Why Most Initial Coin Offerings in 2017 Failed 4 months ago

ICO Fail Background

As ICO’s continue to garner the attention of more traditional financial areas, one aspect of the crypto-market that continues to worry investors is the relatively high failure rate for so many projects. Although venture capitalists would find a 10 or 20 percent success rate to be plenty, the rest of the financial community regards investing in these ventures to be more on the speculative side.

Regardless, funding in the ICO world has ballooned over the past year, with 2017 raising over 5.6 billion USD alone. With even more data becoming available from the hundreds of ICO’s that have been taken place, some trends regarding ICO failures are becoming increasingly clear.

According to a study by Bitcoin, 418 or 46% of the 902 new ICO’s listed on Tokendata in 2017 have failed. Out of that portion, 142 or 16% failed during the ICO stage, while another 276 or 30% failed while the project was post-ICO.

To make the statistics even grimmer, another 113 ICO’s are currently “unresponsive” and have withdrawn all communication with the public. If nothing changes, these additional projects will also likely be classified as “failures”, bumping the failure rate close to 60%.

From a normal business perspective, start-ups have a relatively high failure rate, so it shouldn’t be surprising that the majority of ICO’s are failing. However, these projects are failing at a much faster rate than other traditional businesses and even those in the high-tech sector.

Why Most Initial Coin Offerings in 2017 Failed

Is Over-excitement The Problem?

Before we jump into some of the more practical problems and solutions, it’s worth mentioning that just as cryptocurrencies have grown in popularity, so too has a certain school of thought grown that would seek to write off this excitement and growth as the byproduct of excessive popularity. In economics, its called the Greater Fool Theory; a theory that states the price of an object can increase not just because of its value but because of irrational beliefs that are attached to it.

In another way, this can be described as a bubble, and some have already compared the ICO boom to the internet bubble in the late 1990’s.

Whether that’s true or not isn’t necessarily the question of this article, but it is possible that the escalating excitement surrounding the crypto-market has led to an increase not only in potential investors but also in the number of potentially dubious projects looking for a quick buck. While there are plenty of ICO’s that are well thought out, there are also many projects that are seeking millions in funding despite not having even an alpha version of their token yet. Some developers are creating products more aimed towards having an ICO for the sake of it then generating genuine value to the marketplace. It’s not hard to see why some people think that this explosion in interest inevitably leads to an excess of sub-par ICO’s.

None of these concerns, however, take away from the legitimate value blockchain technology is adding to the world. But while the question of whether the ICO market is in some sort of a bubble isn’t something that we can control, what we can do is make sure that our own projects are well thought out and planned in advance to maximize the chance of success.

 

Is There A Market For Your Token?

Perhaps the first thing to ask before even beginning to start your blockchain project is whether there is a legitimate market need for your offering? This concern can be broken up into three separate considerations.

  1. Is there a large enough need for your product in the first place?

It’s easy to think that just because you are interested in your project that others feel the same way, but it’s important to verify that other companies, businesses, professionals, and your target market recognize this for themselves.

One can also frame this as asking whether or not your project is a good idea in the first place. Will your token be able to gain sufficient user adoption and be useful for solving real-life problems?

In 2017, Mercedes and Silber Pfeil Energy Drink partnered up for an ICO in a case that proved brand recognition isn’t enough to salvage a poor concept. The idea was that sellers would earn AMG Tokens offered by their ICO for every can of Silberpfeil they sold. While the concept of earning tokens as a reward might sound good on paper, reality proved it to be impractical. The idea of having to use a specific cryptocurrency to buy a specific energy drink wasn’t practical for most people and the project failed to raise enough funds to make it past the ICO stage.

 

  1. Is Your Token Offering Redundant?

If you’ve determined that there is indeed a need in the market for your good or service, the next question you need to ask is whether or not there are already pre-existing solutions in the marketplace. Whether these solutions are other ICO’s and crypto-projects or real-life alternatives, you need to ask yourself whether or not your project is doing something that the competitors are not, or at least if there is some type of competitive advantage.

If potential investors have to ask why they shouldn’t just use a pre-existing token, then it’s hard to see why they would bother to fund your own particular currency.

 

  1. Is a Crypto-Solution Necessary In The First Place?

Assuming you’ve taken the first two concerns into consideration, the last question related to market planning addresses whether or not a token solution is needed in the first place. Your idea should legitimately need a token-economy. Many ICO’s in today’s market are selling tokens merely for the purpose of raising easy money rather than genuinely contribute to the blockchain environment.

Investors and contributors in this community are looking for projects with a clearly defined market as well as future utility in your token. Blockchain-based products and services put decentralization and control back into the hands of end users. If your offering doesn’t necessarily require or include this feature, then you might need to go back to the drawing board.

 

Poor Marketing and Branding

The next big problem that ICO’s face comes down to how they present themselves to investors. People make subliminal judgments about your brand in seconds, and the way your company is presented in terms of its website, logo, visuals, and content all says a lot about your content.

If any of these marketing aspects aren’t professional, people are going to question your funding target, regardless of whether it’s $1 million or $10 million. Before one even begins a public token launch, make an investment to get a professional website, whitepaper and other content done. This is especially true for foreign-based crypto-projects where English isn’t a native language, as there are few things more discouraging in a whitepaper then seeing grammatical errors.

Additionally, ICO’s are just as much about your marketing efforts as they are about your innovative product. Whilst many ICO’s receive tremendous amounts of funding, simply throwing money at your marketing department won’t necessarily get you the results that you want. Crafting an intelligent marketing strategy means taking an approach that might be a little unorthodox.

For one, marketing efforts should have a clear picture of who their ideal customer is, what their pain points and needs are, as well as the best channels to reach them at. ICO marketers should have their buyer personas fully developed and should constantly be reviewing and evaluating the success rates and KPI’s on any marketing campaigns. Feel free to look through an earlier article of ours that covered how to market your ICO here.

 

Legal Issues

While much of the western world, including America, Europe, and some east-Asian countries regard cryptocurrencies in a positive light overall, there are still significant differences between the various nations and even within domestic regulatory bodies over how to define, classify, and regulate all the various digital assets. While an ICO that takes proper precautions remains unlike to be completely sidetracked by any legal issues that come its way, too many ICO’s remain ignorant of just how dangerous these problems can be.

In the United States, the Securities Exchange Commission (SEC) began cracking down on a number of ICO’s that weren’t complying with regulations. One notable case late last year was that of Munchee, a company that received $15 million in funding for a token that would work as a payment system for restaurant reviews. The company received a cease and desist notice from the SEC on December 11th.

More specifically, the legal problem Munchee found itself in was that it had mistakenly labeled itself as a “utility” token but was later deemed to be a “securities” token in accordance to the Supreme Courts Howey test. The worst thing about it was that the marketing material explicitly stated that the benefits of investing in Mun tokens included it’s appreciating value in the future, a selling-point distinctly unique for securities.

 

Final Thoughts

In the end, ICO’s fail for a multitude of different reasons, but many of them stem from a lack of proper planning and research before the project was even launched in the first place. Making sure that your ICO can genuinely improve the marketplace is the most important thing to make sure of. This, when coupled with a smart, growth marketing strategy as well as the proper due diligence to make sure no legal roadblocks come up, the chance of your ICO succeeding will drastically improve.


Also published on Medium.