Investments don’t come easy for startups. For any entrepreneur who has raised funds, aggressive due diligence by investors without the promise of an investment in return can turn out to be a harrowing experience.
An entrepreneur is constantly proving his/her worth to investors, sometimes also pivoting according to the latter’s demands.
Over the years, startups have also found alternatives to investments, for example, by going the crowdfunding way. A new solution that has come their way with disruptive blockchain technology is Initial Coin Offering (ICO). Through ICOs, a startup usually issues a token, as a cyrptocurrency, which the investor takes in with the hope that the value of returns is higher than that of the investment.
While ICOs are not yet regulated in India and were even banned from the Chinese markets, the US and Japanese markets have been opening up to the idea of raising funds through ICOs.
Indian startups, too, are slowly opening up to the concept of ICOs, but many others are still holding back considering the volatility of the market. Entrepreneur India spoke to experts as they debated on the advantages and disadvantages of ICOs.
Tried and Tested
Indian cab aggregator startup Drivezy, which was funded and mentored by Google while being a part of the prestigious Y combinator accelerator programme, has already gone ICO. With a GMV of a million dollars and a net revenue of $250k, the startup unlocked the true potential of blockchain.
“With ICOs, one can earn money through an open, transparent platform. At Drivezy, we allow micro-ownership by connecting vehicle owners with customers to create a shared ecosystem for transportation. It allows customers to access cars at a fraction of the cost of owning them, and lets owners turn their vehicles into a revenue generating asset,” said CEO and Co-Founder Ashwarya Pratap Singh.
Drivezy’s ICO venture has tokens called Rental Coins and their first ICO, which opened in November for $5 million, got sold out in 60 seconds after getting alive. Their ICO has been divided into three phases — the first happened in November, the second one is planned for January 2018 for $15 million while the third one is in April for $100 million. With these tokens, investors buy monthly rentals that ensure them a steady supply of income. “Only investors with a networth of $1 million or individuals with salaries of over $30k, can invest in ICOs,” said Singh.
Can the Benefits Surpass the Risks Involved?
Many experts believe that given the unstable nature of blockchain, going the ICO way is a risky adventure. Vishal Gupta, Founder and CEO of SearchTrade and Co-founder of DABFI, completely dismisses the idea of raising money through ICOs.
According to Gupta, raising funds by issuing cryptocurrency tokens assures a 10X return to investors — an improbable task otherwise. “It will be an absolute failure because you cannot promise the return to the investor. You cannot use the fastest growing asset today as an investment token,” said Gupta, adding that it essentially doesn’t work for service businesses.
According to Singh, the changing regulatory environment is a risk also making the offerings restricted, but with time and the acceptance of blockchain it will become clear. “The transaction costs become low, bringing in transparency. It will break the monopoly of investors. This will lead to the democratization of the startup ecosystem in India,” he said.
Going beyond the investor network is what encourages most startups to go the ICO way now. Entrepreneurs also believe that when it comes to Indian investors, it is very hard to sell them hi-tech ideas and if they do agree to the same, it requires months of due diligence and back and forth.
With ICOs, another attraction is global investors. “If you go the ICO way, you’ll have global investors peeping at your platform. So, for startups looking to capturing the global economy, ICOs are favourable,” said Sainath Gupta, a Bitcoin veteran and CEO of Anything.AI.
Gupta also believes that for ICOs, considering it’s not allowed in India currently, there are a lot more efforts required to first create the awareness. “A community that believes in ICOs needs to be built. Currently in India, the expertise for ICOs is lacking. Abroad there are startups that have raised millions of dollars through ICO but such is not the case in India, so far,” said Gupta.
News credit : Entrepreneur