From a guy who helped founders raise more than $280 million
*there is a difference between a coin and a token. For the sake of simplicity we would use the term “coin” instead of token onward
Why will ICOs rule or NOT rule the world
*How to Initial Coin Offerings raise millions without giving equity?
There are more ways this is done usually, as coins or tokens can be different from one another, but here is one standard way. The coins offered are for a certain utility or something that will be automated and that the users can access. Think of medical records that are accessed via a blockchain making sure they are protected and accessible globally at the same time. Every time someone uses this medical blockchain network, she or he needs to buy the coin that allows this network to function. The more people use the network the more its coin value increases.
The reason why when more people access their medical files on the network the more value of its digital coins increases is that they also exist in limited quantities! Hence, there are capital gains for investors just like with stocks. For coins usually there is no interest or dividends, just ownership of the currency used in a small economy. Companies can still take fiat dollars and euros for providing services of their network, but usually they need to convert them to their coins/tokens! Once they do, the value of the tokens increases!
Case study example
Here is how a medical chain blockchain database startup raised money.
The startup sold 30,000,000 coins at an average price of 0.8 USD per coin.
First, they sold at a discount of 40% in the private placement and the first week of the pre-ICO that was opened only to whitelisted investors who could invest at least $20,000. Then, they sold the tokens at a discount that was decreasing with every stage of the initial coin offering while reinvesting part of the money into marketing!
So, if they gave 20% discount on average, does this mean that the cost of capital was 20% too? I don’t think so! No. The blockchain venture got fiat money in return or around 24 million USD! Given they did not give high cash rebates but only token discounts, they cash COC for the fiat part were below 5%. The token discount was around 20%.
However, once they listed on exchanges the price of their token was already 20% above the highest selling price in the ICO! So, imagine that. The company did not raise just $24 million USD – < 5% discount. It also got 30% of the tokens in circulation and 20% of tokens for the founders valued at about another $14 million USD! Additionally, half of the buyers of their tokens were considered future users of the platform and not speculators.
The total cash investment of this amazing team? Around 40,000 USD! However, they were high-quality founders which is sometimes awesome.