7 Reasons to Think Twice About Running an ICO

It’s difficult to understand the challenges a blockchain startup faces when you’re looking at it from the outside. Sure, the headlines sound great. A handful of well marketed companies are raising tens of millions of dollars, a lucky few are raising hundreds of millions.

It can be tempting to want to get in on the craze when other people are making it look so easy.

I’ve had a lot of people approach me about advising their crowdfund in the crypto space after I fundraised over $1 million for my entertainment company. I turn almost all of these people down.

My issue is that I don’t believe they understand blockchain well enough. I’ve noticed that they want to run an ICO for all the wrong reasons. Whether it is greed, a lack of understanding about the developing government regulations, or an ignorance about the economic and social properties of a token with built-in scarcity, many new companies getting into the blockchain industry have no idea what they’re getting into.

Take my experience: I was a member of the crypto community for years before I started my own company, and nothing could have prepared me for it. Before my startup, I remember wondering why so many blockchain startups would do or say things that seemed to directly contradict what the community wanted and believed. I couldn’t understand it until I stepped into their shoes and started my own company, and damn, things are so much different on the other side.

Below, find 7 reasons why you should think twice before running your ICO.

1. You become a public company still in the startup phase

Most companies go public after they already have a large audience and have done significant research and testing on their product/market fit. They also already have a product.

These companies didn’t start out this way. First, the founders of these companies had to work for years in establishing an attractive product/service, and then courting angel investors and an audience. A lot of this work was done “in the dark”, where they were able to test things and make mistakes without anybody watching.

If you run an ICO you immediately create a community around your project — for better or worse. And this community will hold you accountable for every move you make. Meaning that any of your mistakes can suddenly become amplified into PR nightmares that destroy you or your company’s reputation.

Every startup makes mistakes, and almost every startup needs to pivot from their initial idea. These commonalities can be a lot harder to deal with when you have a community with set expectations… and investments.

2. People will tie your success to the value of your token — no matter how successful/unsuccessful you are

An ICO is a customer’s first experience with your company, and the first “product” they receive is your token. Since blockchain is still very much in its early days, you most likely won’t have a full service/product ready for your customers by tomorrow.

So for many months (or even years), the only product that your customers can hold onto is your token. In a sense, your token becomes your company. If its price rises, people will suddenly perceive you as providing lots and lots of value to your project — even if you aren’t. If the token’s price falls, people will blame your company for not doing enough to keep the price up — even if you are working as hard as you can.

This can create a strange disconnect between you and the community. On any given day, you’re either the second coming of Christ, or you’re public enemy number one.

3. Things might be fine in bull markets, but bear markets hurt everyone

A lot of crypto markets are built on speculation. Meaning that a group of people believe that a token or project will have a certain value in the future, and so they don’t mind participating in that market.

This is all fine and dandy in a bull market, where the entire market is going up and prices don’t stop making new highs. But bear markets can be dangerous. Since the crypto markets deal with people’s money, there are many people who lose more than they can afford when the markets take a turn for the worst.

When the markets dried up in 2014–2015, so did the communities. As a startup it can be very hard to plan ahead for something like this. As the space matures, this will not be as much of a problem, but that time is still a long way off.

4. The community will have unrealistic expectations about what you can accomplish in a short amount of time

Like I said earlier, most people are used to interacting with established businesses who have lots of resources for handling new acquisitions, customer outreach, product development, blunders, etc.

Because you’re not an established business, you probably won’t.

You are moving into an industry that is still finding its feet. There is no trail to follow. You are an innovator who must trail blaze and think outside the box. But this trailblazing comes at a cost: time. Whatever you are building is going to take time. More time than even you can predict.

The community wants to see your token’s value increase, it’s why they bought it in the first place. And the quickest way for that to happen is for you to release a steady stream of developments. Which isn’t always possible — or smart.

A community that is bored can very quickly turn into a community that is angry. And let me tell you — that anger is very contagious.

5. Lack of consumer-end applications for the blockchain makes interacting with cryptocurrencies awkward for both consumers and developers

Blockchain is still very much an experiment. No one knows where it will be in five years, let alone ten. Since the industry is so young, building even simple blockchain applications can cost a lot of money and take a lot of time.

From a consumer perspective, using those applications can then be very confusing and frustrating. This increases your chance of failure — if the market isn’t ready for blockchain innovation, it may be very difficult for you to expand outside of the crypto community.

Not to mention, if your startup doesn’t succeed (and quite a few don’t), your community might just villainize you forever.

6. It could harm your established brand image

If you’re already an established brand with a large community, you need to be careful about how you introduce your audience to a cryptocurrency. Remember that these tokens have a monetary value — and that some of your customers/devoted fans will be buying these tokens from third party sites and exchanges. Many of them won’t be investors, and may not understand the risk involved with your token’s volatility.

When you run an ICO the people buying your token are the ones who are taking the most risk. If things go wrong, they’re going to be upset. Upset enough to harm your brand image in a way that may take a very, very long time to repair.

7. Legality

Most newcomers to the space don’t understand the legal issues behind running an ICO. The first rule is to never call your ICO an ICO (I’m using it here because, unfortunately, it is still the industry standard and it gets the best SEO).

But things go much deeper than that. Most people who pitch me tokens are pitching me securities, and if your token is a security you are endangering yourself, your company, and everyone who purchases your token.

Get a lawyer who understands cryptocurrency law. It may be expensive, but it will be well worth it.

And there you have it, 7 reasons why you should think twice before running your ICO. If that didn’t scare you off, and you still intend to run an ICO, I wish you the best of luck. If you think you have a project that can prove me wrong, feel free to email me about it at clay@backto.earth.