Are ICOs the new IPOs?
Startups have always had to find ways to finance their ideas in their early days. From IPOs to crowdfunding campaigns to ICOs, acquiring capital is continually evolving.
One of the ways through which companies finance themselves is by ‘going public’ and selling shares of their company through an Initial Public Offering. Today, blockchain is offering a different way for tech startups to raise funds, and we are seeing more and more of these types of campaigns known as Initial Coin Offering. In case you haven’t heard: ICO is the new IPO.
IPOs: Offering shares to raise capital
Most of the fast growing companies that we know today, such as Google, Facebook, and Apple started out with as a small company. Their global success came from their ability to acquire funding and to expand through an Initial Public Offering.
An Initial Public Offering (IPO) is when a company offers their shares to the general public on the stock exchange market for the first time. Therefore, companies are private until they ‘go public’ with their IPOs. Whenever shares are sold, the company receives money. This capital can be used for various things, one of which is to be reinvested into the company for further development.
Due to government regulation, the process of IPOs are generally time-intensive and complicated. Companies often hire investment banking firms to help them with the process during which the company is required to disclose documents containing important information about their organisation. An advantage of this system is that it allows for greater protection of the investor, however, it becomes a costly process for the company.
Traditionally, IPOs have been an important strategy for raising money, in particular for the tech industry. But today, blockchain startups have been shifting towards Initial Coin Offerings.
What are ICOs and how are they different from IPOs?
An Initial Coin Offering (ICO), also known as a ‘crowdsale’, is a method for blockchain startups to quickly raise capital. In an ICO, blockchain startups run a crowdfunding campaign through the sale of tokens whose value can rise or fall depending on the company’s success rate.
This concept is quickly gaining popularity among blockchain startups who are looking for new ways to secure financial capital for their innovative ideas. IPOs are beginning to look a bit outdated next to ICOs, which allow companies to develop a white paper and rapidly organise a crowdfunding campaign. An important point to remember is that in an ICO, investors purchase tokens rather than shares, or equity, in the company.
While issuing shares through an IPO requires a considerable amount of paperwork and consistent financial reporting, ICOs can be completed much more quickly. Additionally, they are accessible to anyone with a cryptocurrency wallet who wants to invest in a blockchain company or an idea. Based on these differences, you might begin to understand why ICO is the new IPO in terms of profitability, accessibility, and efficiency.
Upcoming ICOs
One of the advantages of ICOs is that small investments can become quite profitable if it is invested into promising technologies. Many companies that are launching ICOs are working to develop cheaper and more efficient processes across various industries. Not only can this benefit companies, but also its users.
For instance, some of my favourite upcoming ICOs are Hirematch, Soma and LucidExchange. All three of them work to use the blockchain in order to reduce costs and to streamline processes of the recruitment, e-commerce, and financial trading industries, respectively.Make sure have a look at their websites.
With Deregulation Comes High Risk
Though the deregulation of ICOs allows for more efficient fundraising by blockchain startups, the lack of structure is a double-edged sword; ICO is the new IPO in the sense that is it cheaper and more efficient for startups. This also means that investors have to be more careful when funding an ICO. Fortunately, the company website and whitepaper of the ICO are public. So, as an investor, it is your responsibility to read it thoroughly and to understand the important concepts before investing.
ICOs have recently earned a bad name with criticism from various sources and the introduction of strong regulatory measures in China, which caused a dip in the cryptocurrency market. However, ICOs continue to be viewed and used as a way of transforming a simple idea into promising businesses. Most new ideas hit a bump somewhere in their development, but it is clear ICOs have emerged to provide blockchain startups a way to increase their capital, and ICOs are here to stay.
Great articel!
To be on the safe side, look what Buterin said about icos: http://www.investopedia.com/news/ethereum-founder-cautions-ico-bubble-vitalek-buterin/
The general advice is to make very sure that the distributed token is absolute necessary for the project to work, otherwise is more about short term financing.
Nice article. Interesting to see I'm not the only one that is thinking about this. I've been asking myself. How many people really do a proper background check before seriously investing in an ICO? I really advice people to take a look at: https://www.coincheckup.com Amazing opportunities came to light when I started using this coins to analyze cryptos.
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