The Other Side of the 'Coin' ICO is a new way of funding a start-up through cyptocurrency as compared to initial public offering (IPO) for any other company.

As the world gradually shifts to blockchain – Internet 2.0 that would change the way we share and store information in form of content, businesses fueled by this technology are taking a hard look at raising capital via Initial Coin Offering (ICO) – the next-gen digital fundraising approach. Sathvik Vishwanath, Co-founder and CEO of Unocoin – Bengaluru-based digital currency exchange explains what makes this technology-aided new financial instrument enabler look attractive.

Has ICO brought in the IPO approach to investments using technology?

ICO is a new way of funding a start-up through cyptocurrency as compared to initial public offering (IPO) for any other company. Entrepreneurs invite investors to pool in money and issue them the digital tokens or coins of the cryptocurrency, similar to how shares are issued to investors during an IPO. On one side, entrepreneurs develop the product for which they have raised capital via ICO and the other side, investors start trading those tokens in the free markets.

So what kinds of cryptocurrencies are generally traded?

Bitcoin is more general in nature and eventually will become the underlying currency for buying into the ICO. One bitcoin is about Rs 2.5 lakh whereas another cryptocurrency such as ethereum could be around Rs 30,000. The price range depends on the demand and supply ratio and how many buyers and sellers are dealing for a particular cryptocurrency. The tokens issued in ICO are traded similarly. The value of the token is enhanced over a period of time just like the equity as the company valuation grows.

But why should businesses choose ICO to raise capital?

At this point, ICO is very nascent in nature but it is a much simpler and straight forward way to raise capital from investors compared to the conventional practices like equity round because ICOs allow anyone and everyone to participate in it without any pre-requisites. It is completely a trust-based transaction. Investors must trust the founder first and believe in his/her idea. Usually entrepreneurs who raise funds via ICOs are serial entrepreneurs who understand growing and scaling businesses.

What if the business fails?

Depending on what has been promised, the remaining amount can be refunded or the founder can raise another round via ICO. Moreover in terms of investor selection, there is no filter to who can participate in the funding round and how many investors can pool in until the founder really want to do that. Most of them don't really bother because tokens are issued on the blockchain which are secured via cryptography. So, security is usually not a risk. There were cases of couple of hacks in the past that had occurred but now, the entire process looks much more reliable.

What is the lock-in period for investors?

There is no specific lock-in period in ICO. Unlike in normal equity investment where founders have to give exit to investors, in ICO the tokens that investors have are tradable in the free market or as soon as they get listed on the exchange platforms. Hence, they can liquidate the tokens whenever they want and there are no obligations. But founders have to decide how much money they want to raise through ICO or, the resources required and how they plan to deploy the fund.

Would ICOs be the new normal in start-up fundraising as blockchain becomes the next Internet?

There are definitely chances for the startups, which will have difficulty raising funds in traditional modes but believe in the idea and think that there could be some interested angels somewhere in the world, to try and get ICO style funding than just trashing the idea. As the ICOs usually happens at much earlier stage of the company than the IPO, the risk of the investor is enormous but there definitely are investors who would buy into it. ICOs also reduce lot of paper work to be done especially during transfer of shares and buy-backs and such.

(This article was first published in the July issue of Entrepreneur Magazine. To subscribe, click here)