What Is an ICO?

In Accounting 101, we learn that assets equals liabilities plus owner’s equity. So when a team of people want to start a business (increase assets) they have two options on funding their venture: first, they can obtain a loan (increase liabilities) or they can receive investments (increase owner’s equity).

Traditionally, startup businesses that chose to fund their company by increasing the owner’s equity had only two options: either bootstrap it themselves or find investors who believed in their business plan. However, a new form of investing called crowd-funding has become popular through websites like kickstarter, indiegogo, gofundme, crowdrise, and others.

One way to think of cryptocurrency is a crowding funding or investment platform. Let me explain, when private companies go public they hold an IPO (Initial Public Offering). Everyone has a chance to invest in the company going public and the business is able to raise capital to support their future growth. ICOs (Initial Coin Offering) are like IPOs in that they raise capital for startup businesses and allow the layman to invest.

So where does the cryptocurrency come into all of this?

The cryptocurrency is a necessary part in all of this for two reasons:

  1. Potential International Investors. Let’s suppose that a man in Ukraine has a phenomenal business idea that fills a growing need. That man needs to raise capital in order to fund his business idea; however, he is unable to fund his business plan with his own funds. If this Ukrainian man is unable to find and convince major investors to support his business plan, the business will never launch and the need his business addresses will never be filled. Yet, there are thousands of people who would be willing to invest in his business plan if they had the opportunity. There’s just one small problem: these people live all around the world and use different currencies. This problem is solved when you introduce a cryptocurrency. Because of the nature these universal digital currencies, people in Ukraine and all around the world are able to receive investment funds to begin businesses.
  2. ICOs Cater to Startup Business. You could argue that the best business plans could receive the proper funding they deserve by being traded on NASDAQ or the NYSE. While that may be true it ignores the fact that startup companies wouldn’t be able to run out of the gates by holding an IPO. IPOs are reserved for companies that have experienced large spread growth being privately owned and need to go public in order to sustain future expansion.

If you are starting a business and are considering funding the said business through an ICO there are major advantages and disadvantages for doing so. Below are just a couple.

Advantages:

  • Ability to Raise a Large Sum of Money. If done correctly, an ICO can raise several million dollars, which for startup businesses is a great start. Honestly, anything more than that cripples the company’s ability to focus on creating revenue. Read more about the money myth here.
  • Forward Thinking. It’s no secret that cryptocurrency and blockchain technology is going mainstream so if you want to get the attention of a lot of potential international investors, having an ICO may be your best place to hedge your bets.

Disadvantages:

  • Your Value is Tethered to a Number. CEOs of newly traded companies typically feel constant stress concerning the perceived value of their company. It’s never a guessing game as to how much a publicly traded company is worth, the market will tell you. And so it is with startup companies that utilize ICOs and continue to have their “stock”/company token traded on cryptocurrency platforms.
  • Don’t Drink the Kool-Aid. Perhaps this isn’t a disadvantage as much as it is a word of caution. You, like many, may be tempted to think that since investors are flocking to cryptocurrency an ICO will go turn out millions of dollars whether or not the business plan is foolproof. Don’t be so naive as to think that every startup’s ICO leads to enormous piles of money. The most successful ICOs include meticulous business planning, well strategized marketing plans, and multiple fruitful roadshows.

If you are starting a business and believe an ICO will yield the best results than you’ll need to understand how to properly market your business in all phases of an ICO sale (pre-ICO, ICO, and post-ICO). See our article: Start Marketing Your ICO With These 3 Simple Tips for more information.

 

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