Late 2017 started off with a bang. We were flying first class to conferences, and went on two extravagant company vacations. Daily company lunches were the norm. The hours were long, but it was all worth it because we had equity in the company, an ICO listing website.
An ICO listing website is a tool for investors to discover and research new projects. The business usually involves selling, marketing, and promoting services to ICOs. We had plans to open a satellite office in NYC. We grew from four employees to 15 almost overnight. During February 2018, we were getting so much business that we decided to invest in a client portal to help automate and complete sales for inbound clients. During this peak month, we raked in over $750k. The best part about it, is that over 90 percent of our business was inbound, meaning that these ICOs around the world came to throw money at us (mostly crypto money). Growth seemed to be automatic. Everyone thought the ICO mania would last forever; the hype and excitement was truly so intense it was blinding.
ICO total funding. Coindesk.com.
Too good to be true? Yup. Once the crypto market started to turn sour in the summer, the ICO market went with it. Company lunches became slowly more infrequent, and benefits such as gym memberships were cut. Then the firings began; four of the newer sales team members were let go because business was consistently slowing. Morale slowly started to deflate as we realized that the ICOs were forced to cut their budgets and conserve. By the second half of 2018, we were burning cash at an alarming rate.
ICO funding over 2018. icobench.com.
We attempted multiple pivots that were largely unsuccessful. We opened a consulting practice to help ICOs execute their roadmap, however, ICOs didn’t have the money for this either. We were successful at monetizing our data to various venture capital firms and market researchers at first, however, it just didn’t pay the bills, considering all the overhead we had accumulated during the bull run.
As an ICO listing site, we lived and died by the market. I’d argue that our beta coefficient was way higher than two. This means that as the market prices of crypto fell, we fell harder and faster on a relative basis. This is due to the high risk nature of early stage ICO investments when compared to say, Bitcoin.
Crypto investors are less willing to part with Bitcoin and Ethereum for riskier ICO tokens in a bear market. The retail investment market in ICOs dried up, as investors fled for lower risk assets such as Bitcoin, or out of crypto altogether. Bitcoin showed one of the best performances in 2018 relative to others, with many altcoins down more than 95 percent from their all-time high.
Additionally, ICO startups' treasuries took serious hits in the bear market if the ICO chose to hold onto the Ether they raised in the sale. However, most ICOs converted some funds to fiat in order to pay some expenses. When ICOs’ treasuries continued to deflate, they were forced to cut their budget somewhere. Most teams would logically cut marketing costs instead of development costs (I would do the same).
This happened because when ICOs became popular, they kept creating earlier rounds before the public ICO. They started doing pre-sales, requiring the investor to invest amounts larger than a threshold. The ICOs then started doing a private sale round exclusively to accredited investors. So what’s the problem with that? The problem is that the ICOs continued to offer steeper discounts to earlier investors. So when the tokens started trading on exchanges, many early participators dumped their tokens on the open market. We saw this time and time again. This eroded retail investor trust in the market.
ICOs demonstrated to us that there is demand for liquidity in early-stage investing. However, until the community figures out the optimal token design and incentive structure for utility tokens, I believe investors will focus more on equity investments in blockchain startups. Additionally, security token offerings have become an emerging trend in 2018. This is because it is currently unclear how some utility tokens will accrue value, and whether the success or adoption of a crypto network is correlated to the price of the token in the long run.
ICO investments are still happening, however, in a different fashion than public ICOs. One major reason for the evaporation of the public sale was that ICOs realized that they were opening themselves up to legal risk from the SEC for selling unregistered securities. Most investments are being made by VCs in a private sale. Crypto companies with tokens are now utilizing the public sale and/or airdrops mostly to gain users, not so much to raise capital. This is unfortunate because the public sale democratized access to venture capital investments, eliminating barriers to entry for investors.
In conclusion, the ICO market changed rapidly in 2018; it will be interesting to see how this fundraising model matures in 2019.
The name of the author and the company he worked for have been changed at his request.