Projects that raise funds on ICOs rarely provide their products on time. Investors are concentrated on token liquidity.
CoinJob has failed to meet its requisite funding goals during their Initial Coin Offering (ICO) according to an announcement on their website in February, now it informs on error.
The project for a low-fee, distributed labor marketplace for computer-based work was launched in August 2017 and planned to raise up to 60,000 ETH, but collected $7,639 (less than 30 ETH at press time), according to ICObench.
“Definitely after the first day of the pre-sale, we knew we weren't going to make it because we just didn't see that many people are talking about it,” a former team member told Cointelegraph anonymously.
According to the source, the biggest problem was insufficient investment in marketing and not giving themselves enough time to advertise. “I think our idea was solid and our team was fantastic but, at the time, there were not standardized routes to having a successful ICO, so we were doing a lot of stumbling around in the dark trying to figure out what worked and what didn’t,” he said.
“I learned that having a great project means nothing if no one knows about it, and building a brand and getting the hype around your project is the most important things,” the source said, adding that the team is going to return money raised to contributors.
Last summer was a good season for ICOs, with more than $1.5 bln raised by 119 ICOs from June to August 2017, according to statistics of ICObench.
In 2017 ICOs raised a total of $4 bln, according to an EY study that analyzed 372 projects. More than 10 percent of ICO proceeds are lost as a result of hacking attacks.
Besides suspicious cases like PlexCorps, DRC or RECoin there are unsuccessful ICOs that raised significantly less than expected and should close their project and those who continue their business but postponed the launch of the product.
Jan Brzezek CEO & co-founder of Crypto Finance believes that only five percent of ICOs will survive five years and only one percent will actively generate revenues for their clients in an amount which would be standard for private equity (P/E) investments. In October, Vitalik Buterin predicted that about 90 percent of token startups will fail.
“Even good projects are not raising the kind of money as in the past,” said Wulf Kaal, professor at the University of St. Thomas and director of Private Investment Fund Institute. Since late 2017, the ICO volume has been slowing down, and fewer projects are reaching fundraising goals, in November 2017, less than 25 percent hit goals, compared with more than 90 percent in June, according to the EY study.
How often does it happen?
TravelCoin, which raised $100,000 at its ICO in August, is going to refund it its customers, two of its founders said in an interview with Cointelegraph. A lot of rules changed since then, one of them explained the failure of the project. “We did not follow KYC process, accepted US/Canada and China customers; also the execution of our ICO could have been much better,” said Emal Safi, CEO of TravelCoin.
About 46 percent of last year’s ICOs have already failed, according to data from Tokendata. Of the 902 crowdsales listed, 142 of them failed at the funding stage and a further 276 ran away with the collected money, or are fading into obscurity reports Bitcoin.com. An additional 113 ICOs can be classified as “semi-failed,” either because their team has stopped communicating on social media or because their community is so small that they have no chance of success.
Many teams, even those who raised enough funds, are not hurrying to present their product. ICOs are typically used to raise money ahead of product launch. Of the companies that had a product prior to their ICO, most had already received venture funding, according to research by Mangrove Capital Partners.
Source: Mangrove Capital Partners
Nathan Christian, an advisor and technical expert with over 35 startups in his portfolio, said in an interview with Cointelegraph that:
“A good number of projects don’t end up ever getting a real working prototype at all, let alone in time for the ICO date. This is going to be changing this year as I feel that more tokens and ICOs are going to be driven by actual utility and not so much speculation like they have previously.”
“A lot of projects that are being started without any real base or any people torque on it, or a fully flushed-out system, without any code written, only one percent has a product,” says Zach Hamilton, managing partner of Airfoil Capital consultancy, “Only the best companies don't touch the market without a prototype and multiple bizdev deals on the table; it’s a laughable amount of them.”
“I love seeing people who put up their own money to build products, got something working, maybe on a test net, and they are going to raise some capital,” he explained on a phone call with Cointelegraph.
Most teams starting ICOs only have a white paper that gives the information about the proposed project and a roadmap.
“Roadmaps are intentionally often so vague, that tracking is futile, barely any ICO starts their business on time,” says Anatoly Knyazev, investor and co-founder of Exante investment company.
“Many teams keep their promises in the roadmap after the ICO, if they want to move forward as a company the roadmap goals should be measurable, realistic, and achievable,” disagrees Ivan Wood, managing partner at Crypto Angel Partners. He estimates that up to 60-70 percent of companies start developing a beta-version prior to executing the ICO.
“Only around 25 percent of top-20 ICOs by amount raised have launched their products in alpha or beta-version to schedule,” says Brian Kean, CBDO at ICORating agency. According to him, they make unrealistic market propositions to attract investors’ money instead of focusing on long-term success.
“An overwhelming majority of ICOs do not have a real product or make it with a significant delay,” Wulf Kaal agrees.
According to Knyazev’s estimation, 90 percent of all ICOs do not deliver the product on time. “Yeah, there is a possibility they will develop it later, but a lot of investors are not acting reasonably,” he says.
“Few do in time,” agreed Miriam Neubauer, crypto capital investor and managing director at Catena Capital Blockchain accelerator, “The more technically challenging the project, the harder it is to have a live prototype that demonstrates the core capabilities of the product.”
“At least 70-80 percent of ICOs don't have anything, 10-15 percent have a beta-version, and one to five percent have a real working product, while less than one percent have actual users and customers,” estimates CFO at Envinary Group and ICO advisor Nikolay Zvezdin.
According to him, 50-60 percent produce their product with some delay, 20-30 percent produce with significant delay, 10 percent experienced no delay at all or delivered earlier than expected, and one to five percent failed to deliver the promised results.
How is it possible?
After the money is collected, founders can stop to be overeager to attract and persuade investors. Many of them return to regular schedule and put the damper on momentum.
“Nobody wants to hear realistic timeframes with reasonable time buffers. Then everyone complains why it takes so long. It’s a challenge to balance expectations well,” Neubauer adds.
“Founders have no responsibilities to investors, which get tokens with unjustified/volatile value and no rights to the future product as well as no share in capital. Founders can also use ICOs to raise significant capital (perhaps even all the capital they could ever need) in one early round of fundraising without giving away any equity in the business and without having to deliver anything more than tokens for a (highly scalable) software-based service,” according to Mangrove research.
Many experts blame founders for laziness and the lack of experience.
“They often underestimate the complexity of Blockchain technology; some just get lazy due to ample cash flow. They are not hungry like classic startups who are living on peanut angel funding and Ramen Noodle diets on the desperate hunt for Round A funding,” said Richard Kastelein, publisher of Blockchain News, founder of Blockchain Partners and interim chief marketing officer a Blockchain startup Humaniq.
“The major factor is unrealistic market propositions made to attract investors’ money instead of focusing on long-term success,” said Kean. Delays may also be caused by investor conflict (Tezos), a hacker attack (DAO), or a lack of marketing and development experience for team members.
“Many top ICOs promised to build complex infrastructural Blockchain platforms, projects like these need at least one to two years to be developed,” Kean says adding that he does not expect a boom year for launches or failures. “The best syndicates avoid ICOs for projects that have long-term crypto infrastructure potential,” according to Kaal.
Illiquidity of tokens is a more significant problem for the community than product deadlines. According to Kastelein, Investors get more frustrated about delays in getting on the exchanges than product. … In the future, we will see milestones written into the smart contracts and funding won't be released until targets are met.
Knyazev describes attracting investment through ICOs as an excellent tool for developing a start-up and gaining financial independence:
“Most teams lack real-world business experience, which leads to two results: the team does not aim to develop the project. I don't mean scams, but simply wants to get capital assuming they can handle the business naturally, getting all the employees and marketing; or the team seriously overestimates their skills, experience, and underestimates the toughness of real business. This is why at the end they get ‘stuck’ in crypto-world, failing to deliver real results and are strongly affected by market movement of currency.”
Nikolay Zvezdin says that, “The main problem for the market is that 99 percent of the time, the team's assumption is that they can stay in "crypto-world" forever, but sooner or later they face real business issues, and even such a small thing as converting raised crypto-capital to fiat to pay vendors, service-providers, and most employees is not that simple if you’re talking about significant amounts.”
“There is a difference between a project which doesn't have a prototype but already has a working business and a project which only formulated a concept. Someone who is moving existing business onto the Blockchain has a better chance of success, than those who are just starting out,” says Bogdan Fiedur Blockchain developer and ICO advisor. He continues:
“Experienced founders already have a business model on which they are building another application layer, but they usually have no experts in the Blockchain space, and later they struggle to assemble teams who could work in one office and be experts from each required domain. On the other hand, new ideas and applications which are purely technological and rely on new inventions can't have much more than a prototype or whitepaper because the concept is so new and there is nothing yet to build on.”
Year of Disillusionment
“The TribeToken ICO never worked out, it only gathered like [sic] 8 ETH and refunded everyone after the ICO,” said its founder Roy Brand, who is now working on another project. According to him, the team worked on the project in their free time and with no payment:
“While it was a fun experience, sadly we could not reach enough funding to start working full time on a possible platform. A few months after the ICO we closed the website down since there were no plans to go on with this ICO because it did not get enough funding.”
“Over 50 percent of ICOs don't meet targets, but hey, [sic] nine out of 10 startups in Silicon Valley fail,” Richard Kastelein says.
“In contrast to the traditional venture capital (VC) where the rule of thumb is one in ten investments survives and thrives, investing in ICOs has been significantly more profitable over the past 1.5-2 years, because of the almost immediate access to liquidity and no or comparatively short lock-up periods, albeit riskier as well,” Neubauer agrees.
“The few great projects will generate the majority of returns, just like in early-stage investing. Pareto Law always applies here,” Hamilton adds.
“2018 will be a year of ‘trough of disillusionment’,” Jan Brezezek predicts. “Which is nothing wrong, as this inflow of money helped the crypto ecosystem to grow further and professionalize itself,” he adds.
According to ICObench, 312 ICOs raised more than $1.3 bln in January and February 2018.
Despite scams, failures, and postponed product launches, the ICO market generally provides high profitability. According to Mangrove research, if one had blindly invested €10,000 in every visible ICO, including those that failed, this would have delivered a 1,320 percent return last year.