Home Technology Cryptocurrency How to Structure a Successful Initial Coin Offering?

How to Structure a Successful Initial Coin Offering?

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Initial coin offerings (ICOs) are now all the rage in the startup funding sector. Since the beginning of the year, over $1.8 billion dollars were raised through this innovative new form of funding that involves the issuance of a new digital token to investors during a crowdsale, whose value acts as a proxy linked to the project’s future success. In that sense, ICOs are quite similar to stock IPOs, with the main difference being that digital tokens are not actual shares in the company, instead they only indirectly represent an investment in the project.

Despite the boom in initial coin offerings, this new source of funding is not without controversy. Due to limited barriers to entry, effectively anyone can launch an ICO to fund their new startup venture. This has, unfortunately, led to a large number of ICO scams as well as a string of mediocre projects hitting the market in search of funding, which, in turn, has given ICOs somewhat of a bad name in the cryptocurrency community.

Hence, if you want to launch a successful ICO, it is important that you structure your initial coin offering in the correct way in order to be appealing to investors and the cryptocurrency community.

In this guide, you will discover all the boxes you need to tick to complete a successful token sale.

Transparency Gives Legitimacy

Firstly, it is absolutely vital that you provide details about the company as well as the team in a clear and easily accessible manner. Due to the unfortunate occurrence of ICO scams, which almost always lack detailed information on the founders as well as the company itself, it is vital to tick this box and demonstrate that the company behind the project is legitimate and that its team is composed of professionals with a track record in successful entrepreneurial projects.

Highlighting the experience of the team as well as previous professional successes of each team member is important as investors want to be able to gauge whether the team can deliver the proposed project or not. Hence, a strong team composed of experienced developers and entrepreneurs is a vital ingredient to a successful ICO.

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Furthermore, open sourcing the code for the project also adds much-appreciated transparency and again highlights the development team’s skills. A bug bounty campaign could also be set up to incentivize outside developers to find errors in the code that can then be alleviated.

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A Detailed Whitepaper, Roadmap and Breakdown of Fund Usage

Secondly, a successful ICO always needs to have a detailed whitepaper that outlines the project in a manner that allows even non-technical folk to understand the project. However, that does not mean that the project’s technical aspects should not be included. On the contrary, highlighting the project’s technology in a detailed fashion is important to show investors and other developers that the project’s development team is up to the task of successfully completing the product or service they are raising funds for.

Having a detailed roadmap for the project is also of importance so that potential investors can get a glimpse of the timeline that they project is aiming for. The roadmap needs to be ambitious but also realistic for investors to buy into it.

Aside from a professionally written whitepaper and a detailed road map, it is also important to state what exactly the raised funds will be used for. Most commonly, ICO landing pages will show a pie chart that is split into development costs, marketing costs, bounties, reserves, etc.

Market and Competitors

Two other important factors that investors take into account when looking at a token sale is whether there is a market for the project’s product or service and who the already active competitors are in this market segment.

If the startup that is raising funds is creating an entirely new market for a previously never before seen product that can be a good sign or a bad sign. Common entrepreneurial knowledge states that if there is no market for the product, then there is also no demand for it. However, in the world of blockchain technology, entirely new products have been created, such as self-executing smart contracts, which went on to create entirely new industries.

Since investors will also look at who a project’s competitors are, it is important to clearly state how you differentiate yourself from existing competitors and those who are also looking to raise funds through a token sale. And, furthermore, state why your project will likely out-compete its competitors.

If you are able to convey convincingly why your company will be able to position itself as the number one in a specific market niche, investors will be much more likely to fund you.

The Digital Token

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There are over 1,000 digital currencies and tokens in the crypto assets market today. Hence, for your ICO to be successful it is important that your token stands out from the crowd. To stand out, your new token needs to have some sort of utility that will likely lead to an increase in value over time.

Before 2017, when token sales were not a daily occurrence, many projects were able to raise funds by simply issuing a token that acts as a quasi-share in the company. A great example of that was the ICO of the digital asset investment platform Iconomi, which raised over $10.5 million.

programmer

However, as there are several new digital tokens being issued on an almost daily basis today, most investors are now looking for more than tokenized securities. They want the token they invest in to have a real-world use or utility within the project’s network that suggests an increase in value as the network grows. Generally speaking, a well-designed token model should encourage mutually beneficial behaviour between users and the network.

Examples of tokens with specific utilities would be the Binance (BNB) token of the Chinese cryptocurrency exchange Binance, which gives holders the right to only pay 50 percent of the trading fees on the exchange or ether (ETH), which is used as fuel to Ethereum smart contract network and used to pay transaction fees.

Investors also look for favourable money supply management that increases the likelihood of an increase in value once the token starts to trade in the secondary market. For example, bitcoin’s money supply is limited to 21 million coins. No more than 21 million coins can ever be mined and this number will not be reached until around 2140. That means increasing demand is met with limited supply. Furthermore, the supply of new coins slows down over time to the regular halving of block rewards.

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Hence, when you are launching an ICO, it is important that you propose a money supply management strategy that investors will consider beneficial. For example, selling the majority of your tokens but holding some so that your company has a vested interest in the value of your tokens or limiting the total supply of tokens during the crowdsale so that once your funding target is reached, no more tokens can be bought. This, in turn, would suggest that the value of the token would increase if the token sale was oversubscribed once it starts trading in the secondary market.

Keep an Eye on Regulations

Finally, depending on your jurisdiction, there may or may not be ICO regulations you will need to follow. Countries such as the US and China are currently in the process of introducing regulations for token sales and other countries will likely follow suit. Hence, it is vital to stay up to date with developments in that space to ensure that you will not be in breach of any law or regulations.

If you are looking to fund a new project through an initial coin offering make sure you tick all of the above-mentioned boxes to increase your chances of a successful token sale.

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John DeCleene
Whilst having spent a lot of his life in Asia, John DeCleene has lived and studied all over the world - including spells in Hong Kong, Mexico, The U.S. and China. He graduated with a BA in Political Science from Tulane University in 2016. Fluent in English and proficient in Mandarin and Spanish, he can communicate and connect with most of the world’s population too, and this certainly helped John as he gained work experience interning for the U.S.-Taiwan Business counsel in Washington D.C. as an investment analyst and then working alongside U.S. Senator Robert P. Casey of Pennsylvania as a legislative intern. He subsequently worked as a business analyst for a mutual fund in Singapore, where his passion for travel and aptitude for creating connections between opportunities and ideas was the perfect intersection of natural ability and experience, spending his time travelling between Cambodia, Hong Kong, and China investigating and discovering untapped investment opportunities. John is a fund manager for OCIM’s fintech fund, and currently progressing towards becoming a CFA charter holder. He loves to travel for business and pleasure, having visited 38 countries (including North Korea); he represents the new breed of global citizen for the 21st century.