The “Initial Coin Offerings: Class of 2017—one year later” report by Ernst & Young profiles the evolving business models and performance of the leading ICOs in 2017.
The report published on October 19 is a follow up to the December 2017 report that compiled the data of 372 top projects in the ICO industry. However, the survey focused on higher netting projects.
The study was conducted with cybersecurity solutions provider Group-IB. It utilized the data given by the projects and from the available online sources.
The December report discovered that the ICO industry was filled with high risk of theft and fraud. Moreover, startups conducting ICOs were found to be giving inaccurate project information to potential investors to boost investments.
The recent E&Y report saw that the ICO market conditions have worsened, and investors are likely dealing with losses at this stage. It found that an ICO portfolio obtained at the start of 2018 would have lost more than 50% of its value. “An investor purchasing a portfolio of The Class of 2017 ICOs on 1 January 2018 would most likely have lost 66% of their investment.”
Another disturbing development shown by the report is that most ICOs had dropped below their initial listing prices. 86% of the 2017 ICOs were trading at a loss compared to the entry prices.
Meanwhile, a small class of ICOs is performing well and reporting profits. The Class of 2017’s gains was concentrated in ten ICO tokens. These include Basic Attention Token, Tron, Tezos, Binance, etc. Interestingly, many profit makers were operating in the blockchain infrastructure category.
Ethereum remains the leading blockchain platform for launching token sales. In the survey, the network hosted more than 70% of the ICOs. Ethereum’s dominance is another indicator of the notion that in the long run, projects focusing on blockchain-based infrastructure perform more efficiently.
The ICO sector is deemed as an ultra-high-risk asset class. The combination of the lack of voluntary accountability from startups and little regulation has contributed to the bad outlook for investors.
Most ICO investments were made without an actual working product. The current largest ICO, EOS, had raised a whopping four billion dollars without an MVP.
In making investment decisions, investors utilize white papers and other technical publications issued by the startups. The funds raised during the token sales are expected to be used to create a prototype.
According to the report, however, most of 2017’s 110 top performing ICOs are yet to develop an MVP, revealing that only approximately 30% of the projects have produced a working product. The percentage constitutes only a 13% rise in prototype rollouts since the end of last year.
With the $5.6 billion generated through ICOs in 2017, the absence of MVPs is a worrying trend. Such causes doubts on the trustworthiness of startups and whether they are rewarded to deliver their promises to investors, considering that they already hold the funds and are not required by law to carry out anything to token sale participants. The study is likely to become a much-referenced calling card for those asking for greater crypto and ICO regulations.
Several of the startups with produced prototypes support other currencies and fiat payments. The report discovered that out of the 25 projects, seven do not require payments in their utility tokens solely.
While a lot of startups have de-emphasized their utility tokens to enhance their products’ functionality and stability, the Ernst & Young report describes the action as “effectively abandoning their ICO investors.”
A project, which token sale has raised 3474 ETH, has gone as far as de-tokenizing its whole business model. A service focusing on crypto inheritance, Digipulse, revealed its decision in August. Such would not have been the desired outcome for its investors.
“It’s clear that blockchain is already having an impact on many business topics beyond cybercurrency. However, the debate remains with currency usage itself, which began with the rise of blockchain in the first place. Once new standards are in place that are accepted by all participants—allowing for improved transparency, fraud prevention, and legitimacy — the protection of investors and users alike has a greater chance of success,” Ernst & Young’s Head of Global Technology, Media & Entertainment and Telecommunications Greg Cudahy explained.
When assessing ICOs’ high failure rate, the few startups with viable working products have to be viewed in the context of startup investing in general.
Seed money is the funding raised from venture capitalists and investors to be used to start a business. It is the earliest stage of financing for a product, and the main influencer for the seed funding decisions of investors are on-paper evaluations and speculative assessments like many ICO projects.
Late-stage funding is granted when a project already has a commercially available service or product in production.
Although the number of projects obtaining seed funding in the US Venture Capital world has increased significantly, there was only a minimal increase in the number of projects delivering a product and getting late-stage funding.
The widening gap suggests the difficulty of producing commercially viable endeavors using seed funding. It is comparable to ICO projects’ success rate in building working products. It indicates that the struggle of establishing a market-ready business is not exclusive to the blockchain ecosystem.
“According to Harvard professor Shikhar Ghosh, 75% of U.S. VC-funded startups fail. This rate is higher than reported by other organizations, such as the National Venture Capital Association, which estimates that only 25% to 30% of VC-backed startups fail completely. However, as Ghosh told the Wall Street Journal, VC tend to bury their dead very quietly,” a March report noted.
Furthermore, it has become an accepted rule-of-thumb that almost all startups fail during the first five years, suggesting that the ICO market may not be that much riskier compared to venture capital and angel investing.