Are ICOs the ultimate democratisation of crowdfunding?

With Facebook the latest major advertiser to crack down on ICO promotions, let’s consider who the real winners and losers are, in this new way of funding start-ups

Traditionally, raising capital to fund a business has been done through a relatively narrow selection of options. If you were unable to bootstrap your business the old fashioned way and raise funding through private loans or investment, then you had to sell your idea (and a big chunk of the equity) to venture capitalists or angel investors - whose main aspiration for their funding was a healthy return over a strictly limited timeframe.

Then everything changed with the advent of crowdfunding platforms a few years ago. Now anybody could promote their own idea and sell the outcomes, rather than the equity, in any units which made sense to them. You could buy a product not yet produced, invest in a performance or piece of art, contribute just a small amount along with millions of others, and be part of something much bigger.

Patreon did the same for the arts, and Seedrs for business investment. But the platforms focussed around physical consumer products, Kickstarter and Indiegogo, were the ones which truly captured the public imaginations.

One of the first high-profile successes was the Pebble watch, which raised $10,266,845 in 37 days - and then suffered a number of teething problems which delayed manufacture and delivery due to the overwhelming uptake, but was ultimately a great financial success for its creators (less so for its investors when the creators sold the company a few years later, leaving a non-updatable series of products in their wake).

The outcome was not much better for purchasers of the Oculus Rift VR headset, whose early faith in an innovative product category ultimately benefited Facebook more than anyone else. But they were both examples of breakout success stories for the Kickstarter platform - which had enabled anyone who chose to invest in a product they believed in.

Or mostly anything.

Because Kickstarter (and other platforms similarly) have a long list of items which is it prohibited to offer, - many of which make sense if you believe that people need protecting from certain categories of content such as miracle cures and replica weapons, but others less so (energy drinks? They usually taste horrible, but you can buy them on ever high street…). And you are not allowed to promote projects for political fundraising - so, you can’t trade and invest totally freely, then.

And of course it costs a lot of money to launch a business, particularly when a physical product is involved. With platform-based crowdfunding, on top of your costs of development, manufacturer and marketing, don’t forget to factor in the costs for using the platform itself: 5% on Kickstarter (4% on Indiegogo), + payment processor fees higher than 3%.

Furthermore, when we talk about investment being ‘open to everyone’, we actually mean ‘open to everyone with easy access to a bank account, credit/debit card and the internet’ - an easy mistake to make in the developed world, where we regard the financial infrastructure we are accustomed to as a hygiene factor for everyday life.

Now, whilst they might remove the central platform fees in most cases, ICOs are not yet able to fully tackle the latter social barrier. Not if they ultimately want their token to be tradeable on popular exchanges. Indeed, the incorporation of rigid ‘Know Your Customer’ procedures during pre-sale registration is seen as a reassuring signal of organisational responsibility.

But let’s remember that KYC and other measures are nothing to do with the transaction itself, and increasingly represent the last gasps of financial institutions who are seriously concerned about losing their monopolistic control of our economy’s value, and the disruption which is coming their way.

So the next time you see someone telling you what you can and can’t do with money you have earned, have a long hard think about the vested interests behind it, and whether that truly aligns with your own interests.

I don’t think we’ve achieved true democratisation of the crowdfunding process just yet. But the sale of crypto-tokens is a start. And as people learn to do their own due diligence about exactly what they’re investing in, then increasingly we won’t need intermediaries telling what we can and can’t buy either.

Then it will really get interesting.