The Biggest Problem for ICOs? Their Own Investors

At the beginning of 2018, the blockchain community reached the pinnacle of the ICO bubble.

The slogan of ICOs, which promised “anyone can invest in an initial project,” sounded wonderful and futuristic. However, as the prices of most ICO tokens continued to tumble over the past year. It appears that the first chapter of this grand experiment has ended in failure.

Why do most ICOs fail to succeed?

Some would cite the greed of individuals blindly looking to make a quick fortune, incompetent project teams led by entrepreneurs that lack expertise, the technical limitations of blockchain platforms that lack scalability and inadequate regulations in countries that have been unable to keep up with changing market conditions.

These are all true. However, there is little to learn from this, as these are difficulties that all innovative, groundbreaking technologies face when forging new markets in their early stages.

Let's take stock of the current situation by examining the inherent limitations of ICOs.

The popularity of group purchasing channels

Despite the burst of the ICO bubble, the blockchain craze in Asian markets is not waning.

In fact, interest in new technological trends and expanding ecosystems is growing. In particular, in markets like China and Korea where cryptocurrencies have gained greater acceptance, retail investors continue to take part in initial investments for blockchain projects through a variety of methods.

In China, the secondary market has become popular because Chinese nationals are restricted from participating in ICOs by law, while in Korea, a number of ‘coin group purchase’ channels are being operated surreptitiously through KakaoTalk messenger or other communities.

Setting aside government regulation, there are other important reasons behind these trends.

Up until as recently as mid-2017, anyone with an interest in blockchain projects could participate in an ICO without much difficulty. However, from the second half of 2017, there has been a movement towards larger private rounds instead of public sales and lower participation from individual investors.

In particular, projects that were more confident in their fundraising ability increasingly sought a greater proportion of investment from institutional investors or dedicated crypto VCs instead of through public sales. Key examples of this are Ontology or Handshake, who simply engaged in community airdrops after a private sale, without conducting an ICO.

Individual investors interested in these projects attempt to get involved through influential brokers that can grant them access to the private round. At the same time, there are many complaints within the community about the expanding trend of institutional investors taking up the lion’s share of private rounds.

A reluctance to accept individual investors

There is a large gap between the role that many projects had hoped individual investors would play during the ICO, and the reality that they have been faced with afterwards.

While providing the public with a fair investment opportunity, project teams also hoped to create a loyal community that would be aligned with the project’s incentives and share in its growth.

Compared to the existing startup model, where the company grows based on investment received from a small number of institutional investors through closed channels, teams believed that ICOs would facilitate the creation of a more open ecosystem which would lead to a virtuous cycle of rapid growth.

However, individual investors in blockchain projects ultimately failed to provide much help to the projects in many cases.

The majority of ICO participants who formed the community’s persona were often “creditors” who only cared about the token price, rather than “contributors.” Many of these individuals simply jumped on the bandwagon of popular projects without a clear understanding of or trust in the project’s core technology or business.

Accordingly, they contributed very little to the productive activities that promote healthy growth within communities. In addition to this, few of the individual investors who took part in ICOs for blockchain projects actually used the tokens they received for the intended purpose once the dapp or platform was released. Instead, they were essentially free riders who sold off their tokens as soon as the price hit a certain level.

This led to a growing awareness among teams that they could actually threaten the long-term development of projects. From the perspective of project teams, it seems more efficient to manage a small number of professional investors rather than have to communicate and provide explanations to a community of individual investors who constantly ask about the price and listing on exchanges, especially during the launch stage when the team is naturally spending most of its energy on development.

Institutional investors also tend to have their own networks and greater insight into the blockchain industry. In many cases, institutional investors have provided practical assistance to help grow the project by playing an advisory role to entrepreneurs or recruiting team members during the early stages. These investors can provide support in a number of ways, including building local communities in key locations, hosting hackathons to connect developers to the project, or acting as a liaison with major media channels.

Because there is a longer lock-up period in private rounds than in public rounds, institutional investors have no choice but to believe in the mid-to-long-term growth of the project and offer assistance where they can. Of course, not all institutional investors effectively contribute to the development of a project. The behavior of some institutional investors who fail to provide promised support or lack expertise and judgment has also been a source of complaints within communities.

However, the competitive nature of markets is helping to correct this problem.

Because of the free and transparent flow of information in the hyper connected crypto ecosystem, information about reputable and not so reputable institutional investors spreads quickly between blockchain entrepreneurs. In time, only reputable crypto funds will be given the opportunity to invest in promising projects, similar to the growth process that venture capital markets went through.

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