They say in business that your network is your most valuable asset.
In the blockchain world, the Initial Coin Offering (ICO), the often speculative, independent and unregulated fundraising tool, has been cast aside of late, in favour of a more coordinated, participatory fundraising method — the Initial Exchange Offering (IEO). IEOs are utilising valuable pools of investors, exchanges and experts in fundraising to bring legitimacy to blockchain projects and the space as a whole.
However, despite the recent buzz around IEO funding, coordination between exchanges and projects is nothing new, and has been happening behind the scenes for some time. Continued coordination will be key for the future development of the industry.
The shift away from ICOs is a response to the ‘Wild West’ nature of the ICO craze — unregulated, decentralised and statistically speaking, risky. Fundraising has gone unchecked from regulators, and resulted in huge portions of investors losing money. An EY report on ICOs in 2017 found that an investor purchasing a portfolio of ‘The Class of 2017 ICOs’ on 1st January 2018 would most likely have lost 66% of their investment.
A fundamental issue with ICOs is the fact that most of them raised money pre-product, without regulated exchanges to support their endeavour. Customers were left burned by scam projects which had poor business models and raised funds through illegitimate websites. Similarly, genuine businesses suffered as a result of the tarnished reputation left by the bad actors. The ICO boom was important in developing a novel form of crowdfunding, but made investment extremely speculative and risky. Enter the IEO.
The IEO model
The IEO fundraising method is making waves in a big way. May 2019 saw 45% of all fundraising by blockchain and crypto projects conducted via the IEO model, whereas ICOs only accounted for 4% of all funding.
IEOs differ from ICOs in that they encourage due diligence and greater risk-sharing among parties. Instead of projects issuing tokens on their own sites, an IEO is administered by an exchange. Fundraising takes place on a well-known exchange’s fundraising platform, where users can purchase tokens with funds directly from their own exchange wallet. Projects are coordinated with regulated exchanges which can uphold greater governance and industry best practices.
Blockchain entrepreneurs are realizing that to succeed long-term, they need the legitimacy of trusted networks — cleared pools of investors, sponsors, marketing experts and guidance from teams of financial experts who have raised funds in the past. In order for blockchain to mature as a genuine mainstream space for investors, these networks will need to be utilised, adding legitimacy to the space.
For many crypto projects launching today, choosing a fundraising model is a daunting decision. The ICO scams that have alienated investors would likely reduce their potential investor base, should they opt for that model — ICOs raised $118 million in Q1 2019, over 58 times less than in Q1 2018.
By opting to issue tokens with an exchange, projects can outsource many problems they encounter in launch stage. Firstly, a significant number of ICOs go unnoticed if they can’t partner with an exchange, and in the event they do succeed in doing so, these partnerships can take months to solidify before tokens get listed. IEOs on the other hand, immediately guarantee users will be exposed to the token, providing an accessible, organized customer base to the project. In addition, purchasers can be confident that their IEO tokens have undergone a vetting by the exchange.
As outlined previously, many ICO projects issued tokens before they had time to create a finished working product. Many projects surfed the ICO marketing wave before fully committing to develop their products. In IEOs, many exchanges offer marketing services to issuers, meaning the project can focus resources on developing it’s product. This results in higher quality projects for the industry as a whole.
In addition, because regulated exchanges are AML and KYC ready, projects also don’t have to contribute to heavy compliance efforts. The project will have access to a pool of pre-approved investors.
Legitimacy to the industry
From an investor perspective, legitimacy is of the highest importance in order to mature the industry. Investors need to trust they are putting their money into safe, scrutinised projects — the 2017/18 ICO boom exposed investors to ventures that often lacked thorough vetting. By partnering with a project in an IEO, exchanges put their reputation on the line adding another layer of trust to the fundraising effort.
Similar to traditional markets, blockchain projects often require guidance along their journey — from initial sale through to the secondary market. Several blockchain exchanges provide this oversight and are instrumental in determining the success of applicant projects. This oversight is particularly important given the disruptive nature of blockchain — industry experts who know the lay of the land are very important.
IEOs can also open projects up to traders and institutional investors who already work with the exchange and have built a professional reputation. Matching new projects with institutional, accredited investors can encourage good governance and industry best practices, driving the whole industry to maturity.
The growth of IEO fundraising represents a shift towards coordination between trusted networks and blockchain projects. Such coordination has been taking place behind the headlines for some time, as we continue to recognise that in order for the industry to mature, projects need to marry crypto and traditional investors, access vetted pools of investors, sponsors, marketing experts and guidance from teams of financial experts who have raised funds in the past.
Making these steps can be expensive, time consuming and at times impossible without the right connections. IEOs are allowing for this mutually beneficial coordination and this will be essential to take the blockchain industry forward.
By Aries Wang, Co-Founder, BiBox Exchange