Until 2018, startups, whose technological core is based on the blockchain, raised funds mainly through the Initial Coin Offering. The excess profits that such startups gained to their investors could be measured by the thousands of percent. On the other hand, teams got an instrument to relatively simply receive investments that did not require them to prepare thoroughly and take responsibility in case of failure. The ICO process has become an attractive tool for all its participants. But is it still true?
Where is my ROI?
According to ICORating research, half of the projects that has announced ICO in the second quarter of 2018 could not even collect $ 100,000. 55% of all ICOs over the period have failed. The funds raised by blockchain projects during the ICO continue to fall along with the number of successfully completed tokensails (ICOs with collected Soft caps). A cumulative capital raised by more than 150 ICOs amounted to more than $ 1.9 billion in May 2018, but over the following months it rapidly fell. In October, an amount of such investments has fallen in almost 10 times compared with the May numbers and reached only $ 236 million and the number of projects did not exceed 30.
Source: Monthly ICORating Overview Report №5
Why do ICOs no longer raise such large funds? The point is an investors” distrust of blockchain projects, which collect funds via this procedure. Investors’ concerns are not actually groundless. Among all ICOs launched from April to June, only 20.5% had an MVP (minimum viable product). In most cases market participants has made investment decision based only on the idea described in the project documentation. But the majority of such projects will never be realized or the market simply does not have a demand for offered solutions. At the moment of preparing this article, 917 decentralized applications out of 1168 registered in Dapp Radar do not have a single user per day which is more than 78% of total amount. The numbers speak for themselves.
The problem is that ICO participants, as a rule, are unqualified investors who cannot always distinguish a scam from a worthwhile project. People who have received unsuccessful experience of ICO investing, leave the capital market forever.
New industry players appeared in the financial sphere during 2018. They are cryptocurrency venture funds specialized in blockchain projects, such as Pantera Capital, Blockchain Capital, Fenbushi Capital. They possess not only significant capital, but also expertise in the field of innovative start‐ups. Thanks to it, such funds are able to analyze in detail the business model and the technical part of the project, identifying both teams of outspoken scammers and startups with vague monetization prospects.
The uprise of large crypto funds is accompanied by the entry of traditional venture capital into the market. Despite the market volatility and weak legal protection, they are ready to invest millions in blockchain projects. 12 investors, including Draper Esprit, have invested $ 75 million in Ledger project. The platform for trading stocks and cryptocurrency Robinhood was able to attract $363 million in round D, where DST Global, the investment unit of Mail.ru Group, acted as the lead investor. A record breaker with the largest deals is well‐known ICO TON launched by Pavel Durov.
According to Crunchbase, during first five months in 2018, an amount of venture capital investments in blockchain projects surpassed the totals of 2017 (more than $ 900 million) and amounted to $ 1.3 billion. This fact suggests that investors’ interest in blockchain projects does not intend to slow down.
Industry tends to develop
The reason for such interest is the “growing up” of the cryptocurrency industry and blockchain projects in general. The volatility of the cryptocurrency market is declining compared to 2017, moreover, governments are developing legislation in the industry. The US Securities and Exchange Commission (SEC) introduced registration of projects with security tokens, the European Union announced a draft law on ICO regulation, and the Financial Action Task Force on Money Laundering is going to create cryptocurrency international regulation rules.
In addition, government agencies provide credibility for such projects using blockchain in such areas as health care, land cadastre and documentation procedure. A forming the legal field and an extension of the financial planning horizon stimulates funds to enter this new market.
Blockchain projects themselves are also developing. Initially, the ICO process was a way to support the project used by industry enthusiasts and later it has become a crowdfunding tool. In many projects, the blockchain does not bear the functional load, but is included in the technical part just for the sake of the opportunity to collect investments. In some cases, ICO negatively affects the public image of the company in the eyes of large investors. Therefore, some blockchain projects prefer not to raise funds through ICO, turning to venture capital investors.
To sum up, the trend of the blockchain industry is the refuse to raise funds through ICO in favor of venture capital investments. Crowdsales participants mainly are unqualified investors, many of whom lost their money and could not influence or support the project while funds have experience in using blockchain technology and are able to support teams in business model development.