Say Hello to the ICO-Operative
At a recent Deloitte and Innovate Finance event, we debated the rise of Initial Coin Offerings (ICOs), asking if they were a security or a scam. Whilst to some extent, our (largely crypto-community) participants said they can be both, it’s clear there is a passionate community backing many ICOs. We believe this passion and community spirit should not be ignored, and in fact, it could be central to the success of many companies that choose to raise funds with ICOs.
ICOs in numbers
The boom in companies raising money through Initial Coin Offerings in 2017 led to over $5bn being invested, $1.2bn in December alone, according to data from Fabric Ventures. Although some companies and investors were drawn to the ICO market with promises of easy money, many others have been attracted by the potential for ICOs to be a fundraising mechanism that delivers significant efficiencies in terms of speed, cost and transparency.
2017 ICO activity was characterised by a large volume of ‘smaller’ raises (between $1m and $30m), of which many resulted in the projects failing (either sincerely or otherwise). So far this year, the market has instead been dominated by larger raises, such as Telegram – for which demand was so great the entire raise happened in private placement.
What's the impact?
These larger raises generate excitement and interest because often the projects are already well known to the general public and/or well used by the growing crypto-community. Furthermore, for those that play in the ICO markets, money is cheap. The boom in cryptocurrency prices means the community has become significantly wealthy over the course of the last 12 months, and as a result has become more focused on social impact, backing ideas they are passionate about.
Telegram, for example, has long been the communications tool of choice for blockchain enthusiasts. In essence, the ICOs like this are creating opportunities for users of a product to participate in the ownership of the company.
In many ways this isn’t anything new. If you use and love a certain brand of product or service, there’s a decent chance you might be able to own a share of the company that sells the thing you love through the public stock markets.
We’ve seen cycles like this before. For example, in the 1980’s there was a public rush to invest in newly privatised public utilities. More recently fans of Brewdog beers have been happy to invest in Brewdog equity and attend AGMs that look and feel closer to a music festival.
The bigger picture
The structure of an ICO creates the possibility of something slightly deeper occurring here. The tokens created through the ICO can both represent a form of company ownership, but also take on value as some form of utility. In short, those using the products and services of a company could automatically become owners of the company. That could mean that ICOs bring about the re-emergence of the co-operative business model.
A set of rules for co-operative business models were established in 1844 through the Rochdale Principles. A big ICO today might not comply with all these rules, but the basic structure is in place. The Rochdale Principles state:
Co-operatives are voluntary organisations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination…
… Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative.
If a company requires that its services can only be used with tokens created through its ICO, and that those tokens also represent ownership, then the company is, to some extent, a co-operative – or, a little cheekily, an ICO-operative.
The need for regulatory clarity is almost universally agreed upon, but any regulatory framework should take care to reflect the specific nature of businesses that have undergone an ICO, and where possible, should encourage new business models that have strong potential.
Co-operative business models have repeatedly performed well, especially when it comes to growing market share within a given industry. Both the hard, rational point of sharing in the company’s success, and the softer emotional point of feeling part of a community, can be key selling points. The ICO-operative model could therefore help some FinTechs overcome their biggest challenge, customer acquisition.