Almost 60% of ICOs effectively cease to exist in the first quarter after the end of the token sale. This information was published by Bloomberg. A little earlier, TechCrunch analyzed the data collected by the websites Coinopsy and DeadCoins, which track the statistics of failed crypto projects, and concluded that over the past year the market “lost” more than 1,000 startups. In turn, Satis Group, one of the leading consulting firms in the initial coin offering sector, cited an even more depressing statistic: 80% of the ICOs conducted in 2017 turned out to be scams.
Why on earth do projects, many of which initially appeared to be very promising, end up collapsing after the end of their ICOs, and what are the most common mistakes that should be avoided to prevent the catastrophe? If we disregard instances of overt fraud when the startup founders right from the start had intended to collect money and “dupe” their token holders, then it is more often than not that projects disappear after their ICOs solely due to their founders' ignorance or inaction. Experts from IBRC (ICOBox Blockchain Research Center) have analyzed the first 50 successful ICOs of H2 2017 – start of 2018 and come with up with the following tips.
Tip 1. Stay in the spotlight
One of the most common errors committed by startups concerns their disappearance from the news after the IPO. After going flat out on the initial currency offering and collecting the hard cap, the creators of projects then take their foot off the gas, on the assumption that their project is so cool that it will elicit the same amount of attention as in the past all on its own. They are quite simply wrong.
Staying in regular contact with the project’s community on social networks and ramping up interest in the platform are key components of surviving after an ICO. It is highly unlikely that the project’s community will appreciate the platform creators' abruptly falling out of regular communications as soon as the initial coin offering ends.
In turn, it is highly unlikely that traders and speculators attentively read through the startup's White Paper and appreciate all its nuances – they simply don’t have time to do this. As in the case of any financial market, they are driven far more by triggers that they can use to judge the viability of the project. News on the size of discounts, announcements on preparations for a new stage or the transition to this stage, the issue of a report on the work performed during a specific time period, backing from institutions, the signing of a cooperation agreement with well-known blockchain enthusiasts or a guru on the cryptocurrency market, exchange listings – the regular release of all this information will make it possible to keep the project in the spotlight, even if you are anticipating a certain downtime in your project's development.
In addition, you should never stop reminding your audience about your roadmap. Strict adherence to all the planned project stages and prompt notification of the market on reaching these stages will help the startup keep the market's trust. By contrast, any deviation from the stages specified in the roadmap makes customers wonder if the project is actually viable. So any changes in the roadmap should be immediately announced and explained to the crypto community.
Any departure from these rules will result in the project’s rapid and inevitable collapse. You only have to forget on a couple of occasions to ramp up interest in your project or divert from the roadmap to crash the value of your tokens and burn.
Tip 2. Don’t overestimate your own abilities
A no less common error is to overestimate your own abilities – in particular after a successful ICO. The project’s creators excessive self-confidence bordering on arrogance has already killed off many projects. More often than not the project founders hold the erroneous belief that if the team successfully handled the preparation and launch of the project, they will be able to continue this success going forward. However, this is not always the case.
Once the ICO ends, the project paradigm shifts. While in the run-up to a token sale more marketing and PR is required, on completion of the initial coin offering it effectively becomes a fully-fledged IT startup. Now fine words and smooth talking are no longer enough – the project needs people capable of managing the platform and establishing all the processes required for it to function.
It goes without saying that there is no need to change the entire project team. At the same time, some restructuring is advisable. An experienced chief operating officer and IT manager will help to rapidly change priorities, without any detriment to external communications and marketing. The latter can be fully outsourced and transferred to marketing and PR agencies. They can deliver far more to the startup after the ICO than the team of close friends who came up with the project. And don’t forget that the underlying principle of the cryptocurrency industry is decentralization. If it becomes clear that certain objectives can be achieved through outsourcing to third-party developers, don't torture yourself and your team with endless overtime hours – simply outsource the task.
As a general rule, divide and rule – you have a business that must operate and evolve; it should not be a hobby club.
Tip 3. Don’t cut corners on security
On average, each ICO project contains five errors in the code, and at least 70% of blockchain projects using smart contacts have errors classified as security vulnerabilities. Such data were cited by Positive Technologies based on its analysis of the market. Moreover, it was discovered that attackers could potentially target the organizers of the ICO (shortcomings enabling them to make attacks were identified in every third (!) analyzed project) and investors, as well as smart contracts, web applications and mobile applications.
Researchers from the Institute of Pennsylvania in the USA also highlighted this issue. They analyzed the top 50 projects and found out that only ten of them had actually provided the smart contracts they promised. The remainder simply did not include a corresponding code in their protocols.
Cryptocurrency holder, blockchain enthusiast and ICOBox co-founder Anar Babaev commented, “The reasons for such errors tend to be the most banal. A rush to launch when project testing deadlines are cut, and the programmers lack the necessary skills. And this can have the most tragic consequences – from attempts to steal the passwords to the domain, hosting and other services up to IP spoofing of the wallet to which the funds are collected. As a result – total havoc.”
And don’t forget that the cryptocurrency market is full of fraudsters ready to convert any of your errors into their own earnings. The security of the project is the last place where you should try to cut corners.
Tip 4. Don’t forget to hire a lawyer
Today’s cryptocurrency industry is not subject to unified legal regulations: different countries apply different rules to cryptocurrencies (or prohibit them altogether). Failure to promptly factor in these aspects and find the right solution to possible issues in the legal framework is another major risk for a project.
The failure to include VAT in the financial model, followed by the realization that you should have included it: you must admit that this is not a nice surprise. The same holds true for tokens – the earlier the project’s developers obtain a legal opinion on its nature, the better.
It is far preferable to spare no expense on competent lawyers from the start than to have to work your way through claims that you misled the public or administrative cases against team members and advisors, or even find yourself facing criminal prosecution. Luckily, more and more lawyers specializing in ICOs are appearing on the market today. In addition, such services are offered by most of the leading companies specializing in preparing startups for ICOs, for example, ICOBox, Applicature, Official Startups, Argon Group, AmaZix, etc.
Tip 5. Decide in advance how the project’s tokens will work
The token of any normal project is created for subsequent use in its economic system. Unfortunately, however, not all the companies out there understand this fact. After issuing the coins, they seek to sell them as quickly as possible on the cryptocurrency market and earn money from the initial offering. Then, having collected their hard cap, they suddenly ask themselves: “And what should we do with them now?”
It is very important to understand: the project will not function if its tokens lie like a dead weight in the pockets of users and are not used. This dead weight could drag the startup to the bottom even after the most successful ICO.
Your tokens should become the driver that will help a project to evolve. They should function within the system. How exactly? This is something that the project’s founders need to think about. And this should best be done before and not during and certainly not after the ICO.
“As in any serious business (and the ICO listing and subsequent development of the startup is definitely a business), in the crypto industry it is also very important to calculate all your risks in advance and anticipate any potential negative project development scenarios. The founders' biggest mistake is that they do everything in a hurry, resolving any issues that arise on the fly, and fail to look further ahead, to the period when the ICO is over,” says Daria Generalova, IBRC Business Development Consultant.
She adds, “When we advise our clients, we always make sure that their plans include a focus on the post-ICO period in all five areas. This is very important, not only for a specific company, but also for the state of the crypto market as a whole. Because the more successful projects operate on the market, the healthier the entire crypto economy will be. And the sooner the world will recognize its role as a fully-fledged financial instrument. That is when cryptocurrencies will become attractive to ‘big money’.”
This article appeared first on Cryptovest