Most commonly Texas startups fund their growth through bootstrapping or venture capital investment (or a profitable product!). But with the ever-increasing interest in cryptocurrency we’ve been seeing more startups turning to ICOs (initial coin offerings) as a way to shore up their finances.
So what exactly is an ICO, and why would Texas startups consider one?
ICOs in a nutshell
An ICO is a fundraising approach that allows people to support your company by purchasing a digital currency of your own making. Investors purchase a stake in the future valuation of your company at a discount rate. Like stocks, it’s speculative. If the company and the cryptocurrency associated with it succeeds, then the purchaser makes a profit. But unlike stocks, the purchaser doesn’t actually “own” a portion of your company. Nor are they entitled to dividends.
It’s a high-risk approach for investors, akin to an IPO in reverse. ICOs are typically used with early-stage companies, making it tough to evaluate potential returns. But for startups they can be a good way to raise money without being as answerable to VCs.
Are ICOs succeeding?
It depends. 2017 saw about $2b in token sales across 140 ICOs, so the money is definitely flowing. However, it’s probably not surprising the bulk of these funds went towards infrastructure, finance, communications and trading & investing platforms. Most of these startups have blockchain technology at their core, so the ICO as fund-raiser makes sense.
But despite the hype, many startups are failing to secure the funds that they need. This is particular true for those who fall outside of the verticals above, and for those with poor marketing and messaging.
Another risk is potential regulation. Different countries view ICOs in different ways. Switzerland is all for them, the US is cautious but interested, and China is a stern “no”. That said, the US has raised questions around ICO tokens and securities laws, so things could well change.
The rise of scam ICOs has also made buyers wary, making it increasingly difficult to get traction with a token offering.
Are ICOs right for Texas startups?
For some, perhaps. If your startup is built on blockchain technology, for one. And second if it can deliver a solid proof of concept along with strong and convincing reasons to be. The ICO model is also a good way to maintain control over your company while getting early buy-in from potential users.
But if you want to proceed without worrying about potential SEC violations or wary investors, traditional methods may be a better bet. VC funding, crowdfunding and bootstrapping are still popular – and they’re lower risk for everyone involved. They’re all well-trodden paths that have been explored in court and by the SEC, making them a known quantity.
Really, it all depends on your risk tolerance. An ICO could be a boon for some Texas startups, but given the challenge of startup life, others may prefer the road more traveled.
Launching a Texas startup and need some advice? Get in touch!