ICO: The Alternative Funding Structure

Previously, we have witnessed Entrepreneurs and Business managers raise capital through traditional banking institutions but the increasing high interest rate on bank loans has indirectly fueled the creation of alternative funding structures such as Business Angel investments, Venture Capital firms, and crowd-funding platforms. Time series data reveals that technology plays a pronounced role on the emergence of various funding platforms such as prominent crowd-funding portals namely; Indiegogo, Kickstarter, and Crowdcube amongst others.

Most recently, a funding structure similar to the Equity Crowd-funding model has emerged as a worthwhile medium for raising money at seed rounds. Using the blockchain technology, Start-ups and SMEs are raising money through Initial Coin Offering (ICO). Ventures adopting ICO as a funding structure often operate within the Blockchain/Cryptocurrency space and several ventures are raising quality capital through this medium.

Through ICO, we have witnessed fundraising from ventures such as Filecoin that raised $257 million for its decentralized cloud storage project over a period of one month. Tezoz is another venture that raised $232 million through ICO for its self-amended distributed ledger project. EOS is also a project that had previously raised $185 million for its smart contract project. Although some of these projects had the backing of leading blockchain Venture Capital investors, the concept of ICO has proved to be a trustworthy way of raising capital for Blockchain/Cryptocurrency related projects.

A growing number of businesses are adopting ICO as a means of raising money. During the second half of 2017, we have seen a leap from 50 numbers of ICOs monthly to about a thousand ICOs monthly. This suggests a growing number of ventures are relying on ICO to raise money for their businesses. However, there are serious concerns on the quality of these projects raising money through ICO. As much as ICO is considered a high-risk asset class for investors due to under valuation or over valuation of the assets, it remains obvious that new ventures are relying on this concept to raise money for the projects.

It is also apparent that VC firms and Angel Investors are leaning towards ICOs as an alternative investment structure with potential for much more higher reward. At the moment, market valuation on token offering seems blurry to investors due to difficulty in determining the actual value of the tokens but the the key question that remains unanswered is; how can investors determine the actual value of tokens? Addressing this question will further validate ICO as a modality for raising money, and it will also help investors in screening and selecting quality projects.