, participating in the Rentberry ICO resulted in ROI of 0.03x USD. This logic is unacceptable for 1st tier project - they cannot exist without the blockchain technology, so their tokens complete fall will lead to the total business failure.
Usually, token in this group has no value and does not add value premium to the business itself. When analysing token functions in such cases, some of our analysts say “Token function in the project A is to gather easy money”.
A reader may ask “Why project from the DI group exist and conduct ICO campaign?”
Here we may outline THREE fundamental reasons for occurring such projects:
1) Poor business sense of the team
1.1) Failure to understand its industry and market
1.2) Failure to understand the blockchain technology
1.3) Overestimated expectation to become game-changers
2) Direct intention to attract easy money for a current business – “Our current platform will be able to accept our token, and everything will be fair thanks to smart-contracts! Just give us 20M USD”. In such cases, a team is hardly to spend money rationally.
3) Scam – a project was initially designed to stole investors’ contributions
So one must bear in mind, that these projects are not supposed to be scam only - greed and fraud are only one of the scenarios possible.
DI projects are investment opportunities a bit far from being attractive, but their ICO campaigns often are successful, so it looks strange and counterintuitive. But there is an explanation, that we express in the formula below.
The formula for “Doubtful Implementation” group of projects is following.
As you could notice, we have touched all the components of this equation above missing the only one – marketing, that will be discussed in the next paragraph with some other staff.
The market around “Doubtful Implementation” group
Projects from the “Doubtful Implementation” group have their ideas but cannot reach their investors. Here a new market arises for these projects. Mark Twain once said “During the gold rush it’s a good time to be in the pick and shovel business”, and it is a perfect explanation in the industry of B2B services for ICOs.
The core of this market is marketing services, and following companies must be named here: AmaZix, Coinzilla, MarketAcross, TokenMarket, Sparkchain and others. As “Doubtful Implementation” group projects represent the biggest number of ICO projects and all of them are willing to raise millions of dollars, they suffer from an extreme competition with the obviously limited amount of money on investors’ accounts. Marketing agencies help to prevent lagging behind the competitors and raise significant funds.
Also, ICOs may attract companies to conduct all the ICO campaign or its specific streams. A well-known company here is ICOBOX.
Other interesting services include: smart-contract-development, legal support, tech support, whitepaper drafting (and other materials), community management, branding, advisory board assembling, events/conferences/roadshows.
We would like to highlight the group of “analytics and rating agencies” as ICOSCORING is obviously among them. ICO rating agencies suffer the problem of competing interests – in the highly competitive market they have to choose from two mutually exclusive options: whether to generate revenue or build up the reputation. Unfortunately, ICO projects are not willing to pay for fair ratings, especially if they turn out to be low. As investors could notice, ratings do not differ much – marks are likely to be high even for obviously bad projects. Here are a few reasons:
1) Lack of VC and valuation expertise among rating agencies
2) Following and copying others’ methodologies and marks
3) Overall overvaluation of the market
4) Bad ratings are not profitable on the highly competitive market of rating agencies
The current situation occurred is the reason why it is extremely difficult for new rating agencies to enter the market, and this market is turning more concentrated – new players have no way to earn fair money from their rating.
ICOSCORING team found an exit from this conflict of interests by building up long-term relations with investors and partners and by monetizing accumulated expertise and experience when choosing blockchain projects for investments.
The first tier – a new trend
1st tier projects are infrastructural projects upgrading the blockchain industry itself. Investors that are following the market and had a few contributions to ICOs could notice that 1st tier projects are likely to demonstrate high ROI. The reasons are good use cases for tokens, the hype around projects and the competition for allocations (natural or artificial).
1st tier projects are the focus of ICOSCORING investments and we may claim that these projects do not face up any obstacles in closing their hardcaps – they are usually oversubscribed by VC funds, individual investors, flippers, pools and etc. The prior obstacle in fundraising for them is to choose right investors who may have a strategic value for a project.
As the result, main sale round for minor investors aims 1) to build up the community, 2) to achieve good token distribution and 3) to facilitate great returns for earlier investors via special terms and hype.
The bottom line
We are witnessing a strong trend toward more projects in the 1st tier and more investments raised there. It seems to be reasonable as these projects are much more proficient in their technologies and are hardly to harness the hype around blockchain and crypto assets.
Chaotic and full of fraud ICO market is turning to something more professional with the more active government regulation and big players around. As our experience mostly covers VC, we hope that deal structures in blockchain projects will turn VC-like with no scam possible. The good news is that it is already happening and the trend is obvious.
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