‘ICO investments at nascent stage in India, tread carefully’

Both the conventional Angel or Venture Capital financing route, and the new ICO route, have their own pros and cons. In my view, both will coexist and be a better fit for different kinds of start-ups.

From an entrepreneur’s point of view, there are three key potential benefits of the ICO concept. It can be, in many cases, faster than a typical VC fund raising.

Secondly, ICOs can allow for the creation of a global community or a network of users of the product or service, even before it is actually developed. ICOs allow for more democratised and decentralised crowdfunding.

Finally, unlike VC money, most ICOs do not involve giving up the equity portion in the start-up.

Instead, they issue crypto tokens to investors.

Start-ups that raise traditional VC funds can often benefit from the value that such investors bring beyond their capital (in terms of networks and advise).

This is one reason why even ICOs have started to raise private rounds with such investors before going for a public sale.

Start-ups that go for VC funding typically raise money in stages based on their growth and other metrics, so one risk with the ICO path is the potential lack of financial discipline when inexperienced teams suddenly raise much more capital than they can efficiently utilise.

Has the ICO marketplace evolved?

Investors must note that the current ICO market is nascent and full of hype, manipulation and at risk of scams.

Combined with the lack of regulation and investor protections that typically come with equity, one must be extremely careful when exploring investments in ICOs.

Pursue a user case where decentralisation and Blockchain will create a real advantage for consumers or businesses.

One must gather a strong technical team with at least one person with Blockchain development experience.

You must treat the white paper (which is offered as an offer document to potential ICO investors) as not only a marketing document, but a well thought out plan to build your project.

Don’t hire paid advisers purely for their name.

Instead, the start-ups need to engage with those who will be actually involved in supporting the project for the long-term.

One must remember that regulators are taking strict action in many countries if capital was solicited in violation of securities laws.

One must not underestimate the time and cost it can take to prepare for and complete the ICO. This is dependent on market cycles. Budget for at least $100,000-200,000 in the current environment.

India is a tiny part of global ICO fund raising avenue thus far. I have tracked between 30 and 40 Indian teams that have tried to pursue ICOs.

Since India does not have a regulatory structure for ICOs, all of these have chosen foreign jurisdictions and most of the capital raised has also been from foreign investors.

The market for ICOs was extremely hot a few months back, partly driven by the exponential rise in the value of Ethereum and Bitcoin.

However, the situation is quite different right now, and it can be longer, more expensive and counter-productive to raise capital through ICOs.

Hence, very few new projects from India are currently able to raise significant capital via ICOs.

Given the disruptive potential of this new method, we are advocating to pay close attention and run sandbox experiments to allow some high-quality ICOs, because India can be a major beneficiary of the capital that can come in to support Indian start-ups.