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Starting a business is never easy, but Indian blockchain startups face a new challenge: the fall of the ICO (initial coin offering). After a lot of buzz, the ICO market slowed down in February as investors became more cautious. In this article, we look at what ICOs are, why the bubble burst, and how that will affect the Indian techpreneurs.
An ICO is a fundraising activity done by a technology-based startup company by giving digital tokens in exchange for money. The first company to do this was Mastercoin (now called Omnilayer) which sold its Mastercoin for bitcoins. It was able to raise $500,000 dollars, which it grew to the value of $5.5 million. After this, more ICOs (and ICO success stories) emerged.
ICO's and crypto-based technology were a hot industry, garnering over $300 million dollars in investment by 2016. IN 2017, we saw a lot of successful companies: Filecoin, Tezos, EOS, Bancor. But this was also the year when people started becoming frustrated with blockchain. They complained about transaction fees and speed, cyber attacks and scams.
Investors also grew disillusioned, burned by startups who sold them a lot of hype and promise in their white papers but were unable to deliver on Blockchain product development. Many of these white papers were not audited and were little more than technical essays. Compare this to the due diligence expected in other industries. Kickstarter, for example, requires business plans and timelines and a video – essentially, proof that a product will work and will be made. Until last year, ICOs could ride on the industry hype to secure massive funding with very minimal initial requirements.
Eventually, investors learned their lesson. By 2018, crypto investments had dropped significantly, hitting a low of $200 million in September. Even companies with an existing product struggled to get any investment or had to settle for a few ten thousand instead of the millions that were given out the previous year.
“Unlike last year, when an ICO was the first step (in fundraising), a working prototype is now the primary requisite for raising money,” said Alay Mehta, founder of blockchain startup ChainEx, in an interview with ET Tech. “A whitepaper alone does not suffice… Startups with products now rely on retail investors or raise an ICO at a later stage. The first step is to raise a seed amount for the product.”
Other startups like InCrypt have also taken to a private meeting with accredited investors. It's a more tedious and time-consuming way of raising funds compared to public offerings, but for them, it is a necessary step during the industry slowdown.
However, experts say that there is a positive effect: since there is so much screening, only the best products, and most well-developed concepts will prevail. In fact, many companies have started training their staff on blockchain – a sign that they're trying to make themselves more competitive, which translates to a better industry, a happier consumer, and more success for the startups that do manage to overcome the initial obstacles.