A recent report on failed ICOs sent shockwaves through the cryptocurrency community when it revealed that almost half of the ICOs held last year have already failed. But a closer look at pertinent details reduces the perceived implications of the report.
According to the research based on Tokendata statistics, the year 2017 saw a total of 902 blockchain projects that carried out token sales. From this number, 142 projects did not even take off as they failed to raise sufficient funds.
A further 276 projects have either gradually faded away or taken investor money and failed to deliver the proposed product. The report has another category that it refers to as “semi-failed”, comprising 113 projects whose teams either stopped communicating or whose communities are so small that their chances at success are almost non-existent.
A Realistic Perspective
While this report highlights a widely accepted truth that ICOs are indeed risky investment choices, getting a more realistic perspective on the issue at hand brings to light an interesting reality.
First, it is true that the ICO market is prone to scams due to the low entry barrier for launching token sales and this fact is well-explained in the report. But classifying these as failed projects inflates the number of failed ICOs unnecessarily.
These were not intended as actual blockchain project but simply as get-rich-quick schemes by fraudsters who take advantage of the weakness in the model.
Similar logic applies to the 142 projects that failed to kick off due to the fact that they did not raise sufficient funds. Their failure to raise funds is instead an indication that no one though t that the project was viable enough to invest in.
When it comes to ICO projects whose social media accounts and communities show low activity, it might not be fair to write them off as failed since there could be lots going on behind the scenes.
ICOs vs. VC-funded Startups
A more interesting revelation comes from a comparison between ICO-funded projects and venture-capital funded ones. Startups in general are said to have a failure rate of nine out of ten, a figure that is so much higher than the inflated 46% highlighted in the report.
According to research done by Shikhar Gosh, a Harvard professor, VC-funded startups have a failure rate of 75%. About 40% of them will end up liquidating their assets but he goes on to show that 95% of them actually do not deliver the ROI stipulated on their proposals.
This is a much higher number than is normally reported by a majority of reports. Gosh explains that this is to be expected as venture capitalists have a tendency to “bury their dead very quietly.”
This comes as a surprise considering that ICO projects are based on a relatively new innovation, blockchain technology, a factor that predisposes them to a higher likelihood of failure than ordinary startups.
What such research shows is that in spite of the source of funding, a majority of startups fail to achieve their objectives.
This implies that in spite of the high risk associated with the funding method, failed ICOs should by no means be used to discredit the potential of cryptocurrency startups in general.