Digital Fundraising

The latest abbreviation in finance and crypto-world is ‘ICO’. A word that gives both local and global financial authorities like the U.S. Securities and Exchange Commission (SEC) nightmares for several reasons.

Not to be confused with Initial Public Offering (IPO) which is used by firms to raise cash through the issuing of shares to the public. An ICO (Initial Coin Offering) serves the same function and works like crowdfunding , but for digital currency and tokens only.

We recently covered a feature on raising funds and capital for a business but missed out on one relatively new method. More and more companies are using ICOs to raise capital for their businesses.250x250

The concept of an ICO works similarly to how a company raises capital through shares in that it is all based on contrived value.

Funding raising in effect boils down to sales! If your actual product or service has nothing substantial or intrinsic to offer a client base, then it is nothing more than a scam.

Launching an ICO is quite easy, and to an extent, many tech companies are now catching onto it.

An ICO is the cryptocurrency space’s rough equivalent to an IPO in the investment world. ICOs act as fundraisers of sorts; a company looking to create a new coin, app, or service launches an ICO — Investopedia.

If you still do not believe it is possible, just listen to this testament from someone who did it after unsuccessfully knocking on doors of conventional funders – the angel investors, venture capitalists and banks.

The alarming spurt rate of ICOs often brings with it a scourge of potential scammers. The SEC and other institutions have to step in to monitor and regulate them.

Social media Platforms like Facebook and Google – which house a bounty of users (potential investors) have banned ICOs ads due to possible prey on unsuspecting investors; exposing them to con artists.

Basically, the scammers use fancy websites, laden with impressive figures and terminology to con users into buying into their coins or tokens.

Though the tokens barely even cost a cent, it adds up if they have millions of people buying in.  Once they have reached a certain amount in funding – they close shop and disappear!

Hypothetically speaking if one wanted to create a new coin called ‘DebunqedCoin’, these are the steps:
  • Create a product concept or Business Plan for the coin or what is called a Whitepaper. This describes in great detail what the coin or token aims to do; the core technologies behind it; the team and their qualifications; the product’s lifecycle/growth path etc.

  • Once completed and water-tight, the whitepaper would be submitted along with an application to one of the best Cryptocurrency Exchanges for review.
  • Naturally, the business would need some initial working capital for liquidity. Some of this is raised by the owners and other institutions (through loans) etc. These will serve as collateral/insurance that there is indeed genuineness in the venture for all stakeholders.
  • You must then assure your investors of a solid return on investment (ROI) and deliver – which goes back to sales and growth. Unless your offering is a scam you actually need to do some work! This comes with regular updates (marketing campaigns can have a tremendous or adverse impact on the uptake and price) on milestones reached.
  • The above is necessary to keep the investors abreast with progress and in the process, getting them to possibly increase funding. Growing interest and addition of more funds creates demand for the coin/ token which, in turn, drives up the price and market capitalization.
  • Voila! you would then be in business!

Here are some of the most successful ICOs of all time

NEO:

Known as “China’s Ethereum”, and backed by Microsoft, Alibaba and the Chinese government, NEO uses smart contract applications. It does so, however, with the addition of decentralized commerce, digitized assets and identification.

It enjoyed a considerable hike in token value from $0.03 to $88.20, NEO has big things coming with a 294,000% ROI.

Ethereum:

Unlike Bitcoin, the second-most valuable cryptocurrency in the world has more functionality than just being a coin. Its ledger technology is used to build and deploy decentralized applications a.k.a. “smart contract” technology.

Ethereum’s ROI has been nothing short of jaw-dropping at 230,000%. Having sold its tokens at $0.31, an Ether token now sits at a whopping $713, second in value only to Bitcoin.

Spectrecoin:

The “premier privacy-focused cryptocurrency” enables users to send and receive currency worldwide with total anonymity. It is currencies like SpectreCoin that have most government tax offices quaking in their boots.

If you had repurchased a token in November 2016, that puny $0.001 would be worth $0.64 today, or an ROI of 64,000%.

Stratis:

This UK-based start-up has craftily created a platform that is compatible with .NET and C#. As a result, the product appeals to veteran users of Microsoft products.

Raising 915 BTC in 5 weeks, those who cashed in on the low investment of $0.01 per token have seen a titanic ROI of 56,000%.

Ark:

With Ark, collaboration is the name of the game. The platform’s SmartBridge is a lightning-fast ecosystem designed to integrate other cryptocurrencies into its blockchain.

Investors were eager as any to buy in, and they have made a 35,400% gain given today’s token price of $3.54.

DigixDAO:

DGD, which stands for Digix Decentralized Autonomous Organization, is a self-governing community. It gives out grants to different projects which will promote the growth of the DGX network.

At a current value of $346.88 per token, this gives them a return of 10,722%.

Quantum (QTUM):

QTUM is an open-source value transfer platform which focuses on mobile decentralized apps or Dapps. QTUM is the world’s first proof-of-stake smart contracts platform.

They hosted a highly successful ICO in March 2017, and since that time has seen an ROI of 6,400%.

Source: investinblockchain.com

The prospect can be daunting for a cryptocurrency investor looking to make money off new investment opportunities, while remaining cushioned from fraudulent ICOs and dodgy coins and tokens.

As there is no guarantee that any cryptocurrency or blockchain-related start-up will be genuine or successful. One simply needs to be vigilant and take steps such as getting to know the core team, poring over the whitepaper with a big magnifying glass. Naturally you should be monitoring progress of the token sales.

Most importantly, one must  just using common sense to gauge just how feasible the project is to ensure that you’re not falling for a scam.

Remember, if it’s too good to be true, then it isn’t true!

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Financing your Small Business

When considering small business financing, it is important to understand all your available options. If not, investors can easily take advantage of you and offer unfair terms.

So before raising any money, find out if using equity, debt or convertible debt financing makes the most sense for you to grow your business.

Equity


Raising capital through equity is popular, if not the most popular choice, for entrepreneurs to pursue. Investors buy stock (or shares) in your company, giving them a financial stake in the future success of your business.

How It Works:

    • You set a specific Dollar/Euro amount for what your company is worth.
    • Based on that valuation, investors agree to give you money in exchange for a certain percentage of your company.
  • Investors receive compensation based on the percent of stock/share they own once you sell the company or go public.

Pros:

    • All your cash can go toward your business rather than loan repayments.
    • Investors take on some risk and don’t have to be paid back until you’re doing well.
    • Investors often have valuable business experience.
  • Since investors have a financial stake in the success of your business, they are motivated to offer sound guidance and valuable business connections.

Cons:

    • Selling shares of your company will make it very difficult to get them back.
  • You will also most likely lose control of part of your board to your investors.

Debt


Debt-based fundraising is the form of small business financing that most small businesses end up choosing, according to Fundable. It is also the easiest to understand. Money is loaned to you with the agreement you’ll repay it over time with an established interest rate.

Get a quick loan for your business here: N26_banner-320x50-EN

How It Works:

    • You borrow money with an agreement to pay it back with interest within a specific time frame.
  • You will also have to offer your lender some form of collateral, which are liquid assets you will give up if you cannot make your loan payments.

Pros:

    • You will raise capital much quicker than with equity small business financing. This is especially true of smaller cash amounts.
    • You can keep 100 percent ownership of your company, along with 100 percent of its profits.
  • Interest payments are tax-deductible.

Cons:

    • You must be completely confident you can make your loan payments in cash each month. If you don’t, lenders can make you sell your business in order to get their money back.
    • Interest payments can become one of your largest business expenses.
  • Commercial lenders will demand small business owners to personally guarantee the loan and offer personal assets as collateral. This even if your company is structured as a corporation or limited liability company, according to Forbes.

Convertible Debt


A convertible debt small business financing structure is a mix of debt and equity financing. The money raised is considered a loan, but at some future date, the loan can convert to equity if the lenders so choose.

How It Works:

    • You will negotiate an interest rate to pay back the loan. This will also be the interest rate for those lenders who decide not to convert any debt into stock.
    • The details concerning how lenders can convert the debt into equity are negotiated at the time of the loan. For the most part, that means agreeing to give lenders a discount or warrant on an upcoming round of equity fundraising.
  • You will also set the valuation cap, or maximum company valuation, at which lenders can convert debt into equity. If investors decide not to trade in their loan for shares at this predetermined valuation level, they can no longer do so at a future date.

Pros:

    • Transaction costs are low and the process moves quickly.
    • If you don’t want to set a company valuation, which involves a lot of uncertainty and risks for new startups, a convertible debt structure for small business financing makes a lot of sense, according to Covestor CEO Asheesh Advani.
  • Using convertible debt protects investors from dilution in future financing rounds.

Cons:

    • Investors are uneasy about giving money without knowing the exact share of a company they will own. You might have to offer steep discounts on equity in order to get them to agree to the terms.
  • You may be forced to set a valuation before you are ready in order to avoid unaffordable loan repayment expenses.

In the end, it’s best you make your final choice, based on which of the mentioned options works best for you, not just now, but in the immediate future.

Read more: about other investment methods.

This article was originally Written by Alex Liu and published on UpCounsel

UpCounsel is an interactive online service that makes it faster and easier for businesses to find and hire legal help solely based on their preferences.