The Galácticos era at world-famous football club Real Madrid saw the club’s management pursue the expensive tactic of signing as many all-star football players as possible to make a super-team. Unfortunately, the club didn’t bag quite as many trophies as such a collection might have expected. It seems that, despite having the best available resource, putting that resource to work to achieve results was no easy feat.
For businesses in the ICO space, this story may hit a little too close to home. Despite ICOs raising $291 million in January 2019 alone, bringing the total raised since 2014 to somewhere over $34 billion, recent research has shown that over half of the companies who conduct them fail within four months – often due to financial mismanagement. No matter how grand the token founder’s vision, the skills needed to bring that vision to life have nothing to do with the founder’s ability to manage volatile cryptocurrency holdings properly and funds raised through an ICO can disappear quickly and needlessly.
For game-changing blockchain projects considering this process, the fact that so many businesses fail before they even have the chance to succeed is certainly a cause for concern. More needs to be done to ensure that these rising stars amount to more than just promise and hype. The easy part is raising the money; the hard part is keeping it.
Managed properly, the capital can finance years of project runway. But this is not without its challenges. One such challenge is the volatility of crypto prices. Founders don’t know whether to risk converting their crypto into fiat, only to see prices rocket; or worse still, to leave their funds in crypto, only to see its value plummet while their competitors may be better positioned to thrive. Simply sitting on the capital isn’t the right approach either. Without an active strategy, firms risk a depleted resources when they face challenges from a changing market or competition.
A careful balancing of treasury management strategies can prevent ICOs from disappearing as quickly as they appear. This doesn’t mean ploughing the entire subscription round into crypto and shooting for astronomical returns. Firms need to work out what level of risk is right for them, balancing the amount of money generated during the ICO, the capital requirements to bring the token strategy to market and the risk of the volatility of cryptocurrency. It’s also crucial that the business keep three to six months of working capital available to allow the day-to-day operations to tick over in the background, allowing the founders, the all-stars of the ICO world, to continue to innovate.
Equally, by presenting well-considered financial plans for the capital they raise, ICOs have an opportunity to project an image of legitimacy before the launch date. Unfortunately, while many projects in the ICO space have legitimate goals, they are too often painted with the same brush as fraudulent projects like Benebit, which was able to raise $2.7 million before its creators mysteriously vanished. As a result, founders can experience an uphill struggle when it comes to reputation.
During an ICO, having a well laid-out plan for treasury management in the whitepaper will help investors separate the weeds from the roses, adding to the token’s legitimacy and potentially helping founders to raise even more capital. After all, why would an investor want to plough money into a cryptocurrency venture that pays no attention to the inherent volatility in that asset class?
Taking a fiscally responsible approach to capital management will not solve all of an ICO’s issues. With no clear end to volatility on the horizon, those considering or having just completed ICOs can’t afford to drop the ball when it comes to managing their assets. This means avoiding the Galacticos approach, and understanding that raising all of the capital in the world means nothing if it isn’t put to work in an intelligent way. Founders need to establish a plan of action before they launch, and ensure they stick to it unfailingly once they have raised the capital. To do anything else would be: at best, foolish; at worst, downright irresponsible.
By Gavin Smith, CEO of Panxora