Reasons why almost all the existing ICOs will end up DEAD
By: Aio Rating
Tags: Blockchain, Bitcoin, ICO, Cryptocurrency, Token

AIO Rating is a business platform using blockchain technology to connect industry experts including retirees and professors with blockchain projects. We believe that blockchain technology should be used more often to contribute to social welfare rather than industry. We believe that when blockchain projects struck with the ‘reality’ they need a real business model that can implement into the real world. We strongly believe when blockchain projects connect with industry experts, they will be able to ‘somewhat compete’ with the traditional market players apart from being completely knocked down. Succeeding in business is not related with the success of ICO funding. We believe that building a plausible and competitive business model and actual expansion into the industry is the key to the success for blockchain projects. We also hope to solve some of the social issues such as aging and retirement by connecting the ‘soon-to-be-retired’ experts and retirees with blockchain projects. We strongly believe that this interconnection will help the experts to continue working as an active member of the society and blockchain projects to bring realistic business models and adopt into the real world successfully.

ICOs, WHY?

“How can ICOs that fundraise over 10, 30 or even 100 million USD and still FAIL?”

“Why do people ‘contribute’ or ‘support’ these ICOs’ ‘dream’ or ‘ponzi-scheme’ when they do not even have a running platform or a product?”

Blockchain projects (ICO) and traditional venture startup share very common points.

One thing you guys should always remember is that most of the ICO projects (Some actually run reverse-ICO or were big from the start) are just startups. They could be ‘experts’ or professionals in blockchain yet in the traditional point of view, they are just startups. They claim an ‘idea’ and say they will do this and that to achieve their goal. They are fundraising to do their ‘to-do list’

Traditional Venture Startup follows the following steps when expanding.

Pre-seed Money -> Seed Money -> Series A (1st Round) -> Series B (2nd Round) -> Series C (3rd Round) -> IPO

Some startups get a series D or even E but it is most unlikely. It is a common step for a startup to get 3 rounds of investment and aim for IPO. I am sure all of you who are reading this post know about this process but I will add a short explanation to each step for convenience.

Pre-seed: You have an idea at this stage. Your co-founders get involved in the funding. It is common that everyone ‘chips in’ to the company. If you are still short in amount, you meet with the F’s (Family, Friends). Then, you convince them to pull extra funding for your business. The most important part in this stage is that you actually ‘Test’ your hypothesis. Being a ‘good idea’ does not guarantee you a success in business. Therefore, in order to continue on the journey, you need to test your hypothesis with limited resources and capital. For instance, there is a Lean Startup Methodology.

Basically you test your idea quickly to see if it’s really working

Seed Money: So you tested your idea and it seems like it turned out to be O.K. So you want to develop your business a little more but then you need more money to do so. (I personally think business has a lot to do with money if not all) This is a stage where you collect more capital to expand your business. Pre-seed or Seed stage are basically the same but I have categorized individually because in this stage you can actually get a professional and institutional funding. Most common examples are angel investors and accelerators.

Series A (1st Round): In this stage, funding is made to complete your either prototype product or alpha & Beta service. From now on, co-founders or founder need to consider their equity dilution.

Series B (2nd Round): So you continue on your journey after the first official investment from series A. And you still feel like this is really going to work. So you want to add extra features to your product or service and fix remaining problems. It is important that you collect reasonable and meaningful data from the market. It is important that you take some of the market shares as well. You will want additional capital in order to do extra marketing and team building. Some startups actually start expanding globally at this stage.

Series C (3rd Round): Startups that have survived until this stage are veterans. At this level, founding members (If not everyone but one has left yet) will not die even getting hit by a truck. Their mindsets are stronger than Adamantium or vibranium. They are probably ready for naval, air and even spacial combat. You can see that NASDAQ listing is coming. Startups at this stage will have users. Not everyone might know them but startups’ target audience (20’s, 30’s, etc.) will know them. They also have substantial and meaningful data from the market and also a ‘real’ running product or service. In short, they are ‘tested’. They also have ‘proved’ their hypothesis. Startups often get investment at this stage for M&A or IPO purposes rather than for business purposes. When startups get through all the grinding and tiresome procedures, once a ‘nobody’ becomes ‘somebody’.

Then, can all the ‘nobodies’ become ‘somebodies’?

In South Korea, KCCI (Korea Chamber of Commerce & Industry) have reported in their report the following data; It takes about 4 days (previously was 22 days) to form a corporation in South Korea thanks to reduced number of evaluation stages (From 12 stages to 2 stages). Basically forming a corporation in South Korea has become faster than in the United States (5.6 days), a paradise for startups. As a result, South Korea had about 33,137 venture startups at the end of 2016.

Survival Rate, though

According to Statistics Korea’s report on ‘2016 Corporate stats’ only 62.4% of venture startups that established in 2013 survived in 2014. This meaning is equivalent to startups fail to survive 1 year =37.6% this is larger than 1/3.

Survival rate after 2 years= 47.5%

Survival rate after 3 years= 38.8%

This means 6 out of 10 startups close within 3 years.

This is shame on South Korea but we have one of the lowest survival rates among OECD (Organisation for Economic Co-operation and Development)

Survival rate for South Korean startup after 3 years is 38.8%. For Sweden it’s 75%. For United Kingdom it’s 59%. For United States it’s 58%. France has 54%. Germany has 52%. Well, apart from Sweden most countries have a 50/50 failure rate after 3 years for startups.

It is very hard to analyze the failure of business within few points. It might have social, political or even religious reasons. However, the most common reason for a business to fail has to do with its business model. All the hard work does not pay off when its business model does not match with the market demand.

It is not hard to remember that there were some of the most innovative inventions and services back in the time. We all have memories of seeing something crazy and amazing when we were in childhood. However, some years later, those amazing and crazy products are gone. Those innovative products were not able to succeed because either people did not need them or understand them. Basically there was no market demand for such products.

The reason why I explain and write about the traditional venture startup is that venture start up faces with numerous ‘reality’ when doing business. It takes a lot of ‘failures’ and ‘doing it over’ for a startup to become somebody. They are also being tested numerous times either by market or themselves. Therefore it is extremely rare for a startup to fail within a year after IPO since they have been ‘tested’ and ‘proven’ their hypothesis and survived in the cold-blooded world of business.

ICO projects did not prove anything

It does not mean that people in the projects are not proven. (Well, there are some dubious individuals who claim something that can not be verified) There are some outstanding individuals in the world of blockchain such as Satoshi Nakamoto or Vitalk Buterin.

It means that the ‘ideas’ of the ICO projects are not proven. Great ideas are just ideas if they are not connected to the real world. Great idea does not mean a great business. It might have business potentials but that’s it. An idea always ends with ‘might’ ‘may’ and ‘maybe’ if it does not happen in the real world. It needs a plausible business model followed by great amount of work to succeed in business.

Maaaany ICOs claim that their blockchain integrated technology can make world a better place. They actually might. It is not hard to forecast that blockchain technology will bring us a change. But no one knows if it’s going to be a big or a small one. However, most of the ICOs are going through the opposite process of the traditional venture startups.

Traditional venture startup: Idea->Test->survive->Investment

ICO projects: Idea->Investment->Test(?)-> ?

ICOs will be tested and they are being tested. In fact, over 50% of last year’s ICOs that have successfully gathered funding have stopped functioning already. I am not surprised by these numbers.

There is A company. It has about 50,000 USD as an annual revenue. It has been losing about 200,000 USD as an operating loss for past 5 consecutive years. It has burnt all of its seed funding which was about 1M USD. This clearly shows that A company does not have a correct business model.

Now, they say they will do reverse-ICO since they were already ‘on business’.

A company claims that they will be a market leader and change the ecosystem in the industry by using ‘blockchain technology’. They have found out that blockchain enables them to do something that they were never been able to. Will A company be making 10x revenue compared to the last year’s earnings just because they will be using ‘blockchain’? I am not so sure.

Over 90% of on-going ICOs are on Seed Money stage if they were traditional venture startups if not on Pre-seed money stage

Over 50% of ICOs do not even have a working product. Around 30% have alpha and 15% have beta. 5% do actually have a running product. All they have is a thick white paper (Bitcoin whitepaper was 8 page long with a reference page) in which does not clearly show 1. How was the token pricing done 2. How will advisors actually help (Do not even know whether they really are on the team until you cross-check) 3. Most importantly, a solid business plan.

Having a great idea and a team of wonderful people with amazing careers do not guarantee a business success. Of course, if a team has a bright members on-board, that team has a higher chance of success. But that chance is not an absolute value.

Once a nobody, now a legend

Just because ICOs target some of the giant players in the industry like google, facebook and amazon and say “We will give back people’s money from these tyrants and make world a better place!” does not address the issue correctly. In fact, in the traditional economic perspective, those ‘tyrants’ are the best ones to invest since they have an entry to barrier.

Finally, most of the investors do not seem to care much about the technology or the change they will bring. Of course there are people who are very bright and intelligent. There are people who actually dig into blockchain and have a clear point of view. Those are the people who can really be called as ‘experts’ in this industry where no official institution or authority gives you an expert verification card.

Of course many people don’t really care much about the corporate when they buy a share in the stock market. Most of them probably only want to know when the price goes up. However, since most of the blockchain projects do not even have an actual running products like other companies listed in the stock market, people really need to concern when the projects launch a running product. Asking “When Lambo?” “When Binance?” “When Upbit?” will probably not bring back anything.

I personally believe that when a certain change to really be called as a technological revolution, even the dumbest person on earth can use that technology. I am not a programmer. I do not know about building a website or a server as much as a programmer. Yet I am writing this very journal. I am not a technician. I do not know how all the parts in the engine are connected. Yet I am driving everyday. I am not a scientist. I do not know in what shape of electricity goes through filament in the bulb so it lights up. But i can turn on and off my light without a problem. All you need to know is how to turn on the power switch on your laptop, put the key into the box and start the car and turn on the light switch.

Blockchain technology asks a little too much knowledge for its users to really be called as a technological revolution at the moment. I know they say blockchain is on its infant state. I really do hope to see an actual product running by a blockchain technology in the near future so that even an ordinary person can use it without any hassle not knowing it’s a blockchain technology powered. And also so that blockchain does not vanish into the mist like VR and AR.