ICO stands for Initial Coin Offering. It is often used by startups to go around the heavily regulated process of raising capital as required by banks or venture capitalists. That is to say that ICO is an unregulated method of raising funds for new cryptocurrency ventures. It works like this: a new start-up is about to raise money using an ICO, it creates a plan of what their project is about, what the project will achieve when it has been completed, how much would be required to finance it, and how much of the realizations would be reserved for the pioneers, the acceptable type of money and the duration of the campaign.
When the campaign begins, supporters of the project buy the startup’s cryptocoins using their coin wallet. If the money raised at the end of the campaign doesn’t meet the company’s target, it is returned to the owners and the ICO is deemed to have failed. However, if the amount is achieved and the project becomes successful, the cryptocoins would increase in value.
Venture capital on the other hand, is funding provided by investors for new businesses; businesses that are believed to have high profit potential. Venture capital is not always in monetary form; sometimes it can be technical or managerial expertise and is usually offered by financial institutions, investment banks or wealthy investors in return for equity in the business.
Pros of Initial Coin Offerings
DecentralizationBeing open to the general public, anyone in the cryptocurrency can partake in an ICO so long as they can get their funds transferred in time. The idea of cryptocurrency is to make the opportunity of investment as decentralized as possible.
Crowd BackingA startup funded by ICO has the advantage of a support system that is more or less a fan base. This increases word of mouth advertising for the company and decreases the need for standard marketing and user acquisition.
Increase in Social EnterpriseAs we know, venture capitalists more often than not invest only in projects that have a high potential for return from their investment. The coming of ICOs will mean funding for many more projects which don’t have the kind of profit motives required by venture capitalists.
Investment OpportunityMost people who have invested in ICOs such as bitcoin and ether do not want to pay capital gains taxes and so are unmotivated to bring their profits offline. ICO offers a solution for those profits. Ether and Bitcoin can be converted into a new cryptocoin which adds to their scarcity and increases their value.
DeregulationICOs are not regulated. It is possible for fake startups to come into the market and defraud supporters. Users may not be reimbursed if things go wrong. However, smart contracts are now used to lock up ICO funds.
TimingWith the speed at which ICOs sell out, many people may not get to partake in the campaign for the mere fact that they can’t get their funds transferred in time
Pros of Venture Capital
Besides monetary funding, venture capitalists can provide business guidance and consultation for startups.
It is easy to make valuable connections because venture capitalists are usually well connected in the business industry.
As a business owner, getting venture capital funding secures your own finances. If the business fails, the owner is not required to pay back the venture capitalists who invested.
Loss of Control
The possibility of the owners of startups losing control of their ventures is quite glaring. This is because venture capital is basically equity financing. Venture capitalists who invest in a business have stakes in that business and depending on the size of the stakes, can assume control over or influence the company’s policies.
There are many ways to fund your new startup. Do your research and go with the one that is the best for your venture.
Related: 5 Ways to Get Entrepreneurship Funding