As I write this I am sitting just a few miles down the hill from where the first piece of gold was unearthed by James Marshall in 1848 at Sutter's Mill in Coloma California. This discovery kicked off the massive migration of over 300,000 wide-eyed individuals seeking their claim to a better future. As they braved a new path into the unknown with a prospect of prosperity, the hills and mines played no favorites, the environment was harsh to all no matter what your background or status.
Over the last year, the cryptocurrency markets have provided entrepreneurs and investors a sense of what it must have been like for the pioneers of the California Gold Rush. The aura of the ICO has been unearthed, this genie is not going back in the bottle, shattering fundraising records - a new migration is underway. The evolvement of the global blockchain movement is touching every industry with the inpouring of over $3.2 billion in funding this year.
We have seen the meteoric rise of organizations raising hundreds of millions of dollars and the dramatic fall of companies from poor governance and internal controls. We have witnessed entrepreneurs with nothing but a business concept and a whitepaper raise millions of dollars on the premise of ‘what could be’, in comparison to what reality is. We have seen the rapid interest of government regulation around the globe with unclear paths on how to regulate decentralized markets with anonymous funding mechanisms.
So, if you were looking to plant your flag, grab your pickax and try to find some gold in those hills like past pioneers then let this be a simple guide to help you evaluate those tokens you’re thinking about buying.
To start, I am going to skip the obvious like the strength of the executive team and their history, does their website pass the scam test (stay tuned for a dedicated story on this), and is the company incorporated.
What this article is about, is how to look at an ICO whitepaper, website and supporting materials to evaluate if it's a good deal or not. But first, a disclaimer: this article, the publication, and I, the author, are not providing investment advice, and accept no legal liability whatsoever arising from or connected to, the accuracy, reliability, or completeness of any material contained in this article. Now that the legal stuff is done with, let's jump in with the four things I look at when evaluating an ICO.
I look to see what is the market size for the opportunity the organization is getting into. Now I know what you're going to say, “blockchain will create its own markets”, yes that may be true, but I am looking for token utility now or within the next 12 months, not 10 years from now. Is the market size large enough to support multiple growing companies in the space? Companies that are both on and off chain will compete for the same customers in most instances. Also, to be clear, I am referring to the addressable market, which is the section of the market the company serves, not total market. Do macro factors dictate the target customer segment which in turn will affect utility and token value? All these questions need to be considered.
Yes, I listed revenue! We are starting to finally see some hints at marketplace sophistication from a company standpoint and investor standpoint by which companies that are currently in operations are migrating to blockchain technology, or are in beta stage with contracts, MOUs (memorandum of understanding) and LOIs (letter of intent) signed and in hand. If a company is pre-product then a revenue roadmap with targets, milestones, and plans for achieving those benchmarks are better than nothing.
Just an FYI, most whitepapers that are sent to me lack most of these milestones listed and this poses a significant red flag. If the organization is just starting out they need to be pre-selling the model, product or service. Typically, my first question when speaking with founders is, what is your path to revenue? When you see that an organization has been selling or pre-selling their product and has a starving crowd waiting for their release, then the path to revenue is clearer.
What makes the product unique (and don't say blockchain)? A unique product or service not only provides something new and different but will not be commoditized and easily replicated by competitors. Does the organization have a true differentiator? Is there a secret sauce they talk about? If you removed blockchain from their offer would it still be attractive? If you have a chance to ask questions to a founder via an AMA, be sure to ask them: How will you stop the value of your firm from being cannibalized by existing competitors or new entrants? The response should speak volumes on their market knowledge, how they tend to make their product sticky with clients and long-term product adoption.
Show me the Metrics
In Jerry Maguire fashion, you want me to "show you the money" well you better show me the metrics. There are several things I look for when reviewing white papers. First, does the company have a forecast of revenues, and do those financials align with industry startups that are off chain? Because the underlying premise of blockchain is to be open and transparent, have they gone full kimono with their financial statements? This is not a use of funds pie chart, I mean are there sales targets? What is required from a cash flow perspective to operate the business? Do they know their customer acquisition cost? Estimated burn rate? What is the revenue model - recurring, one time? Can they anticipate the customer payback period? I would not be surprised if over half of the companies running an ICO right now have even spoken with their target customer let alone tested sales or distribution channels.
If you are new to evaluating businesses, their feasibility and how they will fair over time, then make sure the company you are evaluating answers these five questions at a minimum. What is the product? Who will buy it? Why will they buy it? Why will it win out against the competition? What is the size of the market/opportunity?
The blockchain and crypto markets are just still in their toddler years, which as an entrepreneur or an investor, you should be ecstatic about. There will be plenty of ICO projects for you to evaluate, review, invest or pass on, but I can only hope you arm yourself with the right shovel and pickax to find gold in those ICO hills.