Once the mainstay of blockchain start-ups, the ICO trend is now flooding into the established players’ space. Traditional players have been keen to cash in on the benefits of the token economy and are fast turning their shareholders into token holders with the reverse ICO.
The rising star for instant messaging, Telegram, raised the bar for the reverse ICO with a fund-raiser that soared to $850 million. Kakao, a popular South Korea messaging app, followed suit with a reverse ICO of its own. Big names are increasingly moving into the token economy with a reverse ICO.
So, what are the attractions of the reverse ICO? How is it different to a standard ICO, and what long-term strategic benefits does it offer?
The reverse ICO is a regular ICO but one in which a company’s existing business model shifts from centralised and fiat based to decentralised and cryptocurrency based.
It’s used by firms with existing products, services, and clientele, and acts as an Initial Public Offering (IPO) but allows the launch of cryptocurrency tokens.
The reverse ICO runs through the exact same process as a standard ICO, although the company issues tokens to decentralise its business; it can offer these tokens to investors as a replacement for traditional shares and can use them to crowdsource fundraising efforts.
The token holders then get a share in the company’s profits and in some cases become involved in decision-making processes.
Therefore, the reverse ICO is very similar to a traditional share allotment event, although transactions are made through tokens over a blockchain network.
Benefits of the reverse ICO
“Transactional costs and intermediary influence in even the simplest financial transactions are unwieldy, expensive and they slow innovation. If I lead a forward-thinking company and I have the option to unwind the complexities of ownership and fundraising, I will,” explains Charlie Waldburger, ICO Strategist and Writer.
“Using a token, I can program ownership using smart contracts. I can add any number of exotic rights, preferences and clauses into my token. I can let investors share in revenue upside, offer dividends or interest and liquidate rapidly,” he says.
In an environment where technological innovation has led to an army of start-ups threatening disruption across every industry, traditional players are in the hot seat and are keen to protect their market share.
The reverse ICO has gained traction as it allows established players to grab hold of the benefits of the token economy within their existing businesses.
“I can program all compliance and regulatory checks I need inside my token and keep the fortune I’ll spend on lawyers, accountants and other financial intermediaries in house.
“Also, since I don’t need to trust any third parties to hold or prove asset ownership, my token holders’ data won’t be sitting at the banks and brokers that are daily making the news for being the latest victim of a cyber security attack,” says Waldburger.
In some cases, firms are reverting to the reverse ICO as they expand their products and services with use cases for blockchain technology.
Rewriting business models with the reverse ICO
It’s clear that firms want and need to position themselves to be part of the new token economy and the decentralised business infrastructure model.
However, the fact remains that a token will only hold value if it is intrinsically built into a business use case, so established firms will have to ensure they are transforming not just their finance structure, but their business model as well.
Kik, a social media app with 300 million users and 15 million active users, became the first mainstream company to have transitioned to the tokenomics model after it completed a reverse ICO on the Ethereum blockchain.
With its ad revenue based model, the company had been struggling to compete against bigger players like Facebook Messenger. But through a reverse ICO the firm escaped the prospect of being crushed by monopolies. It transitioned into a blockchain-based model that incentivises user activity through its Kin token.
Kik cashed in on its 300 million users, raising over $100 million during the 2017 token sale and became an icon of the reverse ICO business reboot.
Increasingly, mainstream players are opting in on the token economy; firms are choosing to launch a reverse ICO to expand their business with a blockchain component or to transition to a tokenomics business model that offers incentives to its user base.
So, could the reverse ICO take the gust out of the sail of the blockchain startup, if the token economy becomes a free for all?
“Maybe. For the unprepared ones,” says Waldburger, “if a startup’s value proposition is that they offer a token, then they’re using the ICO as a gimmick; to raise money for something that by itself – without the allure of a token – isn’t worth investing in.
“Now that companies can’t print money by throwing the word “ICO” or “blockchain” on a pitch deck, they’ll need to show a real business, a real path to monetization, a real user base and a real blockchain use case.
“But for the companies that are doing an ICO, (or STO for that matter) and have a technologically savvy team and great business model, the entrance of proven players into the token economy using reverse ICOs won’t hurt.”
Reduced probability of risk for investors
The days of wild and crazed investing into projects without a proper protocol are long since over.
Protocols and dAPPs without enough money to build and deploy products and communities, or those lacking in real user cases, will inevitably die.
This makes investing in a reverse ICO an attractive alternative to the start-up ICO launch; with a business that already carries a pedigree of success, productivity is likely to flow, reducing the risk probability for the investor.
Investors in reverse ICOs are attracted by valuations that can be easier and more transparent than that of the start-up ICO. The track record of established businesses can offer a less risky and more trustworthy venture. Reverse ICO events are also less prone to risks of fraud and capital loss.
“Given that reverse ICOs are launched by businesses with legitimate, market-hardened products or services, there is higher likelihood of stability and company solvency in the near term. More participants broaden the ICO market landscape.
“Investors may have better, more compelling options to invest in. Also, you need to remember: the companies doing reverse ICOs are, for the most part, doing them compliantly. This isn’t easy. It’s not a fast track to cash.
“They could use other approaches to fundraising, but they recognize some new advantage to incorporating blockchain technology, creating a user owned or governed experience or offering rights and privileges otherwise impossible in a standard equity offering, for example,” says Waldburger.
Despite the fact that the reverse ICO seems a safer bet, as always, to protect against the dangers of the pump and dump, investors should do their homework (DYOR) to ensure tokens are integral to a reverse ICO’s business model.
Although established companies may have the upper hand for attracting investors to their reverse ICOs as the legitimacy of their project has already been proven, they also face the obstacles of having to convince that they have a genuine blockchain-based value proposition.
It’s often been just a handful of tokens that have proven to be inextricably connected to the companies’ business model. The Binance coin (BNB), where you need BNB if you want to pay less for trading on the platform, is one such example. Users are incentivised to use BNB, so it’ll be used regardless of what else occurs within the wider crypto market.
Waldburger believes the addition of the reverse ICO trend will be “healthy for the space” as the prevalence of “scammy ICOs, illegal security offerings and bad actors soured many on what is otherwise an incredible space.
“You’re seeing it today. SEC intervention and poor performance has slowed the influx of cash. So, in one sense, reverse ICOs may restore some of the mainstream legitimacy back to ICOs.
“Or, since that word has gotten a bad wrap, they restore market faith in the idea of tokenized offerings,” he says.
The ICO space hasn’t been without its problems but it’s undoubtedly burgeoning. Last year, ICOs raised close to $6 billion, and this year figures have already totaled $9.1 billion, according to an Autonomous Next report.
And, as well-established firms place their bets on the token economy with the reverse ICO, the massive capital influx into ICOs seems set to continue to skyrocket in coming years.