Having an idea that might change the world is good, but having funds to implement it is even better. Moreover, the biggest companies today started as raw ideas and simple intellectual properties only fertilized with funds. Raising capital to start a business is arguably the biggest factor limiting entrepreneurship, but one way to scale this barrier is to harness the power of the collective.
IPOs (Initial Public Offering) is a form of crowdfunding where a company’s shares are sold to members of the public to raise funds for implementation. These shares give holders the right to vote on matters of corporate policy, board members, issuing a security, etc in the company.
In 2012, Facebook held its IPO. The social media giant raised over $16 billion from shares sold to investors, making it the third-largest in U.S history. Today, the emergence of blockchain technology has led to several breathtaking discoveries aiming to disrupt several industries. A tiny fraction of them is funded by team members, while others have to sell tokens to raise funds. This article explores the diverse routes through which blockchain startups can raise funds.
Blockchain startup: Initial Coin Offering(ICO)
This is the foremost and most popular means of raising funds for blockchain projects. The first ICO was held by Mastercoin in 2013. Ethereum followed suit in 2014, raising a groundbreaking 3700 BTC (worth about $2.3million then) in just 12 hours. Since then, ICOs have become an unwavering trend in the crypto sphere.
ICOs involve the sale of tokens of any blockchain startup to individual and institutional investors. As a result, the ICO project is raising funds(mostly cryptocurrency like ETH) that will actualize the project. These tokens are like shares in IPOs and represent a stake in the company or project.
Advantages Of ICO
- ICOs have the potential to yield high returns. In 2017, tokens purchased in ICOs returned an average of 12.8x on initial investment in dollars
- They are usually open to the public
- Investors can help shape the project’s future
Disadvantages Of ICO
- Since they are not regulated by any authorities, ICOs involve high risks of fraud.
- Majority of ICO investors are just enthusiasts with little knowledge.
Blockchain startup: STO (Security Token Offerings)
The meteoric rise of ICOs, unfortunately, paved the way for rogues who leveraged on its lack of regulations to carry out scams. Besides, STOs were borne out of the need to regulate fundraising in the crypto sphere. They involve the sale of tokens to raise funds but unlike ICOs, Security Token Offerings are backed by existing securities and/or underlying investment assets such as bonds and real estate. This makes them more credible and less likely to be a fraud.
Advantages of STO
- STOs are credible since they are regulated
- Security tokens enhance traditional finance since they facilitate services at lower costs
- Easy liquidity for investors since security tokens have specialized exchanges
- Security tokens are programmable and executable by smart contracts
- Low entry barrier
- Security tokens gives room for fractional ownership i.e. underlying assets can be divided into smaller units
Disadvantages of STO
- High complexity of legal regulations
- High costs of legal expertise to cover regions of sale
- The STO market is still very young and is yet to amass popularity like ICOs
Blockchain startup: IEO (Initial Exchange Offering)
IEOs are the next generation fundraising means for blockchain startups. Furthermore, its popularity is gradually on the rise, particularly because of the ease of token purchase and minimal complexity it offers investors.
In IEOs, blockchain startups collaborate with cryptocurrency exchanges who play the role of intermediary between them and investors. In addition, they help publicize and sell tokens to traders and investors on their exchange. On top of this, cryptocurrency exchanges like Binance offer IEO Tokens(BNB) which are exclusively sold.
Advantages of IEO
- IEOs help speed up listing process since tokens trade on the host exchange after completion of token sale
- It helps blockchain startups cut costs of listing and marketing
- Better protection against scams since it is in the exchange’s best interest to list good projects
Disadvantages of IEO
- Many are not comfortable with an exchange solely conducting token sale
- There are issues where the transparency of the exchange is questionable
Choosing the ideal token sale strategy for your blockchain startup is very essential towards its progress. Also, as an investor having knowledge on different token sale methods helps you make the right choices.
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