ICO evaluation & investing — A VC perspective for investment over greedy short term returns!
Updated: Feb 17
ICO investment are getting more and more complex due to the variety of ICO’s on market. Even some of the good ICO’s are lost in the noise that are generally created by scammers. So, the following is my take on evaluating an ICO for investment at a glance -
1.Blockchain Advantage — DLT’s can actually be a hindrance due to its slow speed in most situation and unless it really brings some advantage like security or decentralization, blockchain implementation is unnecessary.
2. White Paper — A simple white paper should contain the following points-
a. Problem Definition — Existing problem in the respective field.
b. Solution — What problem is being solved by implementation of blockchain.
c. Product Offering — MVP (Ideal) or at least POC for displaying the solution.
d. Token Model — Type of token — Utility/ Security/ Asset Backed (Equity)
e. Business — The token should drive the ecosystem and not just merely be a part of the system or a tool to raise funding.
3. Team Composition — While a technical team is necessary but too many times an all performing technical team has failed at delivering products. The team should contain both technical & non-technical people who have been successful in their respective domains. A healthy mix of business developers, graphic designers, product managers, communications officer, etc brings diversity to the team and is of utmost necessity for the post ICO survival.
4. Tokenomics- The token model type along with distribution should be equally cared for. Any ICO which offers hefty discounts (30% and above) in pre-ICO phase should have a mandatory lock-in period. This is to safeguard the interests of retail investors; as often times institutional investors back a project early (getting hefty discounts) and as soon as the ICO gets listen in an exchange they cash out leaving retail investors in the lurch. Any ICO token offering more than 50% discount or 50% of token sale for private investors is a potential scam.
5. Business Model — Since ICO is a one-time token generation event for fundraising. Post ICO the business development and its sustainability is an important issue. Also, there should be some room for raising funds post ICO if and when needed.
6. Social Media Presence — The active participation in the various social media channels like Telegram, Youtube, Facebook, Twitter, etc points towards the success of an ICO. But it should not be a taken as an important consideration as social media participation can be artificially inflated.
7. Collaboration & Partners — The success of any ICO is directly dependent on the collaboration and partnership which drives the ecosystem. The stronger the partnership; the better the chances of ICO survival and becoming profitable.
8. Fund Allocation — Post ICO — the fund allocation gives a unique window of opportunity to examine the interests of the team. Depending on the ICO type the fund allocations should be evaluated. For example — An ICO involved in creation of new protocols can afford to spend more than 50% of budget on the development and launch whereas the same amount is suspect to misuse if an existing protocol is used by an ICO for offering a product.
9. Legal loopholes — Some ICO’s are launched by reputable companies but they fail to connect the ICO with their legal business, meaning investors don’t earn from any value of their established business. Also, the ICO might be a completely new entity and has nothing to do with any existing business (A potential red flag for me).
10. MVP/ DApp/ Working Product — Now why a use case/ DApp is important? Bite on this — Only 36/100 top cryptocurrency has an MVP or application online. Having a working platform is a huge plus.
Now, let’s take a recent scam ICO for evaluation — Shinil Gold Coins ICO. The ICO claimed that a Russian ship Dmitrii Donskoi, which sank 113 years ago, carrying 200 tons of gold worth $133 billion was discovered (Images showing ship name but no actual gold reserves estimated). The ICO would help them finance the operations, in return for future profits from scavenging the gold.
Blockchain Advantage — Zero blockchain necessary for raising funds or actual implementation.
White Paper — No White Paper (Only Pre-ICO private sale raised over 50 millions).
Team — The team comprised of established Industry players from South Korea with a heavy focus on marketing and PR (Very few tech people- Not that it was required still….).
Tokenomics — The estimated price for one token is 10,000 KRW, or around $8.87 post-ICO exchange listing; but no mention about the differences in pricing for each token pre-ICO and ICO periods.
Business Model — The profit was to be shared amongst the ICO investors after the scavenging of alleged sunken GOLD.
Social Media Presence — A lot of content was produced to make this ICO heard atleast in the Eastern and S.E part of Asia.
Collaboration & Partners — Shinil Group, Singapore (more on this later) wanted to go solo on this without even obtaining any license from the South Koran Govt.
Fund Allocation — It was stated but totally off the mark!
Legal Loophole — This is what makes this a big scam alert. The Shinil Group is from South Korea but the ICO was done from Singapore. The CEO of Shinil Group, South Korea Chae Yong-seok said that both companies have no links and the Singaporean entity was started by his brother (who incidentally also holds stock in the South Korean company). More on this http://www.theinvestor.co.kr/view.php?ud=20180726000785
MVP/ DApp/ Working Product — You must be kidding right!
The ICO itself could garner 1.5 (0.5 each for points 3,6,7) out of 10 from the stated evaluation; but the idea along with legal loopholes would have been enough for “normal sane” people to give this ICO a miss. But what followed was pure mayhem, greed overcame common sense; leading to over 100,000 investors sinking nearly £41 million into the company’s cryptocurrency. Needless to say, the ICO scam is being inspected by the South Korean authorities, who have also asked help from the Interpol to nab the perpetrator.
These are some of the things that are recommended before investing in any ICO (Besides a healthy dosage of common sense). If the returns promised are too good to be true, then use your logic; after all no ICO can give you 1% return per day. Just saying! Happy Investing!