The growth and popularity of token sales have grown exponentially since 2016 as a tool for start-ups to raise capital. The token sale process is often referred to as an Initial Coin Offering (ICO) and year to date, the market has seen over 2.3bn USD worth of ICOs — surpassing 2020 by some margin.
ICO’s have become a popular fundraising method used by start-ups to access new capital, build products, and incentivize early adopters. Whilst the intricacies change on a case-by-case basis, the process usually involves building a smart contract on a blockchain, marketing the token to a community of backers, and selling these tokens directly to the end-user.
Early funding rounds are often reserved for institutional investors or friends and family of founders. The decentralized nature of ICO’s means that anyone technically can become an early investor (although bear in mind some countries and regions may prohibit participation in ICOs).
Offers liquidity to investors on-market
More akin to a venture capital style of investment, ICOs offer additional liquidity as tokens are launched and increase in popularity. Real-time pricing can be attained which is set automatically through buying and selling and can be tracked against competitors for a gauge of value.
Little / no paperwork requirement
Raising capital through traditional routes like IPOs or crowdfunding campaigns inherently included the preparation and dissemination of vast amounts of paperwork. Sunk costs exist from legal fees and long lead times slow down offerings. ICO’s offer quick access to capital and as blockchain technology underpins these raises — there is a lack of paperwork and process requirement hoops to jump though.
There are plenty of potential structures a company may look at when launching an ICO. The lack of ‘best practices’ and willingness of investors to explore these open up a plethora of options that can add to a successful raise, integrate with a UI interface, or even just be utilized as a marketing angle.
Reward early backers
It is well documented that early backers of successful projects have the ability to make small (or large!) fortunes from price appreciation. Early adopters are often rewarded for identifying and supporting solid projects at the ICO, and those able to generate a large and active community can benefit greatly as holders are also incentivized to spread the word, help marketing efforts and offer suggestions to better the projects.
Whilst the benefits of launching an ICO is vast, there are also many challenges and risks associated with them. Due to the largely unregulated nature of ICOs, scams can be rife, with poorly informed investors losing most or all of their money. Launches can fail for other reasons such as fraud or incompetence of the founding team. We strongly encourage any company exploring a token offering as a potential route to take this into account to ensure goals and execution are aligned.
How to Raise Money With an ICO
There are hundreds of new ICOs each week. Each has a slightly different structure that should be informed by the utility of the token and the real-life use case of the protocol. Whilst the possibilities are endless when it comes to structuring tokenomics, there is a well-trodden path to a successful launch which usually includes one of two of the below rounds:
Private (or seed) sale
Private sales are usually reserved for either extremely close backers, employees, and institutional investors. It’s usually the earliest and cheapest point in which investors may purchase tokens in a company and these rounds are often capped and will finish once this limit has been hit. From our experience, it’s best to keep these private sales small compared to a public sale, as heavily marketed private rounds often put investors off when it comes to the public sales down the line. Another route that may be favourable is to partner with a venture capital fund at this point. Selling the full private round to a single investor has many benefits — including access to expertise, support, network, and other marketing activities.
Participants in pre-sales are often family friends and other individuals within the founder’s network. Often in this stage, bonuses may be offered alongside investments such as beta testing perks, additional tokens, or priority access. These rounds tend to be marketed heavily and be capped at a certain percentage of the total token supply. Potential public sale investors can be put off by large discounts at this stage as it increases the likelihood of a pump and dump ‘ public sale. From experience, a 10–15% discount to ICO price is accepted and encourages a strong investor base and prevents dumping on DEX offering.
The final and usually the largest part of the IDO is a public sale. Often this involves partnering with a launchpad that acts as a crowdfunding platform — allowing anyone with access to the sale to participate. It’s an easy way to get access to capital for founders, and each launchpad has its own listing ‘fees’ ranging from a percentage of the raise to a flat fee (which can be up to $30,000-$40,000 upfront. Other launchpads, such as the one we run within at Lithium Ventures do not charge fees, but rather look to take early stakes in launched projects — aligning incentives of the launchpad and company.
How to prepare for an ICO process?
Whilst there is little official paperwork to complete in the lead-up to an ICO process, there are several considerations that should be taken care of prior to any fundraising campaign. From experience, we’ve seen a considerable amount of failed and successful launches. Those successful campaigns often already have a large and active community — whether that’s in Telegram, Discord, or Twitter, alongside a strong product roadmap, marketing message and social following.