There is no person in his or her 20’s that has the Internet connection and have not heard of the bitcoin. While the bitcoin and other cryptocurrencies have been in the news for already some years, this year they were the headlines. The reason behind this is very simple. The cryptocurrencies have increased their value nearly 10 times, and of course they have gotten lots of attention. However, the these virtual currencies are also contributing towards the technological advancements, and to be perfectly honest, they are actually revolutionising the financial industry. This year more early stage startups have received their funding via something known as the Initial Coin Offering than from the regular venture capital funds, and today we are going to guide you through the magic world of ICOs.
What is an ICO?
Essentially, the theoretical side of the Initial Coin Offering is not really different from the stock markets’ Initial Public Offering, a process when a company decided to issue some of its shares to the general public at a predetermined rate. As defined by a leading ICO rating agency Tokenguru – it is also quite similar to various crowdfunding platforms like Kickstarter. The idea behind such platforms is really simple – there is a bunch of (hopefully) talented people that have an amazing idea of establishing or growing their business and they miss one important ingredient – the money. Now these gifted folks are deciding to engage in some sort of a trade off – they sell a part of their company’s equity (and potential profits) to the people that have nothing to do with the company, but have some cash available at their disposal.
Let’s illustrate it with an easy example. Imagine there is a guy named Bob. He is an amazing mechanic who just recently got fired because of a fight with his boss. Now Bob has decided to go solo and open up his own body shop. The problem is, our matey Bob is broke as f*ck and he can’t really afford rent, equipment, advertising and all of the other needed items to run the business. However, Bob is a smart guy and he really knows what has to be done and how it has to be done. So he gathers his friends for a few cold ones and offers them to contribute a total of $50,000 in exchange for a half his business and a half of all of the potential profits. Each of his mates can contribute as much as they want, until a total of $50,000 is collected. If you are good in math, you already figured out that one percent Bob’s business (let’s call it BobBodyShopCoin) would be worth $1,000. However, it is possible to buy as little as 0.001% of Bob’s body shop simply by investing $1.
How does an ICO work?
A certain company that is looking to raise the funds has to issue some coins. The number of coins can be either static (say 100,000 coins) or dynamic (as much coins as possible). The general rule is that these coins have to be issued at a fixed price and within the fixed period of time.
Say Bob is looking to raise his $50,000 and plans to issue 50,000 coins, each of them valued at $1. Let’s assume now that Bob has been always helping his friends with their whips, and they all believe that he will be very successful. Let’s also assume that his friendly are quite wealthy. Hence, raising $50,000 should not be an issue for him at all.
Now let’s also assume that instead of going for a flat goal of $50,000, Bob is actually happy to accept as much money as possible. He knows that he can also set up a performance shop, a car wash or any other facility, depending on the available funding. Why would Bob only ask for $50,000 if he knows that he can arrange a great business for $500,000, right?
What are the benefits of an ICO?
When compared to other ways of funding the company, the main advantage of an ICO is the flexibility that it offers. As you see from the example above, it is possible to have a static amount of funding or a dynamic one.
Another thing that makes ICOs great is that the price of a token is fixed throughout the whole time of the offering. Unlike an open part of an IPO, where the price tends to fluctuate (and sometimes can be as volatile as 25% intraday), you can always snap a great deal on an ICO, even if you are about to purchase the last part of the available tokens.
Apart from the mentioned strong points of ICOs, they also tend to share the regular benefits of the cryptocurrencies – transparency, privacy, fast speed and low costs.
For the companies, obviously, the main advantage is the accessibility and costs involved.
Let’s tackle some of those advantages with an example.
Imagine our friend Bob is actually an antisocial person that does not have a single friend. It will be pretty hard for him to find some funding for his company, considering that he doesn’t have anyone to ask about it, right? Well, not with an ICO. When Bob decided to launch his coins, his ideal will be connected with the large pool of potential investors, and these people don’t even need to know Bob’s name to be able to get a cut in his body shop business.
When speaking of a larger companies, we can generally conclude that flipping an IPO or just collaborating with venture companies is actually quite a time-consuming and expensive process. Besides that, the market for such investments has actually quite some caps, unless your idea is actually worth millions – there hardly be anyone interested. However, with an ICO, a company can simply leverage the modern technologies and get the needed funding without any extra costs involved.