Failed Expectations: Why 86% of ICOs Are Worth Less Than Whe
One year after the ICO boom, the markets are way down. What's up?
Some of the loss can be attributed to the fact that the cryptocurrency markets themselves have lost so much of their value over the past year. “Many of those companies received investment in other cryptocurrencies such as ETH, which they held onto (in many cases because they did not have banking facilities or liquidity available to convert the crypto info fiat),” explained Dr. Edgar Radjabli, Managing Partner of investment managing firm Apis Capital Management.
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“Since the value of all cryptos declined nearly 90%, they simply lost the majority of their raised funds to the volatility of the market,” he explained, adding that a large portion of the funds raised may have gone toward hiring top-tier talent.
However, not everyone is willing to give these ICO-backed companies the benefit of the doubt. Ben Ames, Director of Growth at Corl, told Finance Magnates that “often, the people behind ICOs were not capable of leading projects and shouldn’t have been funding in the first place.”
“The Are Unlucky Investors Who Will Never See That Money Again”
“With growing involvement from regulators like the SEC, many projects have been put in place and the money returned to investors. Unfortunately, there are unlucky investors who will never see that money again,” he continued.
His sentiments echoed those of Jim Preissler, CEO of Trade.io. In an interview with Finance Magnates conducted earlier this year, Preissler explained that the nascent nature of the blockchain and crypto industry meant that the founders of many blockchain and crypto startups had no practical experience in the corporate world. “after the ICO, you have to build a company and a product, which is the next big hurdle where you see a tremendous amount of failure, not surprisingly,” he said.
“A lot of this has to do with [the fact] that you have teams that have never done this before–for two guys with only a couple years of corporate experience, to build a business, build a team, build a company, build a product–it’s not easy.”
Jim also added that the high rate of failure in ICO projects is analogous to the failure rate in the world of traditional startups. “When all is said and done, the reality that you’re going to see is that 80 to 95 percent of all ICOs fail, which is not that dissimilar from the VC world–you see most startups fail as well,” he explained.Failure Isn’t Unique to the ICO Space
David Siemer, CEO of Genesis, also pointed out a correlation between ICO-backed startups and the VC world to Finance Magnates. “Common knowledge in the traditional VC market that companies tend to be relatively more inefficient when you massively overfund them and we’re definitely seeing a lot of that in the crypto space.”
“Anecdotally, seen a lot of rich companies with very small teams throwing money at everything. From a strategy perspective, they are looking at a 1-year time horizon when they should be planning for a 5-year marathon,” he added. He also explained that many of the projects that hit their fundraising goals during the ICO craze “would never be able to raise money in the traditional markets.”Par For the Course?
Siemer may be right–indeed, many analysts have explained the general decline in the cryptocurrency markets as a natural (if vicious) maturation of an over-inflated market.
In fact, Ethereum creator Vitalik Buterin himself predicted this “cooling” of the ICO market more than a year ago. “We are in a bubble because all the cryptocurrencies are rising and people have a feeling that they will always continue to rise,” he said to Israeli financial newspaper TheMarker just under a year ago. “In the end the market will need to cool down….A lot of projects will fail and people will lose money.”
There is also some statistical evidence to suggest that the general loss in valuation is all a part of a greater cycle. In the August “Hype Cycle for Emerging Technologies” report published by Gartner, a Connecticut-based research firm, blockchain was said to be entering the “trough of disillusionment phase,” when interest–and capital–hits new lows.
If the Gartner cycle is correct, however, the blockchain and crypto markets will soon be entering into the “slope of Enlightenment,” followed by the “Plateau of Productivity.” In other words, market participants will establish sound ways to conduct business, which will lead to a more stable, secure industry.“The Market Ran Out of Fools”
Indeed, many see the dip in the ICO market as a sort of return to rationality. “Valuations came back to earth,” Siemer said. “Overall a signal of the market maturing and the correction has been in my opinion healthy.”
“What we saw in 2017 was crazy, wild valuations ($200M fully diluted) for a project with two guys and a white paper,” he continued. “Lot of insanity that wasn’t sustainability – should not have been a surprise that the market has corrected.”
“Last year the main driver of prices/valuations was dictated by FOMO, social signaling, etc. vs. actual utility and value delivered to users. The original model was that people invest early at deep discounts and then pass the buck to retail investors – basically the greater fool theory and the market ran out of fools.”