It’s the Wild West in the world of ICOs. It’s shoot-outs-in-the-streets, I-can’t-believe-this-is-legal pandemonium. People get scammed. People get ripped off. And it makes sense. Any scammer or con artist with half a brain is targeting the ICO market right now. This means that those investing in the ICO market need to be careful. Unlike with the top 50 market-cap tokens, we don’t have the luxury of assuming that all the ICO projects are legitimate and kosher. I may have my concerns with IOTA and XRP, but they’re certainly legitimate organizations. But that ICO your roommate just told you about? Well you know what they say about assuming…
You’ve worked hard for your money; don’t throw it away. Protect yourself. In this market, knowledge is power. Do. Your. Research. There is no other way. This isn’t to say it’s easy. It’s time consuming; it’s difficult; you’ll get halfway through a white paper and realize you still don’t have any idea what the project is doing. Don’t worry. It’s not just you. But the truth is, the longer you do it, the easier it gets. The longer you do it, the more you can quickly discard trash projects and hone in on the diamonds in the rough.
Step 1: The Idea
The project must do something unique, or do it much better than its competition. The idea should be easily comprehensible — don’t let complexity trick you into thinking the project is quality. Quality projects should be able to explain complex ideas simply to their audience.
It’s critical that there is a market for the idea. This fundamental and seemingly simple premise sometimes gets forgotten in today’s “decentralize and tokenize everything” environment. The team could be stellar, the partners exceptional, the marketing on point, but if there isn’t a true need for the project, you are better off spending your money on scratch offs and beanie babies.
There are enough impressive ICOs today that mediocrity is not something we tolerate. If it doesn’t “blow us away,” we’re probably not investing.
Summarizing Peter Thiel’s thoughts in his book, Zero to One: for a project to monopolize a product in an already existing industry, it must do it magnitudes better than its existing competition. Slightly better won’t cut it. In addition, projects that relay heavily on a wide user base (network effect) — which is essentially every DLT based project — must be as beneficial to their early users as they are for their end users. No project will succeed if it requires a million participants to bring any value to its users. There has to be an incentive for the first ten people to join the network before a million users will ever be achievable.
Step 2: The Team
An idea is only as good as the team behind it. Delivering a new product, in a new industry, all while utilizing new technology is enormously difficult. If the team lacks the relevant experience, it’s just a pipe dream. Honestly, we usually evaluate the team before the idea. Understanding an idea is time consuming; an efficient way of filtering projects is by quickly judging the team’s quality. PhD’s, serious experience, and strong technical backgrounds are keys that we look for.
There are some tricks projects will pull to arbitrarily strengthen their team. Statements like “developed software for Google, Facebook, and Yahoo” doesn’t necessarily mean they worked for those companies; more likely they worked for some type of consultant company that was contracted. Watch for superfluous, filler, bios that are light on details and specifics. And of course, cross-check everything on LinkedIn. Can’t find them on LinkedIn or their bios don’t match? PASS.
We place a heavy emphasis on the technical developers and their relevant experience.
Step 3: Advisors
A strong advisory team brings significant value and legitimacy to projects. Relevant advisers bring expertise and insight to a team. In addition, by aligning their name with the project they are staking their reputation — they must have a level of confidence to do so. However, recognize that there is a paid market for advisory positions in this market; take them with a grain of salt.
Step 4: Partners & Investors
Partners and investors bring enormous networking and financial help. Especially large, legitimate funds and institutions have their own extensive due diligence processes for determining quality projects. An investment from VCs like Sequoia, Link, FBG, or Fenbushi, holds significant weight. However, be aware that scam sites may still illegitimately list strong partners and investors. It’s enormously important to independently confirm partnerships, especially for early stage projects. Another trick that many projects will use is that they will list their paid consultants and agencies as “partners.” Deloitte is likely not partnering with that ICO…
Step 5: Token Economics
Hard cap. This is entirely subjective. The smaller the cap, the less the risk. It’s much easier for a $10 million cap ICO to 10x than it is for a $50 million cap project. However, with quality usually comes a higher cap. It is a rare day to find a sub $30 million gem.
Lockup period. Some projects have lockup periods, although this usually only applies to presales. As with caps, our willingness to invest with long lockups is entirely dependent on the quality of the project.
Early presale bonuses. Projects with large presale bonuses usually dump when they hit exchanges. Recognize that if you’re buying at ICO price on a token that sold for an 80% discount in its presale, you’re effectively buying almost at a 2x. This isn’t a problem if you’re the one getting the discount, but definitely should be a consideration if you’re not. Massive discounts are also a turn off in terms of a project’s legitimacy. This is supposed to be a legitimate company, not a casino.
Step 6: Roadmap
Roadmaps should be well defined and clearly determined. It’s important for the project to document their plan and approach and convey that to their investors. Investigate as well the timeline for the launch of a project’s mainnet. Obviously, the sooner the release the better. Projects with launch dates years in the future for their first main product are going to encounter a significantly different competitive climate than the one in which you are now investing.
A project that fails to meet their roadmap deadlines will see that reflected in their valuation.
Step 7: Additional Relevant Information
GitHub. Investigating a project’s GitHub is critical. GitHub is a site that allows projects to publish their open source code. An empty GitHub is generally a red flag, however, some projects wait before publishing their code to prevent intellectual theft. It’s important to recognize that many GitHubs will look “full,” but all the content will be forked. This means that it’s not original source code. Also, check how recent and often the code is updated and by how many developers. The more developers, the better.
ICO practices. Some projects do what is called Proof of Contribution meaning that in order to participate in the ICO, one must provide proof of some kind of contribution towards the project. This can be in the form of publications, Reddit posts, tweets, etc. Its a turn off when we find projects utilizing these methods. It generally results in a flood of low quality posts and overwhelms the actual quality content being produced on their social media.
Website. A quality website is important. Team information should be clearly outlined. A clean and clear website demonstrates a commitment towards the project and a high level of professionalism. Depending on the project’s location however, sometimes we make exceptions for this. Projects out of Asia at times have very low quality websites.
Social media presence. Especially when deciding on ICOs to invest in, it’s important to understand one, how many in the community are aware of the project, and two, what the project’s level of engagement is with the community. From the project, I want to see active posting on Twitter and Medium, as well as a well administrated Telegram and Slack (if they have one). I place less emphasis on Facebook as it is not generally the main engagement platform.
As we progress towards true DLT adoption, those who do their own due diligence will reap the biggest rewards. The industry is ripe with scams, cash grabs, and incompetency. A holistic evaluation of projects accounts for not only the viability and functionality of the idea and underlying technology, but also investigates the expertise of the team, the support of the community, and the project’s institutional backing.
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Disclaimer: This is not investment advice, merely our opinion and analysis on the project. Do your own research.