While there were many memes born from the inauguration of US President Joe Biden on 20 January, none have proven as prolific as Bernie…
Okay, so you want to raise millions of dollars through an initial coin offering (ICO)? It seems easy enough, with literally thousands of ICOs being run each month. Not quite, says Llew Morkel.
His startup Prosperiprop may have raised “over $200 000” in an ICO which closed last week (30 November), but it didn’t come easy.
“An ICO can set you back R1-million before you have sold a single token. And there is no guarantee of success,” says Morkel.
In a wide ranging Q&A with Ventureburn, Morkel outlines what South African entrepreneurs specifically (but not exclusively) should know about in preparing to run an ICO (for more on how to raise angel investing, see Ventureburn’s guide here).
Ventureburn: Firstly, why would one opt for an ICO when there are so many other ways one can raise capital?
Llew Morkel: An ICO lets absolutely anyone launch their idea onto the global stage to be funded in a relatively short period of time by the global community.
ProsperiProp started with traditional venture capital (VC) sourced from the InvestmentNetwork.co.za and thereafter we opted to do an ICO because it offered a quick way to fund a brilliant but technically complex idea.
Raising venture capital in the traditional way involves applying to venture capital companies for funding. VC firms sift through a tsunami of proposals flooding their inboxes everyday. Your proposal becomes a needle in a haystack.
When your proposal is eventually spotted the chance of the firm having the expert technical and entrepreneurial skills to fully understand the complexities of the product is quite slim. If you don’t understand the product how can one gauge its potential?
Advertising your ICO on a mainstream website like CoinDesk will set you back R300 000 per week — with no guarantees of traffic or hits
But it is the due diligence process that breaks many a would be entrepreneur’s spirit. Once you get to the due diligence stage of the venture capital application cycle you are often required to commit to a period of non-binding exclusivity.
This allows the firm’s experts enough time to comb through your concept or source code or product details. If the firm declines to invest, for whatever reason, the entrepreneur loses months — and mostly has to restart the funding process.
ICOs cut through this red tape and gets you an immediate decision: yes or no. It takes between four and six months to launch an ICO.
If your ICO is successful you can raise your required funding within five to seven months from setting off on this journey. Is that really faster than traditional routes?
Also, setting up an ICO costs money — big money. An ICO can set you back R1-million before you have sold a single token. And there is no guarantee of success.
VB: What is the difference between crowdfunding and an ICO?
LM: The term ICO is used in the cryptocurrency industry to describe everything from crowdfunding to launching a new cryptocurrency coin. An “initial coin offering” (ICO) is when a company releases a coin.
The coin is specific to a system and it is used to pay for services on that platform — that’s why they call it a “coin”. Ether, the coin issued by the Ethereum platform, is a good example. Ether coin are used inside the Ethereum platform to pay for and execute smart contracts.
Crowdfunding is when people contribute money to a specific cause. One mechanism for running a Crowdfunding project is a crypto tokens sale.
Supporters of the project buy project tokens. These tokens are your proof of participation. If a project token holds promise of future returns it is likely to be deemed an asset (or a security). A token that is deemed to be a security may need to comply with financial and banking laws.
For purposes of this Q&A we shall assume that the term ICO means the latter ie a cryptocurrency crowdfunding initiative.
VB: What are five main things one should look at when opting to set up an ICO?
LM: These are around legal issues, budget, assembling a team, getting buy-in and building trust. More exactly they are:
- Legal: What are the regulatory constraints and requirements with respect to the product you are offering in your own country as well as key markets like the US? For example, if your token promises any kind of return or payout, then it is likely to be considered a security which must be registered with the US Securities Exchange Commission (SEC). Consider the time, cost and effort of obtaining these specialised licenses in every country where you want to sell your token.
- Budget: Do you have enough capital to back your ICO? Most of the ICOs that have met or exceeded their funding targets also had large marketing budgets. With so many projects entering the ICO space you need to get your ICO publicised and in front of as many people as possible. Advertising your ICO on a mainstream website like CoinDesk will set you back R300 000 per week — with no guarantees of traffic or hits.
- Team: If investors have faith and confidence in the team they are far more likely to invest. Ensure that your team members are experts in their field and that they have a verifiable, clean track record. Investors actually check. Do professional photos and supplement it with video and group photos. People invest in people.
- Buy-in: Will people understand the project and the value they can derive from it? Right now Bitcoin is every ICO’s biggest competition. Why would people invest in your project rather than Bitcoin?
- Trust: If people don’t trust your company or your project they won’t buy your token. Trust is both generated and earned. Get yourself known on forums long before you launch the ICO. Build a network of potential investors. Speak to them often, start the ICO with sales in the bag. People trust more easily when they see other trust you already.
VB: There is a growing number of people who views ICOs as a kind of fraud — how do you gain the trust of investors?
LM: As critical as I am of venture capital companies, their processes and procedures protect their investors. ICOs don’t do that. There are no regulatory bodies that govern ICOs. ICOs can literally sell you tokens today and disappear tomorrow.
A good way to earn trust is by joining industry bodies like incubators (example AlphaCode.club), inviting credible people to serve on your board and getting the buy-in from the international tech communities.
If you are going to invest in an ICO look for coins that offer something called a smart contract and DAO (decentralised autonomous organisation).
A smart contract tells you exactly what you are buying and what the rules are, for example what happens to your money if the minimum investment target is not met? The smart contract could refund you instantly the moment the ICO closes under their minimum defined target. The DAO is also a smart contract — but with voting rights.
(Another way to ensure against fraud is if a) group of people for an organisation have signing rights to the funding account. If trusted people are defined as the “trustees” of the account, then you have a better chance of not being scammed.
VB: Given that authorities in the US are scrutinising ICOs more so than ever before (after the ban in China and South Korea earlier this year), what kind of regulatory issues does one have to consider?
LM: Regulation always protects three sets of interests: those of the company, those of consumers and those of the local authority. Until such time as that the law catches up to the tech, you need to regulate yourself.
Firstly, you need to consider whether you sell a product or a financial service. If you are selling a product, consider yourself an ecommerce store. All the same laws will apply.
If your product is a financial service you need to comply with the Banking Act, FAIS Act, Crowdfunding Act (in the US), tax laws etc. Consult corporate lawyers, preferably lawyers that have experience in dealing with cryptocurrencies and ICOs (I recommend Sandama attorneys).
VB: Should you use your own token or a popular one, like Bitcoin or Ethereum? What are the main points to consider here – over why you would use your own token and not another well known one?
LM: Bitcoin is a means of payment, a currency. You can accept Bitcoin as payment for a product but you cannot start an ICO that sells Bitcoin (or Ether or any other existing token). Coins are specific to a platform. They perform a function on the platform.
ProsperiProp.com’s PROPX (trading as PXT on IDEX.market) is a token that unlocks the features of the PROPX NanoChain software. So, when a banking corporate uses the platform to issue a new fractional investment product, they buy PROPX to activate the service. That’s how demand for PXT is driven.
When you run an ICO the choice, therefore, is between cryptocurrency platforms rather than coins. The platform offers certain services that the developer would use to create a new coin. The current industry standard is the Ethereum platform.
Coins, like PXT, created on the Ethereum platform are based on a smart contract. The smart contract is stored on the platform’s version of the blockchain and it can be viewed by anyone. When it comes to listing your coin on a cryptocurrency exchange like Bittrex and Yobit.net they read your smart contract(s) to understand what your coin is about.
VB: How do you deal with media who are very interested in ICOs, but either don’t understand what they are, or suspect they are a fraud of some kind?
LM: As a pioneer in this field, dealing with the media has been one of my greatest learning curves. The media is an absolutely invaluable part of your marketing strategy. You need to find ways to relate your product to non-technical people.
Here are four pointers:
- Hire a good public relations company, preferably a company with ICO or crypto expertise. (I recommend: BrandFundi.co.za)
- Allow the media to ask questions until they understand. CNBC Africa’s Ran Neu Ner helped us understand our product by asking hard-hitting questions.
- Remember who you are addressing. Lose the tech jargon. It scares people.
- Respect the media.
VB: Are there any ICO consultants you would recommend?
LM: I am available to consult on any ICO project and would love to see more South African (and African) ICOs join the global market.
Unfortunately there aren’t many other options in South Africa. Globally there are between 200 and 500 experienced ICO consultants, but beware. There are many people out there, especially on LinkedIn, that sell their skills as ICO consultants — without any experience whatsoever.
VB: Your startup’s ICO initially failed to gain any traction, how did you turn things around?
LM: Our ICO failed to gain traction for two reasons. Firstly, we tried to be something we are not. We ultimately positioned ourselves as a financial services provider with a vision to “disrupt” the property investment industry. Secondly, our product was technically so complex that no-one understood it.
We managed to turn our ICO around by owning up to our mistakes, both to ourselves and to our supporters at the time. We re-positioned our offering to extend that what our team does best: build software solutions. So, instead of trying to be a property investment business, in every country in the world, we are a software business that supplies a blockchain software product to financial institutions around the world.
This way, our clients are burdened with compliance and marketing the product in their countries. We simply maintain and operate the software.
VB: What was your ICO budget?
LM: We went into the ICO with less than R1-million. That money was spread between c-commerce (crypto-commerce) website development (integrated cryptocurrency and credit card payment system), smart contract development, whitepaper writing, technical consulting and much more.
We had very little money left for marketing. We managed to overcome the lack of marketing budget with some clever innovation. We managed to build up a small following on Facebook, Twitter, Slack and BitcoinTalk.
From there we were able to launch a referral campaign that paid people when people they referred bought coins. This got people talking about our project and In the end it was the referral campaign that helped us pull through.
VB: What are some things that will seriously kill your ICO and could even land you in trouble with the law or losing millions or dollars?
LM: Almost every fintech entrepreneur is fixated on disrupting the banking sector. It is important to understand that there are laws that protect both the people and the country’s financial and revenue systems. If you are going to launch a product that contravenes laws you may become liable for prosecution and, as it happened in America, you may have to surrender all of your ICO earnings.
Fintech is important and financial technology entrepreneurs are shaping the future of banking services. But there is a point where we need to work together.
Banks already have the client base, they already have credibility and the trust of many. Let them do what they do best: manage accounts, manage product, protect money, sell product to their clients and operate the call centres.
Fintech entrepreneurs should focus on what we do best: invent new ways to bank and pay. Banks should motivate techies to design the future of banking.
Read more: Fintech Prosperiprop nets over $200 000 in ICO to develop property software
Read more: SA’s Prosperiprop responds to poorly performing ICO, adding PROPX NanoChain
Read more: With nine days to go Prosperiprop ICO has raised just $20 000 against $20m target
Read more: ProsperiProp PROPX ICO aimed at property investments now under way
Read more: ProsperiProp appoints Grant Thornton for ICO in bid to boost investor confidence
Read more: SA startup ProsperiProp delays ICO following China’s ban on token offerings
Read more: SA’s ProsperiProp plans to run two ICOs to get around crowdfunding challenge