ICO Evaluation Deep-Dive — 13 Questions To Ask ||Daniel & the Invictus Capital Team||

ICO Evaluation Deep-Dive — 13 Questions To Ask

ICOs have minted more than tokens — new independent venture capitalists are now faced with the challenge of sifting through thousands of investment opportunities. The following in-depth discussion provides investors with a framework for evaluating these opportunities.

1. Is the value of the token linked to an ICOs value proposition?

There is nothing requiring a blockchain company to even have a cryptocurrency or token, and there is nothing preventing one from receiving revenue in fiat currencies or any other cryptocurrency for their services.

For an ICO investor receiving coins or tokens in exchange for their investment, it is essential to ensure that the value created by the company is directly linked to the value of the token.

For example, if a coin or token is the only means with which a blockchain product or service may be accessed or purchased, then the value created by the project will be linked to the value of the token — hype and speculation aside. Ether, the coin of the Ethereum blockchain, or Steem, the token of Steemit are the means by which users pay for transactions on the blockchain, or by which content providers are rewarded respectively. Investors must ensure that the value proposition of a company is directly linked to the token received in an ICO.

1. Do the tokenomics make sense and are they likely to yield a return on the investment?

There are numerous points that should be considered to determine if the basic tokenomics even allow an opportunity for an ROI. Does the product of the number of tokens issued with the ICO token price result in a realistic valuation of the company? If not, investors should expect to see the value of the token decline until the product of the token price, and total circulating supply align with a reasonable valuation of the project.

Investors should thoroughly consider the supply of tokens and how this will influence the value of their investment over time. Does the proposed maximum token supply far exceed the initial circulating supply? Who will receive these additional tokens — the founding team? The release of these additional tokens will likely cause a reduction in price.

Is there a limit on the ultimate supply of tokens and can they be minted at will? The ability to mint tokens without limits places ICO investors in a very precarious position as the token value may be eroded at any time should there be nefarious activity on the part of the token management team.

Will token burning take place to decrease supply and drive prices higher? This is a common mechanic implemented to artificially increase token price.

Will unsold tokens from the ICO be burnt? If not, consider the following scenario: an ICO allocates 10% to team members yet sets a very high hard cap and does not burn tokens — they manage to raise only 10% of this hard cap, i.e. 9% of the total token supply. The team now ends up with an allocation of 91%! Be careful — this kind of scenario is often purposefully engineered.

If you invest in a project that already has momentum and funding the risk of the project failing is reduced — but you should be acutely aware of the pricing offered to pre-sale participants. If the pre-sale discount or bonus was very large it is likely best to avoid the project. The pre-sale participants could sell off their tokens below the price you paid at ICO and still achieve a profit.

The amount being raise must be scrutinized. Is the team looking to raise more money than is reasonably required to finance the project towards profitability? Alternatively, if a project is ambitious, have the founders created a hard-cap that is too low, limiting what they can reasonably achieve?

Is the team allocation too large (more than 15%)? If the team immediately gains access to a significant portion of the incoming funds, they will have little incentive to continue the project and grow the value of their allocation. They could simply cash out the second the token trades on the market and then drag their heels. Ensuring that the team allocation is small, and that the tokens they do receive vest over time incentivises them to carry the project out as proposed. A significant majority of tokens should ideally be allocated to ICO investors and community participants.

1. Is using blockchain technology necessary and advantageous?

Just because a company is holding an ICO, does not necessarily mean that their product has anything to do with blockchain technology — just that they have tokenized their fundraising efforts using a platform like Ethereum or NEO.

It is not a universal law that using blockchain technology is better, and investors need to be aware of why.

Blockchains or decentralized applications (dapps) in the SaaS domain do provide some fantastic advantages over centralized systems, such as system stability, security, transparency and censorship-resistance — but they are often also slower, can consume more resources, and can result in less-than-desirable user experiences.

Investors need to question if it makes good business sense to invest in a company based purely on its use of blockchain technology. Probing why the use of a dapp over an app is essential for market disruption or value creation is a good starting point. If use of blockchain is not advantageous, steer clear.

1. Are the ideas and the white paper original?

It is reasonable to assume that before any of these questions will be asked, an investor has already decided that the fundamental ideas behind a project and its value proposition have merit.

The white paper is the most fundamental medium for communicating to investors and users the objective and design of a project. It should be the product of intense dialogue between founders and their advisory board. Most importantly, it should be original.

It is not uncommon for founders to copy ideas, repackaging an existing idea in a shiny new wrapper, or simply plagiarizing entire sections of white papers. Improving on another’s ideas is acceptable if at least conveyed in one’s own words.
One of the most powerful strategies by which investors can silence the noise around a project and determine true the creativity and integrity of a team is to scrutinize their white paper and compare it to others for plagiarized text and ideas. This can provide enormous insight to the founder’s motives, technical prowess and ability to deliver.

If a team can’t rise to the simple challenge of writing an original white paper, it is highly unlikely that they will be able to rise to the slew of challenges that will follow the ICO and deliver what was promised.

To assist investors in scrutinizing white papers for originality, Invictus Capital has provided public access to their in-house Titan AI tool capable of detecting white paper plagiarism and providing insight to white paper originality.

1. What is a reasonable valuation of the market and projected capitalization of it?

Once an investor has a firm grip on the objectives of a project, and the market it seeks to either create or disrupt, an investor should try to size this market and determine what fraction of it can reasonably be obtained, and retained, by the project (competition, discussed next, is a significant contributing factor).

Doing this is by no means simple, but even the most crude approximations can be helpful. Creating a rough estimate of the potential market capitalization, and how this capitalization can be expected to grow over time allows an investor to divide the resulting value, and growth projection, with the expected circulating supply of tokens to obtain a token price. If this price is lower than the ICO price, beware.

Additionally, investors should consider how other companies in the sector have fared historically. Is this industry or market in growth or decline? Have previous disruptors achieved success? Not all industries are equal. Understanding the industry-specific relationships between the stability of market share and annual returns is important.

1. What does the competitive landscape look like?

Determining the size of a market is one thing, actually being able to achieve the proposed market share in the face of competition is another. Having evaluated the potential market of a project, an investor must come to a conclusion regarding the team’s ability to realize this capitalization in the face of competition. If no competition exists, one should consider how long this will be the case, how long first mover advantage will last, and carefully question why competition is absent.

Investors should aim to determine whether competitors have working products and what degree of success they have achieved to date. If competitors are ahead, how strong is their first-mover-advantage and just how significant is product differentiation. Determining market saturation is crucial; even if a new product does have better features, it may never secure enough of a footing in the market to begin its ascent.

In the face of strong competition marketing will be more difficult. Unique selling propositions (additional services, lower fees, etc.) will need to be present and the team will require the necessary resilience and flexibility to achieve more than just a technical advantage.

1. Does the team have a proof of concept (POC) or minimum viable product (MVP)?

A POC is usually just a technical demonstration of a key idea or component of a system. An MVP is far superior in that it represents a first offering of the actual product.

The presence of a POC or MVP demonstrates the personal investment made by founders to develop their idea before seeking funding and can prove that their proposed project is indeed viable.

Backing a team that has personally invested a noteworthy amount of time and funding into a project can significantly reduce risk. A complete lack of both a POC or MVP, or worse, no mention of them in the roadmap must, undoubtedly, be a red flag to investors.

An MVP provides insight into many aspects of the project. Be sure to test an MVP if possible, consider how well it aligns with the promises made in the white paper, satisfies the use case, and demonstrates the advantages over other offerings in the space. Since MVPs should have users, investigate any available customer feedback and how the team has responded.

1. Does it appear that the main reason for launching the project is to provide ICO investors with returns?

In the ICO space, scammers are pervasive and they know all too well how to lure investors in through the key incentive that drives them — the fundamental pursuit of investment returns.

If the whitepaper or promotional material explicitly guarantees returns — avoid! This is the hallmark of many fraudulent and illegal schemes.

Are high returns on investment a continuous theme in marketing materials? Is there a skewed focus towards return on investment over the problem they are looking to solve, the credibility of their solution or their plan for executing it?

Has the team detailed key milestones that are crucial for the success of the project and challenges they anticipate in achieving them? If the team only focuses on the best case scenario, and does not present a realistic analysis of the challenges they may encounter, or plans for navigating potential roadblocks, it is a signal that their focus is not the success of their project, but rather, taking investors’ money.

1. Does the team have a good marketing budget and media presence?

Every day, new ICOs are being announced. It is no longer enough to have a standout project founded by a strong team. A significant, strategic and multi-pronged marketing campaign is required for a successful ICO.

In this space, it is possible for projects to hold enormously successful token sales as a result of the strength of their marketing, and not the strength of their product or team. Allocation of resources to marketing is essential as return on investment on an ICO can often be created by hype alone.

A legitimate ICO that has excelled in key evaluation criteria will most likely have attracted meaningful media coverage and commentary. Social media coverage should be expected to include the opinions of cryptocurrency experts — a possible guide for investors on the promise and risks of a project.

If VCs or industry-specific investors have backed a project pre-ICO, scrutinize their writings to gain insight to the rationale motivating their investments. Reputable investors or companies operating within the industry choosing to align themselves with the vision of the entrepreneurs can provide investors with a degree of confidence.

Hype around a project can be a positive indicator for achieving short term returns on an investment and has often proven to be a good indicator for a successful ICO.

However, special care should be taken to investigate how the hype was generated, and it should be established that the project is otherwise sound. If the hype has been generated solely from link spam and a multi-level marketing mechanism — it is probably best to avoid.

1. Is the team credible, competent and accomplished?

Elon Musk has said that, “All a company is is a bunch of people [working] together to create a product or service. There’s no such thing as a business, just pursuit of a goal — a group of people pursuing a goal.”

Regarding the team, the first priority is to investigate if all the team members are actively involved in the project, and importantly, which of them are committed full-time.

This includes examining LinkedIn profiles, social media accounts, Github and similar sources of evidence indicating credibility and activity. This investigation should also establish if team members possess an appropriate track record for the project at hand. Reverse image searches and inquiries into involvement in past fraudulent activities should be made if any red flags appear at this stage. It is not uncommon for stolen images to be used for creating fake profiles.

After establishing that a credible team is in place, some thought needs to be given to their stated goals. Extraordinary claims require extraordinary evidence and it is highly unlikely that — all else being equal — a team without strong track record will change the world on their first outing.

Investors should determine if the team can execute the task at hand, containing the necessary diversity of skills and distribution of qualifications. Importantly, the team’s level of commitment must be established. They must have skin in the game (i.e. they have invested significant personal capital) and only receive rewards that vest over time.

In pursuit of answering any questions about the team or project it should also be possible — within reasonable bounds — to engage them on Discord/Slack/Telegram/Twitter. Investors should be able to ask difficult questions and not be banned for asking them. A good ICO company will listen to their community and be available to instill confidence, substantiate their stance on contentious topics, and demonstrate they they are working full time to ensure the success of the project.

1. Do critical contingencies exist?

Core considerations for identifying contingencies are: does the project require a key license from a governing institution; can a single new regulation in a key jurisdiction critically undermine the project; does the project require a critical rate of adoption; does the project require adoption by a key, lead institution; does the project require adoption of a key technological standard or rest on the success of another blockchain project, such as Ethereum?

A common theme in recent ICO scandals has emerged: the major institutional ‘partner’ that, in fact, has no agreement in place with the ICO. These agreements should be verified independently. The Visa/Mastercard partnership promoted by fraudulent ICO Centra comes to mind.

Failing to identify critical contingencies that could hamstring a project may result in unnecessary losses that could have been otherwise avoided. Identifying contingencies enables risk to be more suitably assigned to the investment opportunity presented by an ICO.

1. Is the project operationally sound?

In order to conduct business effectively a company needs to be registered. The details of incorporation should be available (with transparency) and the company should have retained a competent legal team. A plan should also have been set out for the management of accounts and audits.

If the listing of a token is a key factor in the realization of returns, they should have listing partners and be able to provide some insight as to which exchanges tokens will be listing on, and on what general time-frame.

1. To what extent are the advisors actually advisors?

Having a strong list of industry veterans on a panel of advisors has become a common feature on project websites. It is certainly a powerful marketing tool and serves to give a project credibility in the eyes of the investor.

Consequently, advisors-for-hire have enjoyed a booming market for their “services” and are often nothing more than window dressing.

It is not uncommon for advisors to receive a token allocation simply for allowing their names to be listed on a company’s advisory panel. In some cases, advisors are listed even without having given permission.

Researching if advisors are actually involved with a project in a true advisory capacity and determining if they have produced media on the project, and what their views of a project are, can be beneficial.

A brief search should be performed to determine if the advisors have been involved in any past projects which have proven to be scams or outright failures.

We hope this deep-dive into the fundamentals underlying investment into token offerings will prove useful to you and we look forward to your feedback, comments and suggestions!