In the U.S., more than 90 percent of startups “fail” their first year. There isn’t yet enough statistical data that ICOs fail more often than startups that raise [funds] through more traditional means. One needs to define what failure means – does it mean failure to get traction and deliver the product, or failure to raise funds?
Amy Wan, Sagewise
She has a valid point. When Vitalik Buterin comes out with shocking statements like “90 percent of ICOs will fail,” he’s actually not saying anything new. After all, if it were that easy to come up with a viable idea, get funding, onboard customers, and make it work, everyone would be doing it.
Are nine out of ten friends of yours business owners and millionaires? Probably not. Although, I guess it depends where you hang out.
But since we’re talking about the crypto world, and because this method of fundraising is public, fast and (rightfully) open to scrutiny, let’s examine the main reasons most ICOs haven’t gone the distance (assuming they raised the capital in the first place).
Lack of Market Research and Customer Collaboration
Richard Nehrboss is the CEO of Shardix, a decentralized database company. He believes that most ICO teams are too focused on the technology to consider market adoption. He says:
Over the last year, we have seen numerous ICOs introduce promising new technologies. However, many of these companies have lacked a coherent community interface. This stems from a pervasive mindset in the blockchain community which has been primarily focused on the technology side of development – “build it and they will come”.
With over 30 years’ experience in business, finance, and software development, Nehrboss knows a thing or two about the subject. “While these ICOs are busy one-upping each other with increasingly outlandish tech, they don’t spend enough time gauging the needs and desires of the community – dialoguing with them in a way that will encourage further growth and word of mouth.”
Lack of Experience
Browsing the websites of most aspiring ICOs is enough to make anyone feel old. The faces beaming out from them look young enough to be your… younger siblings. No one is denying that they have brilliant minds. And who better to lead the charge in this technological revolution than those who grew up with technology woven into their daily lives? But what they do lack is the experience. And that’s not something you get overnight.
Says Ian Kane, Co-Founder of Ternio:
In my opinion, there are a few reasons ICOs fail, but it all boils down to lack of experience. These companies lack experience in a few categories:
1) The industry they are targeting – banking, shipping, real estate, etc.
2) Why blockchain is even needed for their use case.
3) How to effectively manage a business – hiring, finances, PR.
4) Post ICO communication – updates to their core community are critical.
When building any business, it’s important to have an unfair advantage. You must communicate why your solution is better than everything else already out there and why no one else has a more appealing offer. Making something that is just incrementally better will not help your business succeed.
Low Barriers to Entry
CEO and co-founder of BitBull Capital Joe DiPasquale is an authority on investing in ICOs and blockchain projects, as well as a regular on the conference circuit. Beyond a lack of experience and long-term vision, he believes the funding mechanism itself sets ICOs up for failure from the start.
Too many ICOs are launching without having a minimally viable product – or, in many cases, even a proof of concept. The simplicity of throwing together a website and launching an ERC20 token has led many projects to ICO even when failure is probable. Most other startups normally have a higher threshold of viability that must be achieved before a project can even think about seeking outside funding. This results in fewer of them failing as publicly as some of the more infamous ICOs have.
Pavel Bains, CEO and Co-Founder of Bluzelle, echoes this sentiment. Having successfully raised his funding target of $19.5 million during an ICO earlier this year, he says:
One of the most important [reasons ICOs fail] is that there’s a lower barrier to entry for raising money through an ICO than other funding options, such as venture capital. As a result, more untested ideas that haven’t gone through the rigorous process of assessment by experienced investment professionals get through to [the] ICO stage than with other avenues. Therefore, projects that would have been rejected by VC or Angels are still able to start the ICO process, even if they then flounder as ICO investors scrutinize the detail.
ICOs Are a Victim of Their Own Success
Jeff Koyen, CEO of 360 Blockchain USA, says that ICO teams simply buy into the hype, and that becomes their downfall. “Crypto is a victim of its own success. It’s one thing to read about some hotshot Stanford grad landing a $10 million Series A round on Sand Hill Road with nothing but a pitch deck and a wireframe. But if you know anything about running a startup, you know that $10 million is not ‘easy money.’ There’s a board of directors, equity dilution, maybe an overbearing VC with a hand on the wheel. Traditional capital comes with strings attached in the form of oversight.”
While the vast majority of traditional startups fail as well, it’s particularly common with ICOs, as they simply aren’t prepared to bring their product to market. Koyen adds, “It’s wonderful to raise money without sacrificing equity. Most ICO-funded founders still control their companies. They have advisors, not directors; they have token-holders, not cap tables. But without traditional accountability, founders and team members can lack discipline. In short, the money was too easy.”
Final Thoughts
ICO teams are still operating in a new space. Perhaps brandishing them as failures is a little premature. Many startups fail to get funding once, twice, three times, or more, and go on to be a success. On the other side of the coin, for those still standing, holding a victory parade may be premature.
“It is hard to say if any ICOs have truly made it, as many are currently still building out their platforms or products and have yet to truly go to market,” DiPasquale reminds us. “Time will tell if these successful ICOs are able to make the transition to revenue – and profit – generating companies.”
