The modern digital world had seen the creation and development of the fundraising platforms due to rising need of an individual availability of the real opportunities and small private businesses development as well as innovative ideas financing via the Internet.
Even long before the Initial Coin Offering model came into big-time market play, the popularity of those largest platforms had been more noticeable, which had provided the chance to promote and finance the project online, like the most significant players of this business – Kickstarter and IndieGoGo.
Nowadays, the promising startups of independent projects have the opportunity and alternative to the classic venture capital funds. Anyway, both models do exist in parallel at the moment, each of them having apparent advantages and disadvantages, cons, and pros. Let’s have a closer look at the ICO and crowdfunding models, considering their best and worst current features.
The rise and fall of crowdfunding: from first success to the major problems.
The first example of the successful fundraising by the public network had been made 20 years ago – in 1997 the British band Marillion successfully raised $60,000 for its American tour, which was a significant event at the time.
However, this model of financing had gone mainstream only after more than a decade – with the advent of specialized websites like Kickstarter and IndieGoGo. Gradually, the private business shifted to the Internet, and yet, despite the popularity of such money investments grow even year, the main problem is still not resolved – the number of technological solutions of development had only increased the competition run, but it had not created fundamentally different mechanisms of financing for independent projects.
Right now, the undisputed market leader among the crowdfunding projects is the Kickstarter for sure. The platform, launched back in 2010, had shown consistent growth of almost 200% every year, but since 2014 the situation began to change, and it began to show serious problems.
Moreover, as the number of ambitious projects grew, eventually the attracted volumes of funds had reached tens of millions of dollars. Unfortunately, some of the extremely expensive projects had become an excellent example of the high-profile scams either dissatisfaction with the final product after the release date shown by many investors.
Here is the most striking example of such phenomena – at the time the project team behind the refrigerator Coolest Cooler creation, which raised $13 million, had not fulfilled its promises, and backers supporting the project lost severe investments. Another excellent case of the significant losses – a video game micro-console Ouya, which had cost its investors nearly $9 million. The project had been successfully funded, but in the final prototype was something much less than expected – beyond the user’s hope, as well as its sales were unsatisfactory.
An infamous project of Zano drone that devastated pockets of its bakers by as much as $3 million is also worth mentioning. At its time, it had been one of the most successful European project platforms, but with 12,000 investors extreme dissatisfaction of the unfulfilled promises by developers and the final poorly working prototype, general disappointment in the platform Kickstarter and crowdfunding had come along.
Video game developer had undoubtedly liked the crowdfunding model – a lot of teams collected vast amounts of funds, but the projects often did not reach even the stages of beta versions. Someone had focused their efforts for simple theft of tiny amounts– the indie project “Mansion Lord” developer had just disappeared a few years ago, after collecting a total of $30,000 from his project contributors.
These factors had a significant influence on the popularity of Kickstarter at all: if during 2013 more than 44,000 campaigns had been created, in 2014 the number raised to 67,000, 2015 had already started to show the growth rate slowing down – only 77,000. In 2016 the number of created campaigns decreased to the total number of 58,000, which gives a very negative outlook for future if the rules of the game on the platform stay the safe in forthcoming future.
Next, another serious problem is that the original essence of the platform created for the development and funding of the independent projects had somehow become smudged and almost lost. After the waves of success of particular small projects on the platform, the stable big-budget companies with colossal funding came into play. It is a fact that significant investments lead to significantly higher losses.
The fraud schemes involving the use of several hundred or more users appeared, which meant that companies had funded the successful launch of the campaigns from their own pockets – only to have real backers joined after noticing the sky-high start of a particular project on the platform. Because of such dishonest practices, the chances for the small developers and enthusiasts had been reduced slightly – without proper investments in PR-campaigns and Internet traffic, they risked to collect absolutely nothing or fail while being half-way to success.
According to all-time official statistics of the platform, over $ 3.3 billion of investment had been raised since launch, 13.6 million users had supported at least one campaign, and the total number of successfully funded projects is now more than 132,000.
If in the nearest future arrangements for the regulation of domestic competition are not introduced, the major players from the world of business will continue to reduce the number of advanced independent projects even more. Also, such things as fraud, deceit, and failure of obligations of the campaign organizer of the project are still present at large.
With the growth of demand for independent financing, the number of websites for crowdfunding is growing, but they mostly just copy the functionality with the addition of minor features to the existing and heightened competition. With the development of blockchain technologies and the emergence of ICOs independent entrepreneurs had gotten a real chance.
Initial Coin Offering is a crowdfunding campaign based on the blockchain technology, it has a lot in common with the traditional crowdfunding, but there are also significant differences. Initially, ICO was one of the crowdfunding variants specified for cryptocurrency projects that did not want to work with traditional venture funds and capital – because it would, in fact, mean the loss of desired independence.
The most important difference between the ICO-crowdsale and crowdfunding lies like a financial asset that investor acquires. The crowdfunding campaigns get the real, Fiat money from its sponsors and that is, actually a payment in advance for the final product of a particular project. ICO, in turn, involves the purchase of a digital token for use by the client of the service project after its launch. In most cases, these tokens can be traded on the stock exchange, and some investors have the opportunity to obtain exclusive rights of a shareholder.
The ICOs organizers seek to obtain investments in the project by the concerned community, where funding is likely to be done with the use of Bitcoin or other cryptocurrencies. The nature of these digital assets allows one to send them to the recipient anywhere in the world, quickly and almost without any cost, as well as avoiding the traditional banking system. No doubt, such advantages will be appreciated by those who had ever transferred money overseas.
It should also be noted that, over time, the collection of money has ceased to be the single most crucial part of the ICO often tokens of the project are used as the local currency for various actions on a specially created platform. 2017 showed a real boom in the growth of the ICO projects. According to CoinSchedule, compared with 2016, the number of successful and active ICOs in the past year increased significantly from 46 to several hundred. As at the end of 2017, the funds raised during the ICO investments in the USA exceeded $4 billion, reports Bloomberg, citing data from Autonomous Research LLP.
Unfortunately, there is still a shortage of solutions allowing investors and startups find each other because the technological complexity sometimes is beyond the understanding of project participants and the conducting of its developers and organizers.
Besides the funding approaches, there are other significant differences. The ICOs and crowdfunding project principles of conduct are not the same, so is their audience.
The main differences between ICO and crowdfunding are:
While investing in crowdfunding projects, backers pay for the result of the job of the specific team that they are interested in – final products, merely saying.
Cryptocurrency projects investors are mainly driven by the motivation of fast earnings or promotion of the new technologies in specific areas. In the first case, the prepayment is made for the product, in another – it is the financing of an idea or concept.
2) Campaign length:
Crowdfunding projects take too much time to prepare and conduct the campaign. For example, it took the LHV Company 2 long years to develop its campaign. It is not the tool that is best suitable for independent startups – the only exceptions are those campaigns that are funded by the venture capital investors. ICOs, in turn, can be carried out much faster – from weeks to minutes and seconds even.
Some striking examples of it:
Based on blockchain technology internet browser Brave raised $35 million, and although it’s not much for the modern ICO market, the fact is the full amount had been collected in only 24 seconds, and after a week the benefit of the investors of the project came to astonishing 676%. The most recent example – on Dec. 27 the Singularity Net startup, designed to create a decentralized framework for AI-based blockchain, during only 66 seconds collected $36 million for its developer company.
3) Financial features:
Top projects crowdfunding with multi-million dollar budget, as mentioned above, can often fail or merely turn out to be a Scam. With traditional crowdfunding, users can risk of losing investments of Fiat money – besides, the investor should invest their money, wait until the company begins to create the product, but if the development does not succeed, the money can be lost in many cases. In case of ICO, the investor can track what is happening with the project. The potential benefit for the future investors grows in many times.
4) Investor accessibility:
Nowadays, most crowdfunding projects are restricted to a particular region or a specific country that is native to the people behind the project. While some of the projects are global, not all apply to a broader scope, unlike ICOs.
In turn, many would be able to participate in coin offerings as the accessibility for it falls on a broader range. A lot of ICOs have gathered investors from all over the world as they are more accessible for people around the globe as they are advertised well in social media.
Besides that, they offer something much more that would attract the eye of the masses. Although some of the newer token sales set restrictions to be able to join, a lot of people still pass those restrictions and can participate in the mentioned ICO.
5) The contributor’s confidence:
In contrast to the dynamically growing ICO project markets, the crowdfunding platform like Kickstarter, in particular, is inferior not only regarding the growth rate but also in steadily decreasing of the number of completed projects. Pure statistics: back in 2015 this figure was 22,000 projects, and – already 18,800 in 2016. The share of successful projects from 2011 to 2014, on average, ranged from 45 to 50%, and this fell to 20-25% in some categories. Slightly better things are with the budget projects with funding of up to $10,000 – 69% of current success, according to the recent statistics Kickstarter campaign.
Fact is, existing crowdfunding platforms are registered and regulated by the law.
This perspective market is expected to reach $96 billion by 2025. Anyway, some countries governments have already come up with regulations that set requirements for crowdfunding projects and define liabilities. One of such regulations is JOBS Act, issued in the US in 2012. Only qualified investors could invest in startup projects due to it, and France is the only country to perform government control over crowdfunding in the European sector.
Nowadays, ICOs are still usually unregulated. In consequence, ICO investors and project enthusiasts are subjected to some risks. Of course, the investors in ICO startups cannot be fully protected. As a result, many lost their money. According to Chainalysis, for the year 2017, fraudsters appropriated about 14% of the funds raised by projects using the Ethereum-based ICO, namely approximately $ 225 million out of $ 1.6 billion. As a result of fraudulent activity, about 30,000 investors suffered losses with an average of $7,500. Cybercrime concerning investors’ financial resources is growing faster than the number of investments attracted within ICO. The jump in both these indicators has become especially noticeable since March 2017.
Security and Exchange Commission had recently imposed first charges on companies that went on ICO for fraud. Among other risks are technical mistakes in smart-contracts that lie underneath ICO processes – one of the most infamous examples of it is the DAO that raised over $150 m and lost one-third of its funding due to the exploited by hackers vulnerabilities in smart-contracts. Filecoin ICO, for example, had become the first regulated ICO ever and raised record-breaking $252 million in less than an hour.
7) The rewards
Traditional crowdfunding model bakers don’t expect some decent rewards. Companies or enthusiasts who launch campaigns may offer fancy, but useless stuff like T-shirts, a copy of the final product upon the release or pure gratitude in credits. Other case sees reward models offer the possibility to pre-order the product.
The Initial Coin Offering participants receive tokens in return according to the amount contributed. Some issued tokens give access to the services that platform will offer in the future. An ICO might involve attributing equity to a token so that ownership provides voting privileges and access to future dividends. The typical use case of a token issued in an ICO is the creation of an asset that gives access to the features of a particular project. Besides, some view tokens as an investment opportunity as they hope that the price will go up sooner or later.
Both models, ICOs and CF, have a lot of advantages and significant features. Initial Coin Offering and Crowdfunding may seem to have a similar nature, at first sight, but they do differ in many key aspects. Traditional crowdfunding is regulated and is less risky for investors and the blockchain project, and ICOs is the fastest and easiest way to raise money. In some cases, the amount of money raised may surpass the sum required to launch a project.
Therefore, technical progress always wins, and there is no doubt about the future triumph of the new technologies such as blockchain startups.