1. Cryptocurrencies and the role of Initial Coin Offerings (ICOs) in the entrepreneurial finance
Dr Yannis Pierrakis
Small Business Research Centre,
Kingston Business School, Kingston University London

2. What is an ICO?
An ICO or Initial Coin Offering is the initial offering of a digital cryptographically secure piece of data (a digital token) created on a blockchain as part of a decentralised software protocol
An ICO is a popular way to raise money for a new project/start up by distributing a percentage of the initial currency supply to early supporters of the relevant project
Unlike conventional crowdfunding, however, tokens are usually tradable via online exchanges. This liquidity helps attract investors, and means that the overall ICO process has similarities both with conventional crowdfuning and with an Initial Public Offering

3. Top ICOs raised in 2017

4. Top ICOs raised in 2018 and return to investors
Source: Bitcoinmarket Journal

5. ICOs trends

6. How does it work
OR Users

7. How does it work
Exchange Platforms
OR Users
Services

8. Digital assets – some definitions
ICOs (Initial Coin Offering):
Digital money: when a coin is issued (e.g. bitcoin, etherium, litecoin)
Utility token: when a token is issued for future participation in the ecosystem the startup is creating
STOs (Security Token Offering): Tokenised securities – a version of a fractional digital ownership of:
Equity
Real estate, debt, other

9. VC, CF, BAs vs ICOs VC, Crowdfunding, BAs ICOs Slow settlements
Many intermediaries
Costly process
Opaque process
Lack of liquidity for investors
ICOs
Can raise money in seconds (e.g. Filecoin raised $252 Million in 30 minutes; Brave’s 'Basic Attention Token' raised $36 Million in 30 seconds)
No intermediaries involved
Low cost of token issuance
Transparent process
Offers immediate liquidity to investors
Paperless process

10. VCs and ICOs
VCs are often invited to take part in ‘by invitation only’ pre-sale of ICOs
Emergence of VC funds investing solely on ICOs
VC funds investing equity (fiat) and buying coins at the same time 

11. Key features of ICOs Start up: creating and harnessing value Investor
Fundraising (through platforms)
Due diligence ( i.e. medium)
Product validation and improvement (i.e. github)
Marketing and advocacy (i.e. advisors and social media)
Investor
Access to pre-vetted digital securities
Liquidity
Original valuation of the company is done by founders
Post-ICO valuation by crowd
No control of the company
No dilution
Often victims of fraud (e.g. Confido)

12. Current state of the ICO industry
Cryptocurrency bubble: original amounts raised by ICOs in 2018 are now worth much less due to the collapse of the cryptocurrency market [investors use cryptocurrency such as Ethereum (but not Fiat) to buy tokens]
As a result, ventures may not be able to deliver on their promises
Most tokens are now trading with significant loss – investors lost money
Most tokens are not in use yet
Only a small proportion of ICOs was originated by quality ventures
STOs are increasingly more prominent

13. Why policy makers should be interested (I)
Significant source of finance for startups (circa $4b in 2018)
Potential impact: loss of monetary policy, loss of taxes, creation of a parallel economic not controlled by governments
In the US, the Securities and Exchange Commission (SEC) declared that “almost all tokens would be classified as securities” under its definition and several ventures have been prosecuted since
There is a need for a speedy government/legislation response to fully realise the potential of the industry

14. Why policy makers should be interested (II)
Lack of investors’ protection
Tax incentives offered to investors through other forms of investments (Business Angels, equity crowdfunding investors) could be also offered to ICO investors once a regulatory environment is confined

15. Research objectives Potential impact of ICO strategies in:
(i) fundraising success
(ii) product validation and
(iii) legitimacy of the new venture
We examine the extent to which ventures can improve ICOs success by adopting strategies aimed at building outsourcing and social capital, namely by providing free coins to outsource expertise and by adapting social media campaigns.

16. Sample 2,721 ICOs between 2016-2018 Source ICOALERT ICODATA
ICOs websites
ICOBENCH
ICOHOLDER
Crunchbase
Variable
Amounts raised X
Outsourcing strategies
Social media
Human capital of founders
Advisors

17. Geography of ICOs Country Number % of sample United States of America
590
27.21
United Kingdom
257
11.85
Singapore
189
8.72
Switzerland
125
5.77
Estonia 93
4.29
Russia 57
2.63
Canada 51
2.35
Hong Kong
China 40
1.85
Gibraltar 39
1.8
Australia 38
1.75
Germany 36
1.66

18. Why ventures raise money?
Dummy indicating where the money will be spent
Proportion of the money to be spent for this purpose
Variable
Obs
Mean
Std. Dev.
Min
Max
Marketing
1,645
0.638
0.481
0.158
0.162
0.8
Development
0.512
0.500
0.188
0.220 1
Legal
1,644
0.424
0.494
0.039
0.072
0.85
Operations
1,646
0.429
0.495
0.096
0.161
Research and Development
0.221
0.415
0.077
0.170
0.83
Reserves
0.198
0.398
0.034
Business development
0.156
0.363
0.043
0.122
0.9
Admin
0.142
0.349
0.019
0.063
0.99
Team
0.128
0.334
0.023
0.079
0.75
Other
1,643
0.312
0.463
0.067
0.157
Overheads
0.044
0.206
0.007
0.046
0.84
Infrastructure
0.080
0.272
0.018
Security
0.059
0.236
0.005
0.024
0.25
Partners
0.061
0.239
0.009
0.040
0.4
Sales
0.055
0.227
0.012
0.65
Expansion
0.049
0.215

19. Allocation of tokens
Table 2a: Allocation of tokens (usage of the particular tool)
Variable
Obs
Mean
Std. Dev.
Min
Max
Bounty program
1,875
0.359
0.48 1
Advisors
0.236
0.425
Crowdsale
0.899
0.302
Table 2b: Proportion of coins allocated to each tool
1,884
0.024
0.054
0.86
0.018
0.046
0.83
0.26

20. Use of social media platforms
Variable
Obs
Mean
Std. Dev.
Min
Max
Twitter
2,721
0.721
0.448 1
Telegram
0.682
0.466
Facebook
0.622
0.485
Medium
0.444
0.497
Linkedin
0.394
0.489
Bitcointalk
0.359
0.48
Reddit
0.345
0.475
Github
0.302
0.459
Youtube
0.274
0.446
Instagram
0.124
0.329

21. Human capital variables
Obs
Mean
Std. Dev.
Min
Max
 Advisors’ experience (number of ICO they advised)
 300
 10.733
 19.05  0
 112
Number of companies founded by the team
463 12
Female in the team (dummy) 1
Number of founders 36

22. Results – Outsourcing an Social Media strategies
VARIABLES
Amount (log)
 Amount (log)
Outsourcing
Social media
Bounty prop. (2-4%)
-0.165**
 - -
Medium
0.128*  +
(0.0802)
(0.0661)
Bounty prop. (>4%)
-0.352***
 - - -
Linkedin
0.258***
 + + +
(0.0754)
(0.0615)
Advisors prop. (2-4%)
-0.145
Facebook
-0.256***
(0.124)
(0.0823)
Advisors prop. (>4%)
-0.155**
Github
0.397***
(0.0759)
(0.0641)
Crowdsale prop. (20-40%)
0.120
Twitter
0.0496
(0.0992)
(0.105)
Crowdsale prop. (41-60%)
0.148*
(0.0816)
Crowdsale prop. (>61%)
0.205***
  + + +
(0.0786)
Country FE
Yes
Industry FE
Constant
1.422***
(0.143)
Observations
2,090

23. Results – Human capital
Variables
Amount (log)
Advisors’ experience
0.112**
+ +
(0.004)
Twitter followers
0.0377**
(0.0186)
No of companies previously funded
0.0763* +
(0.0437)
Female in the team
-0.392**
- -
(0.176)
Number of founders
0.102***
+ + +
(0.0321)
Outsourcing strategies controls
Yes
Industry FE
Country FE
Constant
1.031***
(0.319)
Observations
296

24. Key findings
The higher the proportion of coins offered for sale to the crowd the more likely for the ICO to succeed
Offering free coins to outsource talent is not always a good thing
Strategies to attract advisors only work when they attract experienced advisors
The presence of a female in the venture team is associated to ICO failure, while the more founding experience the founders possess the more likely is for the ICO to succeed
The use of Github and Linkedin is associated with ICO success
In contrast the use of Facebook is associated to failure

25. Conclusions
Post-ICO bounty programs allocation may be seen as risky by investors (i.e. lack of internal expertise) and it should be allocated prior to ICO
There is a need for better pre-ICO vetting of advisors
Social media platforms that allow interaction between IT specialists, advisors and investors are integral part of the process
The fundamentals of successful ICOs’ founding teams are similar to those raising money through other forms of funding