It seems like no matter where I go these days, I see an ad or hear people talking about an ICO, or initial coin offering, for a blockchain startup. With the immense market capitalization of cryptocurrency and the meteoric rise of Bitcoin, Ethereum, and other cryptocurrencies, there is unprecedented interest from people all around the world seeking to invest in these startups and their tokens/ICO's. Working in the industry, I get asked the same question so often "Hey what do you think about [insert startup or ICO here], have you invested in them? Should I invest?". In the end, I usually have a generic answer: Yes, I have invested or no I have not, and it's hard to say whether you should invest or not.
After quite a few personal investment wins and losses, I have finally honed in on what I believe is the most accurate way to evaluate an ICO in terms of whether or not it is a worthy investment and even when to invest. I would like to preface this with a disclaimer, I am not claiming to have a magic way to guarantee returns on ICO or token investments, nor can I say my approach is the end-all-be-all of investment approaches so please take my opinions as such. They are just that, my opinions and thoughts, meant to be a guideline for you to make your own decisions upon. Now that the annoying legalese is out of the way, let's get down to business.
I have narrowed my investment approach for ICO's and token sales to three categories of criteria: Personal Finance, Market Conditions, and The Business.
The first and foremost set of criteria relates to one's own personal financial situation. When considering any investment, including ICO's and token sales, the most important decision criteria is whether or not an investment is financially feasible and responsible for a person. I feel that the personal finance aspect of investing is often completely ignored or under-emphasized within all of the hype that there is around ICO's, cryptocurrency, and the like. I have narrowed this down to five crucial questions one should ask themselves when considering an investment:
Do I have sufficient financial capability to invest in the volume I need to achieve my goal return on investment?
At the volume I need to buy to achieve my return goal with this investment, can I reasonably afford to make this investment without putting my standard of living or my ability to meet my financial obligations at risk?
How likely is it that I would need to pull my invested capital out before reaching my return goals to meet my normal financial obligations?
For my personal tolerance for risk, how comfortable am I with the level of risk associated with this investment?
If I were to lose a majority of or all of my invested capital for this investment, would my standard of living or ability to meet my financial obligations at risk?
I'm sure many of these questions seem very straightforward, but also somewhat hard to quantify. I totally understand that. My main philosophy is if you can't confidently invest in your target investment without fearing significant financial strife if it were to fail, don't bother with this investment and look onwards to another opportunity. There are always high risk and low-risk investments, high buy-in and low buy-in, so on and so forth. Find the one that fits your unique financial needs. Criteria 1, check.
The second and also often overlooked set of criteria is the actual state of the market, and where the market seems to be trending. By the market, I mean the world that this token is trying to make a splash in and gain users and investors. For example, in today's market, radio advertising has become a deprecated way of reaching potential customers, so if I see a startup selling tokens for facilitating radio ads in a unique and innovative way, I will stray away. Why? Because even if the technology works perfectly, their roll-out is perfect, and their team does everything right (which will never happen, ever), the market they are trying to dive into has so little room for profit. They would be diving into a market that has already run close to dry! It is so important to consider the market that the token is trying to derive value from when deciding to invest, because even the most innovative solutions can still fail if the industry does not have the longevity to go the distance.
On the other side of the coin (cryptocurrency token pun intended), you also have to consider not only what the market is like right now, but what it will be when the startup launches their token and application to the masses. One mustn't forget that blockchain is still an extremely nascent technology, it is still in its infancy (or maybe toddler stage). Many of these token sales or ICO's are selling tokens for applications that will not truly launch to the public for a couple of years or more if they even make it at all! Thus, it is just as important to consider market conditions in the future as it relates to how well a token will or will not appreciate in value as the application it serves becomes highly adopted. For example, the IOTA token is a crucial part of an Internet-of-Things platform based on blockchain technology. In today's market, everything is becoming more and more connected, even toasters are internet-enabled. With that increased connectivity comes increasingly massive amounts of data being created every year and it is projected to become the #1 cybersecurity threat of the next decade. IOTA's application seeks to capitalize on that fact (I am launching a video all about IOTA soon). Thus, it would make sense that IOTA could be a long-term play for investment. See? Consider where the market is going, not just where it is.
Finally, and arguably the most often forgotten of the market discussion is whether or not the token is even designed to appreciate in value. For example, an application that is intended to be used to send digital tokens in the place of physical coins when giving change for purchases would only work if the digital tokens themselves remained at a reasonable value. Thus, the company issuing the tokens will likely increase supply (volume) of tokens as demand increases in an effort to keep the value of each token low. As the value starts to increase, more tokens are created to keep the price down. Clearly, this token is not intended to appreciate in value, thus it is not viable for an investment for the purposes of achieving returns on investment. In this example, one may wish to invest in some tokens to reap the benefits of using the tokens in place of pocket change, but not to earn money on their investment. Keep this in mind when deciding what to invest in.
Keeping with the above pattern of asking oneself questions to evaluate their potential investment, here are seven questions to ask in regards to market conditions:
Is the actual product or service the token(s) pertain to targeting a viable and healthy industry, or is there no room for capitalization?
Does the product or service the token(s) pertain to address a need in the current market?
If the product or service the token(s) pertain to does not launch to market within two years, will the market conditions be more or less favorable?
Based on market trends and the regulatory environment, will the product or service the token(s) pertain to be more or less valuable in the future?
How saturated with competing blockchain startups is the target market for the product or service the token(s) pertain to?
Is the token intended to appreciate in value based on the final purpose of the application?
Last but not least, it seems like an obvious one, but you have to look at the business or startup itself to determine if an investment has any chance to generate returns. I feel that most people look at a business in the context of the market like we did above, but we have already discussed that. In this case, when I refer to the business, I mean that I want to analyze the team behind the product or service itself. When an ICO piques my interest, the first thing I do is go to their website and see if they have a "Team" page. I want to know who is going to be responsible for driving this business forward and gauge their likelihood of success. You're not just investing in a business or a token, you're investing in the team that is creating those things. People forget, 75% of venture-backed startups fail (Harvard Business School study 2017), and these companies issuing ICO's and token sales are no different in those odds. The only thing that has changed in this equation is now the access to investors is massive, these startups do not always have to go for venture capital and forfeit equity in their company, they can sell you, an individual, tokens and generate capital. In a way, you are acting as a venture capitalist, you're investing in a small startup hoping that they token that they have created will accrue in value as they grow, just like equity as a company grows. Do you think venture capitalists buy into any company without researching the team who is responsible for spending their money? No bloody way; so why in the world would you? I encourage you to look at each startups' "Team" page before you even consider buying one token, and at the very least, go on LinkedIn and search the CEO, CFO, and CIO to see what they have done in their careers to earn your trust in this venture, trust in the form of your money! What should you look for?
Personally, I want to know the following:
Has the leadership team on this startup built a company before? Have they been successful or not?
Do they have relevant industry experience?
How much of a presence do they have on social media and are there complaints against them on these networks?
Are they affiliated with any big name companies or industry leaders? i.e. Microsoft and Google, or Bill Gates and Jeff Bezos
Do the team members' skills and experiences complement one another to cover the bases of a business (finance, technology, compliance, etc.)?
I know you're probably thinking "this dude is nuts, he didn't even mention their education.", and you are not wrong, I may be nuts. However, I do not believe education necessarily earns or breeds success in the wild world of business, especially when building a company from scratch. It is a slippery slope simply giving someone the benefit of the doubt because they are a Ph.D. or ivy-league educated - just because a person is highly educated or a true genius, does not mean they will successfully take a business to the big leagues. At the end of the day, if it is important to you, by all means, take it into account, but I personally don't give education a ton of weight.
You may think that I simply want to see a leadership team that has successfully built a company before, and yes, that does look very good. However, I am just as happy to see one or several failed businesses. Why? Because failure is a sure-fire way to learn a whole heck of a lot about what could have been done better and what was done right. One caveat here: a big red flag is seeing the same people having several businesses fail for the same reason(s), this indicates that they do not learn from their mistakes and that is a bad sign. Long story short, I usually like to see at least one team member with some semblance of success building a business, as well as a good resume of failure that the team members have learned from. Furthermore, I want the team to have relevant industry experience for the market they are trying to enter. For example, if all of the team members have financial services experience that looks very impressive, but they are trying to launch a business in the consumer product market, that experience carries a little less weight to me. Pay attention to not only the quality of the experience but the industry it is in!
Social media may not seem to be a great way to determine whether or not you want to invest in a team, but it really is. Take a look at the team members' LinkedIn, public profiles (Facebook, Instagram, Twitter) and see how long they've been around. Potential red flags: they have no social media presence or have just created profiles to start asking people like you for money on their ICO. Early this year, a startup called Confido with a fairly strong product idea and what seemed like a strong team launched an ICO virtually out of nowhere that collected $375k in funds. Then, all of a sudden, the entire team and company disappeared from all social media and their website was disconnected. They were gone. How could anyone have predicted this? Social media. Taking a look at the social media to vet the startup and its team, one can gain some clues as to the likelihood of this type of "exit scam" where companies disappear with everyone's money. The CEO of this startup claimed to have worked for big names like PepsiCo, but his LinkedIn had no peer references from supervisors or co-workers at those companies nor in-depth descriptions of his roles at those companies. That's a red flag. If I don't read a description of the role that tells me that one has done something or see a recommendation from a supervisor or co-worker, I'm not convinced. Furthermore, at the time that the ICO came to the market, the "company" had only existed on social media for a matter of months, and little was known about the CEO who had claimed he worked at big-name companies. That throws more red flags. The moral of the story is to be cognizant of the red flags out there in the public for you to see. Watching for the warning signs can save you money, literally!
Remember the three pillars I have laid out in this article when evaluating ICO's and token sales to invest in: Personal Finance, Market Conditions, and The Business. I hope that my battle-tested way of evaluating ICO's will help you when you are making your decisions.