The Hidden Trade-Offs of ICOs for Entrepreneurs

Initial coin offerings (ICOs) seem like a dream come true for entrepreneurs.

They have to find a way to get their product in the hands of the public, and they also have to raise money to fund the building and operation of their networks. ICOs can kill two birds with one stone.

But taking a closer look at how ICOs work makes me wonder if there is a question entrepreneurs should ask, but aren’t… are they giving up too much value creation to others?

Every entrepreneur I know has called me to talk about ICOs. In their minds, the primary benefit is non-dilutive financing. They don’t have to give up any equity, or control, of their companies.

But if you’ve ever had an introductory economics course, you know there is a famous idea called the “no free lunch” theorem. It says that everything in economics comes with trade-offs. Nothing comes for free.

So what are the hidden trade-offs for ICOs?

Fickle backers

For starters, liquidity is a doubled-edged sword.

Early-stage companies go through many ups and downs. There are many times when, as an early stage investor, you would like to sell and get out. But, startup equity is illiquid and so you often have to buckle down and figure out a path forward for the company.

With tokens, you can drop them on a moment’s notice. There is no reason to tough it out through the rough times. For the entrepreneur, that means you are relying on fair-weather friends.

Public panic

The world today isn’t run on truth – it’s run on information cascades, and availability cascades.

What this means is that if one piece of bad news comes out, that causes a large token holder to sell, and the price goes down, and as more people sell, the investor actions will cause people to question your underlying business and network. Potential customers or network partners see the token price tanking and assume you aren’t going to be successful…

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