In 2017, ICOs (Initial Coin Offerings) blew up in the cryptocurrency market and raised a total of $5.6 billion dollars. Startups discovered a new way to fundraise and receive capital faster, by holding these coin offerings. Instead of going through the traditional VC route which pinholes their company early to a specific valuation, they decided to just go straight to individual investors to raise capital. They offer digital tokens in exchange for funding for their startup.
Traditionally, Venture Capital firms hire extensive auditors to research startup companies before actually investing in them. Due diligence is done in checking things such as credentials of the founding team, KPIs (key performance indicators), the market/competition, and profit or runway on the project before the funding round. However, the biggest issue that has surfaced from these ICOs, is the fundraising is completely unregulated and by going directly to individual investors, they completely skip the extensive audit.
Many investors get sold on the idea but aren’t educated enough or know how to do the proper research. There have been many instances this past year of almost every major country attempted to ban these fundraising tactics due to fraudulent activities. Back in November, the founder of an ICO, Confido, ran away with $375,000. Just recently, there have been two projects uncovered as Ponzi schemes such as OneCoin and BitConnect.
Not all ICOs are fraudulent, but with most unregulated, except the ones backed by SAFTs in the U.S, it poses a danger.
Just recently I wrote about MedicalChain, a U.K based medical record blockchain startup that completed their $24 million capped ICO. When doing research for my article, I ran across another similar ICO called ‘MediChain’ and decided to do some research of my own. I’ll walk you through how I analyze and research a new Initial Coin Offering.
The first thing I look for is the information on the project given or video displayed on their website. Most ICOs have video(s) that display their vision and goals for the project. I won’t go into further detail about my opinion on this video but I will just link MedicalChain and Medichain’s videos below, and you can make the comparison for yourself.
The credentials of the founding team on a project are crucial to a successful business. You wouldn’t hire a plumber to solve legal issues you may have. With that said, these new age entrepreneurs wear many different hats and possess various skill sets, but backgrounds in a particular space are important. The founding team on a project is the backbone and when doing due diligence should be your top priority. Having advisors in a relative field or with business backgrounds is a bonus but I’d focus on the core team.
Most working individuals have LinkedIn accounts which display their current employer, skill set, work history, and education. I dug a little deeper into each member of MediChain and discovered some things that drew some major red flags for me.
First, mostly every person in the founding team via their LinkedIn lived in various cities around the world. Most of which didn’t even have MediChain as their employers. For any startup, it may make sense that individuals working on a project may not yet be able to be on it full time but the fact that they were all in random places around the world surprised me. If the core team is not located in one specific area, how much can be done effectively and why should I give my money to this? Lastly, the only actual medical doctor within the group is an advisor. The founder refers to himself as “Dr” but has his PhD in Philosophy and possesses a Masters in Science.
Lastly, I tried to research a little more into what the team has actually done that would require them to need funding. On the company’s website, their ‘roadmap’ only shows their Q1 goals but doesn’t show anything that they’ve done before now, which seemed a bit odd to me. For companies to raise capital, they usually have to show something to investors in order to gain funds. I decided to do some research on the Reddit Forums and the companies Twitter to dig a little deeper. On Reddit, the only information I could find was about the upcoming ICO, and it only dates back 3 weeks.
When I researched their Twitter, I also found something interesting.
There was a seven-month lag between postings on their twitter, and the above post shows the first mention of MediChain. The articles before this MediChain ICO announcement were just medical data and information in healthcare. It remains unknown and unclear what the team had done before they planned to raise money.
Do Your Research
Ultimately, it all comes down to the individual if they end up losing money in an ICO. Research and due diligence are essential in this unregulated space. I hope walking you through how I researched and evaluated an ICO is useful to you.
If you have any comments or would like to tell us how you do your research, leave it in the comment box below.
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