2016: Blockchain ICOs changed the venture capital model

Baozou Comment : In 2016, ICO projects continued to emerge and became the main financing method in the field of cryptocurrency. There are many projects with clear business profit models; and these projects are basically centered on the Ethereum blockchain. Although the industry has good expectations for ICO projects in 2017, there are many uncertainties in the laws and regulations in this field, and some investment operations need to be adjusted. Therefore, it is currently impossible to predict the specific ICO model in the future.

Translation: Annie_Xu

You may have missed ICOs in 2016, but initial coin offerings have become the primary funding method for cryptocurrency projects.

Projects in ICO sell some tokens to early cryptocurrency adopters to obtain project operating funds.

There are two main benefits of ICOs. One is to provide funding for the project, and the other is to encourage the community to contribute (if the project is successful, they can get benefits higher than the purchase price).

Although there were many ICO projects in 2016, we are not unfamiliar with them. The ICOs in early 2015 included the famous Ethereum, Factom, Augur, NXT, and Mastercoin.

2016 was a year of particularly high activity in the ICO space; both the number of projects and the amount of funding raised were huge.

And the trends that began in 2016 may determine the future of ICOs.

As a preface, we would like to say that The DAO is not mentioned in this analysis because it does not fit the conventional ICO model, although investors still hold funds and have the right to decide how to use them.

Projects with a commercial model

In 2016 we saw a number of projects that received funding through ICOs and had effective business models.

If the project or company is successful, ICO token holders will receive dividends. These dividends do not come from inflation, but from the potential returns of regular proof-of-stake cryptocurrencies.

Therefore, for the first time, we can provide valuation models for these cryptocurrency tokens, as their value calculations go beyond speculation. Ultimately, the project cash flows will support the value of the tokens.

Although the ultimate value depends on the accuracy of the valuation model, investors can set different data and valuation ranges for their own models.

The ICOs that met this characteristic in 2016 were:

ICONOMI ($10 million): A project to develop cryptocurrency indices and hedge funds, an open source platform for managed investment funds.

SingularDTV ($75 million): ConsenSys’ first ICO, providing a digital rights management platform for TV series and movies.

We have summarized some valuation models from these projects for investors to learn. They use existing financial tools to evaluate companies, and investors can use this as a basis to decide whether to invest in ICOs.

Augur, which raised $5 million in its ICO in 2015, also issued Augur tokens for trading in 2016 with the aim of building a decentralized prediction market.

However, these projects are not profitable at present, but may become profitable in 2017.

Many people are looking forward to the project going online, and ICO investors will also get a return on their investment.

Regardless of whether they are securities or not, ultimately these ICOs may not pass the Howey Test and therefore may require more legal and regulatory help.

New blockchain or existing blockchain

The trend that emerged with the rise of ICOs in 2016 included developing projects on top of existing blockchains, most notably Ethereum.

ICONOMI, FirstBlood, SingularDTV and other ICO projects that have received a lot of investment are all based on the Ethereum blockchain.

In 2016, excluding The DAO, Ethereum-based ICO projects raised a total of $46 million.

The ICO projects Lisk (raising $6.4 million) and Waves (raising $15.9 million) in early 2016 may become new token issuance platforms in the future.

Incent Loyalty issued tokens on the Waves platform, but Ethereum is still the mainstream. This is also the first time we see the network effect of the Ethereum ecosystem.

Ethereum also provides potential investors. The downside is that potential enthusiasm may lead to neglect of due diligence. Many projects have perfect plans, but there are problems with the business model or technology, or they are simply scams.

We expect this trend to continue in 2017 as many Ethereum projects will come online and issue tokens on Ethereum.

Investor Due Diligence

The ICO trend in 2016 is good, especially in the medium term.

FirstBlood raised $5.5 million in ten minutes, while SingularDTV raised $7.5 million in fifteen minutes.

We expect that investors will conduct more due diligence in 2017 and have higher standards for ICO projects.

You can no longer raise $10 million with just a white paper and an about page.

Investors will pay more attention to project background, sustainability, technical capabilities, and real business use cases; at the same time, they will fully consider the price of tokens.

Questions that need answers in 2017

The ICO trend was quite obvious in 2016, but many factors that will affect the growth of ICO in 2017 still need to be addressed.

The community is still debating whether ICOs should have a cap. In 2016, many ICOs set a cap, but they were sold out almost immediately after the cap was reached.

We are not sure if there will be a cap after the ICO, but the percentage of ICO tokens that can be given away will face more stringent scrutiny.

On the one hand, ICO investors may want to hold most of the tokens; on the other hand, if ICOs begin to compete with traditional venture capital for investment projects, they may follow a similar multi-round process.

ICOs may try new financing models. For example, Ethereum-based Gnosis plans to adopt the Dutch auction, a bidding model popular in the bond market.

Other questions include which ICO tokens will be considered securities by regulators.

Some new methods of operation may emerge in this area.

Hopefully, regulation will also adjust as businesses grow.