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Why ICOs Fail – Industry Survey

Blog • 5min read
Tanya Chepkova

Written by

Tanya Chepkova
Published on December 14, 2018

Startups often make common mistakes that could turn their ICOs into a complete disaster.

Startups and established businesses have launched over 1500 Initial Coin Offerings (ICOs), but more than a half of them failed to raise enough money to proceed with product development. Another big chunk will gradually cease to exist soon after the fundraising round.

In certain instances, the projects just collapsed or were abandoned by their founders, but in most cases, failure seemed to be a result of sloppy planning and lack of forethought.  

While the facts are dismal, there is no need to despair. Startups may significantly increase their chance of success if they take into account the most common mistakes that may lead to ICO failure.

1. Low social activity

The ICO market is a crowded place, so it is essential for individual projects to spread the word about their products and services. The more any business project or brand is talked about, the more credible and attractive it seems. Sad but true, sometimes such hype is used by scam projects. And yet, any ICO success story goes hand-in hand with high social activity and solid community support.

The project developers should attract the public attention by ensuring their presence on various types of social media like Reddit, Twitter, and Facebook, and establish a presence on cryptocurrency forums like BitcoinTalk and GitHub. Meanwhile, some experts do not recommend focusing much on Telegram, since it’s more often associated with scammers. It could also be useful to introduce and support online discussions or forums for your followers.

Unfortunately, even the projects that have a brilliant idea, or, more valuable, a working product, might go up in smoke if they are not socially active. As numerous statistics show, the lion’s share of failed ICOs tended to attract less than 2000 Twitter followers and posted tweets less often than once a week. One such example was the Landcoin project, designed to democratize access to investments in land ownership and real estate. However, its Twitter account has only two posts and 19 subscribers. No wonder, the project managed to raise just about $1,500, according to Tokendata.io.

2. Nothing but the idea

According to ICOratings data, more than three quarters of all ICOs launched this year had only an idea behind them. Disturbingly, many blockchain startups don’t bother themselves to develop a minimal viable product (MVP), which is a prototype or a beta version of a product, that is used by the companies to get early feedback from users and make changes where necessary. This tendency is toxic for ICOs because the lack of any samples and demos makes it difficult for prospective investors to understand the offered product or service, and assess its quality, usability, and potential. On the whole, the human psychology is such that it needs something to be seen, perceived and tried to believe in it. Besides, it is but natural that investors will be more cautious if they have to trust someone’s mere allegations that can’t be verified on practice.

Unsurprisingly, the overwhelming majority of successful ICOs have a working MVP, while among the failures, more than half of projects at the time of ICO offered at best only some alpha version of the product in the foreseeable future. Such was the story of Trendit, a startup that aimed to create a blockchain-based social media platform, with the date of its full Beta launch stated on the official site as Q1 2019. The project didn’t manage to reach its hard cap in February 2018.

3. Legal ignorance

ICO startups ignore legal issues at their own risk and peril as a clash with regulatory authorities can kill even the most successful project. Negligent approach to Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures may result in serious problems.

Currently, there are no clear regulatory requirements for cryptocurrency-related business and fundraising via initial coin offerings in most of the countries. However, the absence of regulation does not mean that blockchain startups have a green light to do whatever they want. On the contrary, teams should be extra careful and make sure that they comply with all applicable laws and regulations of their jurisdiction. Otherwise, they may face hefty fines and even lawsuits.

A few things to consider:

  • Some countries have imposed a total ban on ICOs. It means that you cannot have an ICO in this country and sell your tokens to its residents. (China, South Korea)
  • In some states you will need to obtain permission or register with a regulator, especially if you are offering a security token. (USA, Canada)
  • Malta and Gibraltar are among the most loyal jurisdictions, while UK, Switzerland and Singapore and some other countries have adopted a relatively mild approach to attract investments in their economies.

4. Wrong token status

Utility tokens are less fussy as there is no need to go through a tiresome registration process and comply with strict security legislative requirements. As a result, most startups claim that they have a utility token. However, there is another side of the coin: investors often feel unprotected and wary of buying utility tokens with weak structure or unconvincing use cases. This is confirmed by statistics: the majority of ICOs with utility tokens failed to reach their soft cap. Moreover, regulators are always on the alert, watching for illegal security sales. If a financial watchdog decides that the token functions as a security, the company will be severely punished, which will quickly turn even a successful ICO into a complete failure.

Back in 2017, the US Security and Exchange Commission (SEC) issued a cease and desist to Munchee, a company that raised $15 million by selling its MUN token. The company claimed that it would be used within the Munchee ecosystem; however, SEC decided that issued a security masquerading as a utility as the company was going to use the proceeds to finance its business development.

5. Bad idea

Many projects are doomed to fail from the start because they are based on a bad or a weak idea. The project won't attract enough users if their product doesn't solve real-life problems in a unique and user-focused way. The latest statistics show that the majority of the ICOs launched so far in 2018 offer solutions for financial services, investments and gaming industries. These spaces are oversaturated with too many players engaged in a fierce competition. You'll have to offer something new and ingenious to differentiate yourself from your rivals.  Otherwise, your product will fall into a category of clones and be forgotten sooner than you even start your pre-sale.

Apart from that, many unsuccessful projects don't have clear tokenomics and profit opportunities. People won't buy a token that is not deemed useful or potentially profitable. If a project cannot demonstrate a long-term value of the token, will hardly be able to raise enough money during ICO.

So you have a great idea, something really new and useful for people? Take your time to think it over, create an MVP or a beta version of your product and start to build a community of your future users. Once you have a big pool of followers and supporters, enthusiastic about your project, proceed to prepare an ICO. Don't forget to take into account all legal aspects and make sure that you are not in breach of any applicable regulation, and you are as good as done!

Published on December 14, 2018