The Regrettable Under-Performance Of ICOs


Despite their phenomenal rise, today’s ICOs are greatly under-performing. Not because they are ineffective as such in raising capital for startups and projects, but because their true potential is only fractionally used: their inherent power is only partially harvested, because just a tiny part of their native force is exploited so far.

And this is regrettable

I am a great and loyal advocate of ICO’s, though I feel truly sad when realizing that such a powerful instrument is merely old wine in new bottles in its current form and appearance. The difference between raising capital through an ICO is unfortunately not yet fundamentally different from the traditional raising of capital through crowdfunding, angel investors, venture capitalists, debt financing etc.

Agreed, the ICO cosmetics are more fashionable, the tactics are somehow newer, and the channels are seemingly more modern, but at the end of the day, the core is the same old one: a promising idea is developed and written down by a small group of entrepreneurs or experts, is presented as such to potential investors, marketing efforts are made, classical enthusiasm is generated, and if all goes well, an amount of capital is raised. With that capital, that same small and confined group goes to work and develops the project further like any other traditional project. And that’s about it.

I firmly believe that tokens allow for far more dynamic methods of raising multiple types of capital and they can do so in far more dynamic ways. Ways which can match perfectly the desires of both issuers and token-holders. Tokens are the perfect gateway to access radically other dimensions of raising capital, multifaceted dimensions of raising capital, and they completely fail in doing so today.

We naturally tend to think of capital as some form of money. That may have been right, accurate, and true in 1998. But we’re in 2018 now. Capital can take many different forms today. It can be intellectual capital (ideas), human capital (a great team), crowd capital (the wisdom of crowds), and even in its monetary form, it can take many shapes and appearances (debt, equity, hybrid capital, seed capital, growth capital, subventions etc). We must urgently start thinking of ICOs as instruments for raising far more than just money-capital.

You’re quite right: I am just criticizing until now. Criticism is the practice of judging the merits and faults of something. Criticism is an evaluative or corrective exercise that can occur in any area of human or economic life. How exactly people go about criticizing can vary a great deal. In specific areas of human endeavor, the form of criticism can be highly specialized and technical; it often requires professional knowledge to understand the criticism. But to criticize does not necessarily imply ‘to find fault’, even if the word is often taken to mean the simple expression of an object against prejudice, no matter positive or negative. Often, criticism involves active disagreement, but it can just be an exploration of the different sides of an issue.

Most of all, criticism is about pointing at weaknesses and coming up with alternatives. Normally, criticism involves a dialogue of some kind, direct or indirect, and, in that sense, criticism is an intrinsically social activity. And dialogue is exactly what I intend to provoke through my criticism of the current forms and shapes that ICOs take today.

So let me point out the key weaknesses of today’s ICOs, but let me come up with some very valid and candid presumed alternatives.

Pioneer Tokens for intellectual capital and early-stage funding

First of all, long before any ICO is bound to take place, an initial entrepreneurial or technical concept is developed, usually by a team of experts in a certain field. Such initial concept could, in my opinion and under almost all circumstances, be enriched, enlarged, made better, and optimized, if submitted to the wisdom of crowds. Why should any idea, even if ground-breaking in its primary form, be kept in a proprietary circle, be presented as a finished product right from the start? Why should it be concealed and protected? Why not let it undergo the suffering of criticism, of challenge, of optimization?

Publishing a white paper under the form of a Pioneer White Paper for evaluation and scrutiny by a great many different technicians, enthusiasts, and other entrepreneurs would undoubtedly open the door for fresh inputs, constructive criticism, new features, angles, and unbiased innovation. Any initial concept could become so much better, so much richer, so much more innovative, simply because of the fully-fledged criticism by just anyone. And thereupon, contributors and critics could be rewarded with tokens for their input, for having helped turn a pioneer white paper into a full-blown white paper.

At the same time, publishing a pioneer white paper would put any initial concept in the spotlight with a global public of pioneers and early adopters that could well be hugely interested in, and allowed to invest in, the initial concept at a very early stage, while at the same time allowing and enabling technical and intellectual contributions from these pioneers.

These same pioneers could identify an interesting concept, see its potential, help to make it better and at the same time invest in its evolving initial concept at an early stage, knowing they are in touch with a really good concept that they can help to make an even greater concept. Any tokens issued at such an early stage, whether they are used for rewarding fresh input and ideas or whether they are used in exchange for early investment capital, would be called Pioneer Tokens.

Pioneer Tokens could typically be held for the longer term, but could be sold on during ICO-pre-sale or ICO by the pioneer token-holders. Pioneers could cash-in on their pioneer contributions or benefit from an early entry at a very low price.

Pioneer tokens for human capital

Pioneer tokens could be a very efficient instrument for attracting human capital for the longer term as well. As a project goes through the process of gathering and building its core management and operational team beyond its initial stage, the prospects of sharing in the spoils of an ICO would undoubtedly be a very convincing argument to attract formidable talent for any promising project. Tokens are, in my opinion, a sharp, comprehensive and efficient way to attract human capital which is sadly undervalued and barely recognized in today’s ICOs.

Revenue Tokens: beyond traditional equity and debt financing for projects

Besides that, tokens have the inherent possibility to represent far more than just some form of equity or debt in a project. Equity traditionally represents a form of ownership in a project. This practically means that equity represents the bundling of almost all economic aspects of a project: its revenue, cost of sales, operating costs, staff costs, financial costs, fiscal costs, and, at the end of the year, its net profit or loss.

These economic aspects cover a very wide area of risk and reward components, which are not always wanted or desired by all. An investor may well be interested in and believe in the commercial success of a project (its pure and simple capacity to generate revenue, regardless of the efficiency of its operational and financial management) but may be far less interested in or convinced of a project’s capacity to generate net profits in the short or medium term. Tokens can easily be designed to represent a stake in just the revenue stream generated by a project and not in the whole ownership economic and financial household of a project. Such tokens are called Revenue Tokens.

Revenue Tokens can be an innovative financing instrument and a powerful alternative for debt or equity financing. Debt financing is capital acquired through the borrowing of funds to be repaid at a later date. Common types of debt financing are loans and credit. Debt financing requires the payment of interest, meaning that the total amount repaid exceeds the initial sum loaned. It is quite obvious that debt financing is by far the most cost-efficient financing method for any project and for any entrepreneur. But put yourself for a moment in the position of the debt financier: the traditional debt financier is looking for the best value for its money with the least amount of risk. The major issue with debt financing is that the financier does not get to share in the successes of a project. All it gets is its money back with interest while taking on the risk of default. The interest rate is not going to provide an impressive return by investment standards. In fact, it will most probably offer only single-digit returns.

Revenue based financing (or RBF) is a form of debt financing in which repayments are based on a percentage of a project’s revenue rather than on a fixed amount. Revenue based financing is a highly customized form of debt or loan (actually, it’s far more like a business partnership between lender and borrower than a loan agreement) where each loan depends greatly on a project’s revenues (its turnover), on the structure of the project, and on the projects potential for growth. RBF is simply a type of funding in which a borrower agrees to share a percentage of future revenue with a lender in exchange for upfront capital. RBF materializes through Revenue Tokens in the digital age.

Tokens as an instrument to leverage the traditional raising of capital

And last but not least, there is the idea that raising different forms of capital through Pioneer Tokens, ICO pre-sale, or ICO and Revenue Tokens can be a superb lever for the attraction of capital in more traditional ways.

Buying Pioneer Tokens or tokens at ICO makes you, above all, part of an initiative. Inherent within it is the prospect of making an innovative concept into a real-world company, ideally with real (institutional) shareholders who operate in the same industry as the new concept. The initiative will make itself known among its peers and potential competitors through the wisdom and support of its crowd of token-holders.

Tokens, the symbol of how blockchain is changing the world of financing for good, represent real people’s perception of the potential success of a project, and bridge the gap between the digital world and the real world. Tokens are a solid indicator for the potential interest of future shareholders. The now-relatively-outdated traditional world of companies and shareholders can therefore be synergized with the ultramodern world of blockchain and tokens. Let’s assume a project manages to build a large and influential crowd of (pioneer) token-holders. Doing so will translate into a series of very important consequences. The fact that a large crowd has placed its trust in a project sets a benchmark for people’s perception of the value of a project. That benchmark can in turn serve as the basis for the project’s valuation by potential and future shareholders. This means that, the larger a token-holder crowd gets, the more valuable a project is perceived to be and the more capital it will be able to raise. And, the more capital it is able to raise, the more intrinsic power it will have and the more likely stratospheric success becomes. A large crowd of token-holders can generate crucial negotiating power with future and potential shareholders. A project won’t be one of the many startups that have to do the rounds, begging greedy and arrogant financiers, venture capitalists and investors for venture capital. No: it will be heard with the respect and full attention of its audience. It will be in a position to choose its shareholders. It will be in position to uphold a set of values, ethics and principles of doing business. It will be in a position to require that any future shareholders sign up to radically advanced charters of values. Among others, the core values contained in such charters could be: total fairness to clients; extreme transparency in all aspects of business; high moral standards; ceaseless striving for total responsiveness to clients’ needs and expectations; and respect for the client-first principle. A project will be in a position to ask our future and potential shareholders to delegate some of their youngest and brightest employees to come and work on the project, to join its team and to implement and optimize all of its business at every level and in all its aspects. Shareholders will be asked to share their best practices and insights with a project so that it will never stop improving.

By Dominique Michael Bellemans, CEO at Tera Vera Group

I therefore take the opportunity to invite you to react to this article and enrich it with your own input and ideas. To enrich it with your criticism and to share your views and ideas with us.



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