Are ICOs a viable funding solution for SMEs?
The reduced banking lending facilities and the difficult access to private funding have led SMEs to increasingly look at alternative solutions to access capital in recent years; Initial Coin Offerings (ICOs) are one of them.
But even though money continues to flood in the ICO market with US$1.12 billion raised in Europe in Q2 this year, according to data from ICORating, the number of SMEs reaching their fundraising target has dropped significantly in recent months.
Thus, 50 per cent of the ICO projects announced worldwide in Q2 2018 were not able to attract more than US$100,000. In comparison, only 13 per cent of the projects could not go above this amount in Q1-Q2 2017.
For Clément Jeanneau, co-founder of Blockchain Partner, a consulting firm based in Paris, this drop has to do with the quality of projects.
“There was a lot of enthusiasm for ICOs at the end of 2017 – beginning of 2018, which can be explained by the arrival of retail investors on the market who bought tokens because everybody was doing it,” he says. “But before an ICO takes place, the token actually needs to make sense. ”
ICOs are a fundraising mechanism, in which companies and projects issue digital tokens in the view for investors to purchase them in exchange for established crypto currencies such as Bitcoin or Ether.
Marina Titova, head of ICO Advisory at the blockchain investment bank, NKB Group, in London, concedes that many investors who entered the crypto market last year are now taking a step back as companies still fail to assess the real need for their token.
“As a company, you must bear in mind that your investors may want to sell the token on a platform at some point and make a profit out of it. So, if there is no real need for the token, it will be really difficult to find the investors in the first place.”
A number of conditions must be met before an ICO becomes successful. First, smart contracts that allow for the automatic transfer of digital assets between parties and which are based upon pre-specified conditions must be written. Second, the SME seeking to raise funds needs to determine which securities should be associated with the smart contracts.
In addition, the company should take a strategic approach and decide how many tokens will be issued, at what price and the exact role of the token. Finally, the company should determine the right timing and how long the ICO will run for.
This takes a lot of time and financial effort. But for Julien Béranger, a member of iEx.ec - a blockchain-related company based in Lyon that successfully raised US$12.5 million through an ICO in 2017 – this also requires some marketing knowledge.
“From a pure technical standpoint, it’s easy to launch an ICO,” he says. “We are talking about digital assets and this is something everybody can deploy through a series of smart contracts. But if you want to reach your target, you need to market your project at least six months in advance. Only the projects, which are known among investors can hope to raise large amounts of money.”
As to know which investors are more likely to take part in ICOs, all the experts interviewed as part of this article agree to say that, the quality of projects coupled with the new regulatory frameworks across Europe will help attract more sophisticated investors such as venture capitalists, corporate or even institutional investors in the coming years.