How to Use Cryptocurrency to Fund Your Startup

By Adrian Cruce

The global cryptocurrency market size was valued at $1.49 billion in 2020. At the same time, it is projected to reach $4.94 billion by 2030. The promising future of the crypto market has lured aspiring entrepreneurs to enter this dynamic realm; however, making a breakthrough in the crypto landscape is no easy treat. You may have an out-of-the-box idea but need financial resources and investors to support your dream.

ICOs, short for Initial Coin Offerings, have emerged as a popular fundraising mechanism for early-stage cryptocurrency and blockchain-based projects. This new type of crowdfunding enables entrepreneurs and innovators to reach potential investors and acquire capital faster and with fewer formalities. With more resources, you can kick-start your business rather quickly. But to propel your startup toward success, you must understand all the intricate details of this alternative fundraising avenue.

So, let us help you launch a successful ICO campaign!

Initial Coin Offerings (ICOs) – Concept and Functioning

Initial Coin Offerings (ICO) is a capital-raising event in the cryptocurrency and blockchain environment. ICOs are equivalent to Initial Public Offerings (IPO) but have greatly revolutionized traditional fundraising methods. ICOs leverage the power of blockchain technology to attract global investors while also removing intermediaries from the fundraising process.

Companies and individuals publicly announce their “bright ideas” through the ICO trading platforms, inviting everyone to invest in the crypto-based project. The company creates, issues and sells digital tokens and coins to investors in exchange for established cryptocurrency coins such as Bitcoin and Ethereum. The new cryptocurrency tokens or coins represent a stake or utility within a specific project or platform.

Investors purchase the coins at a predetermined price, expecting their value to increase as the project gains traction. ICOs have decentralized the fundraising system, allowing entrepreneurs to secure sufficient resources to power up their innovative ventures.

ICO Vs IPO: Know the Difference

Initial Coin Offering and Initial Public Offering may look similar but are poles apart. Although both methods are used to raise funds for a crypto-based startup, they have many dissimilarities.

  • In an IPO, you buy a share of the company. In an ICO, you buy a token representing various things within the project’s ecosystem, e.g., utility, value, voting, staking etc.
  • In IPO, founders must give equity to the I vectors; in ICO, the equity remains with the creators.
  • IPOs are regulated, and the founders must create a prospectus (a legal document). The prospectus must contain all the information about the company giving the investors an in-depth insight into the business. Whereas ICOs are not regulated and therefore require fewer bureaucracies.
  • In ICOs, investors can directly contribute to the project through the designated cryptocurrency, such as Ethereum. In the IPO, investors rely on brokers to facilitate the funding process.

Why Are ICOs Considered Beneficial for Fundraising?

ICOs were first introduced in 2013 when J. R. Willet was able to raise $500,000 worth of Bitcoin by writing a white paper titled “The Second Bitcoin White Paper” for the token MasterCoin (now called Omni).

Following Mr Willet’s footsteps, entrepreneurs and individuals began raising capital through ICOs. In 2014, $30 million were collectively raised by seven different crypto-base projects. Ethereum’s ICO,  one of the most successful ICO of 2014, raised $18 million in just 42 days!

So, why are entrepreneurs and investors determined to acquire funds through ICOs? Here are all the benefits that encourage founders and investors to rely on ICOs.

1.    Global Accessibility

ICOs provide a global platform for startups to access a diverse pool of investors worldwide. This global reach allows projects to tap into a broader investor base while bringing more capital for the founders.

Since ICOs are open to all, investors have the leverage to contribute to the startup at any given time. Early investors enjoy more benefits as they tend to pay less by avoiding premiums. And once the project succeeds, they can enjoy a greater return on their investment.

2.    Increased Liquidity

ICOs provide liquidity to both investors and project teams. Investors can trade the tokens acquired during the ICO on cryptocurrency exchanges. They can potentially benefit from price appreciation or liquidity in the secondary market.

For the founders, the increased liquidity can be advantageous. If the project gains traction, the token’s demand will increase, allowing the founders to fund ongoing development or operational expenses.

3.    Cost Variation

Using ICOs as a funding mechanism offers the potential for significant variation in token values across different startup projects. This dynamic range of token values lowers the risk for investors and enhances the opportunity to realize substantial profits.

Furthermore, attracting many investors facilitates the execution of multi-million dollar ICO projects, enabling ambitious ventures to secure substantial funding for their initiatives.

4.    Less Paperwork

ICO is streamlined, time-saving and efficient compared to the traditional fundraising method. By issuing tokens, founders can generate a substantial amount of capital without the need for intermediaries, complex paperwork, and approvals.

5.    Control And Flexibility

Founders have greater control over the terms and conditions of the ICO, including token pricing, supply, and distribution mechanisms. This flexibility allows founders to tailor the fundraising process to meet their needs and goals.

Potential Risks Associated With ICOs

Initial Coin offerings may allow enthusiastic creators to meet risk-tolerant supporters, but every coin has two sides. There are some risks associated with this unique fundraising idea, such as:

  • If the ICO fails, the tokens lose value and become worthless, making it a high-risk investment.
  • You may fall prey to scams and frauds.
  • The ICO market is under–regulated.
  • Limited transparency regarding the progress of the project.
  • Investors have no protection if an ICO fails or turns out to be fraudulent.

Since the ICO market is a breeding ground for fraudsters and the legality of cryptocurrency or digital assets is not guaranteed to persist,  many countries have banned ICOs. In 2017, the People’s Bank of China issued an official ban on ICOs, specifying them as counterproductive to economic and financial stability. South Korea also prohibits ICOs for raising funds.

The Securities and Exchange Commission (SEC) has implemented regulatory measures to oversee and control ICOs in the United States. SEC was able to trap some suspicious ICOs showing their commitment to protecting investors.

Countries such as Australia, New Zealand, Hong Kong and the United Arab Emirates (UAE) have already formulated guidelines governing ICOs.

ICOs

Best Practices for a Successful ICO Campaign

ICO has witnessed tremendous growth over the past few years. However, certain factors may be considered to make your ICO campaign a successful business.

▪         Developing a Clear White Paper

Whitepaper is the foundation for any ICO campaign. The “White Paper” usually contains all the necessary information about a particular project, including:

  1. What the project is about.
  2. How the project aims to fulfill all its objectives.
  3. Capital is required to undertake the venture.
  4. Currency accepted
  5. How many virtual tokens will the issuer keep for themselves?
  6. The team behind the ICO paper and so on.

The whitepaper is prepared before the founders launch the new currency. And so, it is necessary to clarify all the details in the whitepaper, allowing investors to see the full picture of your venture.

▪         Building a Strong Community of Supporters

Having a strong community of supporters will help you reach your goals quickly. Engaged community members act as brand ambassadors promoting the ICO campaign through word-of-mouth referrals. Spreading the word about the project, sharing updates, and participating in discussions, amplifying the project’s message and attracting more potential investors.

▪         Socially Engaging With Investors

Social platforms can significantly enhance the success of an ICO. By actively engaging with investors through social media platforms and discussion forums, founders can establish a sense of authenticity, transparency and credibility.

The entrepreneurs can also initiate discussions, host live Q&A sessions, and share project updates on social media platforms. Founders can also gather feedback and suggestions from investors to enhance the quality of the project. These simple strategies foster a collaborative relationship between the team and investors while attracting new project investors.

▪         ICO Audits

By seeking the services of independent auditing advisories to conduct audits on their ICOs, firms can effectively communicate their trustworthiness to potential investors. The audits help uncover potential issues with the ICO, such as legal framework, financial model etc. ICO audits increase the project’s credibility, making investors feel more confident.