You Can Still Make Money In Token Sales By Thinking Like A Venture Capitalist

12 / 19 / 2018 By Mark Thomas

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Token Sales are dead. We’ve heard this mantra spoken several times over the past three months from experts and “former enthusiasts” within the crypto and blockchain industry. We’ve seen it in the price of alt-coins that have tanked over 90% in price since summertime. We feel it in the general malaise that creeps across people’s faces when discussing cryptocurrencies (if they’re even willing to discuss crypto at all).

But all of this is healthy and is setting us up for the real party.

They hype and euphoria of Token Sales we experienced from the summer of 2017 until the summer of 2018 when ICO’s could raise $50M on an idea and a whitepaper alone simply weren’t sustainable. Speculation ruled the day as to how and when projects would eventually be adopted by the masses and/or customer and revenue growth would be achieved. Whether there was any real use case for a particular protocol or Dapp didn’t really matter because the get-rich-quick mentality that was pervasive across the globe drowned out voices of reason. The Greater Fool Theory was rampant, and no one cared to look at the fundamentals.

Like all things that are often too good to be true, the crypto markets began to sink in early 2018, then again this summer, and then the nail in the coffin happened last month when Bitcoin broke through support at $5,800 and free-fell to its current $3K levels. Overall, Bitcoin is down 85% from it’s all-time-high a year ago, with most other alt coins fairing even worse.

The reason these prices crashed back down to Earth was the lack of fundamentals exhibited by 99% of the projects that were behind the coins. Eventually, investors are going to want to see real-life use cases, customer and revenue growth, and adoptability. Bitcoin probably fared the best because it has the highest chance of becoming “digital gold” and the standard of all cryptocurrencies (through its first-mover advantage). But all of the other alt coins and projects behind them needed to show that they were ready to become scalable products in order to justify their lofty raise amounts and valuations. Clearly, this hasn’t happened yet.

The good news is that this massive correction has forced both incumbents and new projects to focus their attention on what matters — building sustainable products that consumers and businesses want to use in their every day lives. It has also drastically reduced the number of gimmicky ICO’s and Token Sales down to just a select few that have the potential to be big. Investor appetite for fundamentals is now required, and that has a funny way of weeding out those that were just looking to make a quick buck (or coin) and leaving us with the products and projects that are building something sustainable.

So what’s a retail crypto investor to do in a market like this, where you still believe in blockchain and cryptocurrencies changing the world, but looking at prices every day on your Binance app makes you physically ill? The answer is to start approaching Token Sale investing like venture capitalists and angel investors approach startup investing.

Professional startup investors have a checklist of things that are must-have’s before they’ll write a check (or before they’ll send their crypto), and they’re very selective about what they invest and don’t invest in. They don’t rely on some greater fool to sell to further down the line. They have a rigorous process that has led to huge returns funding the top technologies that rule the world. Their checklist allows them to pattern match and determine which companies have the highest likelihood of success based on what they’ve seen in other successful companies. If you approach investing in Token Sales like VC’s and angel investors approach investing in startups, your opportunity for making outsized returns that dwarf any other asset class increases exponentially.

Here’s what to look for in Token Sale projects and what your process should look like:

1.Minimum sellable product — Back in the heyday of ICO’s, working products were optional. A team and a whitepaper were sufficient. But with rare exception, you would never see most professional startup investors put money into a startup with no working product (repeat successful founders and Y Combinator might be the two exceptions). In fact, you’ll rarely see them put money into companies with only a working product. Professional investors don’t want to see just an “MVP” (Minimum Viable Product). They want to see an MSP — Minimum Sellable Product. MSP means that the product is something that consumers or businesses will actually pay money to use today or in the very immediate future. While a Minimum Sellable Product in and of itself should not be enough to invest in a project’s Token Sale, the fact that a team was able to ship a product that people are willing to pay for speaks volumes on their technology acumen and follow through. Bonus points if the company does continuous development, shares product updates on their website, and is building towards a better user experience with higher revenue potential.

2. At least a handful of users and paying customers —if a company has a Minimum Sellable Product, that means they’ve got some paying cusotmers or will have some paying customers verysoon. The exact amount of paying customers should be higher or lower based on the amount of funding that a company/project is looking to raise (see #3 below). What’s not important here is the amount of traction, but that there is at least some traction to show that product/market fit has a chance of taking shape. Even if there are only 10 users or paying customers, that’s fine. Chances are, if the company can get 10 users/paying customers, they can get 100. And if they can get 100, they can get 1,000. And so on. But . . .

3. The fundraising amount and valuation must be directly proportionate to the traction — While it’s ok to only have 10 users or paying customers if the company is looking to raise $500K-$1M, it’s not ok to only have that traction if you’re looking to raise $100M (unless the annual contract value on those 10 customers is $10M each). Theoretically, any kind of traction can be investable if the amount that is being raised and the valuation/price that you’re getting are directly in line with what that traction is. In other words, the appropriate risk to reward ratio should always be present. The following are some good benchmarks for what to look for traction-wise based on the amount of funding that a company is looked for and at what valuation:

  • $1M-$3M in funding — this amount is what generally constitutes “Seed funding” in the startup world. More Token Sales are raising in this range nowadays because of the lackluster markets, so investors should be open to projects and companies looking to raise a lesser amount as a stepping stone for getting to the next level. When companies are raising in this amount, look for either A) a combination of a few thousand active users plus the ability to generate revenue in the next 3 months, or B) somewhere between $5,000 to $20,000 per month in revenue/bookings. What you don’t want at this level is no one using the product and being 12+ months out before any revenue is in sight. You should expect to receive 20% to 50% of the securities in the company during this round (lower if equity, higher if just tokens).
  • $3M-$10M in funding — this amount generally constitutes the “Series A” level that professional startup investors look at. As discussed previously, with the higher fundraising amount comes higher expectations traction-wise. It’s common to see companies in this range doing at least $50,000 to $100,000 per month in revenue and/or have 10,000–100,000 active users. Also, strong month-over-month growth is critical at this stage so that you know that the company can get to the next level quickly. You should expect to receive 15% to 40% of the securities in the company during this round.
  • $10M+ in funding — this is the “Series B” in the typical fundraising cycle for startups. At this point, revenue should start to be in the $1M per month range, with strong growth, and a clear path to $100M in annual revenue within 24–36 months. Most crypto projects don’t fall into this category yet, so it can probably be ignored on your part when looking at Token Sales to invest in.

4. Market size should be huge or about to be huge—many novice investors fall in love with the product and team, but overlook the market size or future market size of a potential product. This often happens when an investor says “I could see myself using this product”. But they then fail to ask themselves the next question of “Could I see a lot of other people using this product?” Without many many many people using this product, or without at least several businesses paying a lot of money to use this product, the company has no chance to scale. The good news is that technology is inherently much more scalable than service businesses are, so don’t worry about the marketing challenges of growing. Just focus on would a lot of people use it if they knew about it. If the answer is yes, you’re in good shape. **Important Note, the market for the product doesn’t have to be huge right now, but you have to be able to discern whether the product itself can make the market huge. Great examples of markets that didn’t exist prior to the product existing are AirBnb and Algolia (sleep in other people’s homes? Search as a Service?). Before these products came along, there was virtually no market or demand for these products. But the products created that demand, and clearly, have been very successful.

5. Cryptocurrencies and blockchain should accelerate growth and create a more delightful experience — it’s not on accident that I left this as the last thing that you should be looking for, even though this is a post about investing in Token Sales. In all of my travels where I’ve been talking about the impact of blockchain and crypto on technology, I continuously tell people that the first and foremost focus should be on building great products that people actually use, not on building the coolest tech that 2 nerds in a basement love. That’s why #1 and #2 on this list are about a Minimum Sellable Product that has at least a little bit of traction. In the case of Dapps, people should be willing to use their products even absent the presence of crypto or blockchain. I.e. the products should stand on their own. Crypto and blockchain should simply be the accelerators that make for a more delightful product experience. Not the end onto be all. In the case of blockchain protocol Token Sales, frame the question in a different way — could this blockchain be built in a centralized manner and would people still buy it or use it? If Ethereum wasn’t decentralized, would people still use it given that it only processes 15 transactions per second? The answer is probably no. Of course, the technology can improve over time, which is why #1 through #4 on this list are important proof points to be looking at as well.

The fear that we’re not out of the cryptocurrency bear market is real, and it’s understandable why investors are skittish to put more money into cryptocurrency and blockchain companies right now. But don’t confuse the speculation that has tanked this market with the real businesses that are going to pull us out of it. Real businesses with solid fundamentals have staying power. They’re not going anywhere, and in fact, buying into them when the market is low is exactly the place you want to be as an investor. It’s actually a very simple equation:

Business with solid fundamentals + Bear market = Best buying opportunity

The smart money is getting into the best crypto and blockchain companies right now. They know that the pendulum has swung too far in the other direction on the best opportunities, and they’re taking advantage of retail investors’ confusion with overall market conditions and solid company fundamentals. The smartest investors stand to gain the most when the market rebounds. Uber, AirBnb, Snapchat, and WhatsApp were all founded during The Great Recession of 2008–2010. A $25,000 investment into Uber back in 2010 is worth over $250,000,000 today.

Don’t let the smart money squeeze you out. Start thinking like a venture capitalist.

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