Almost all of us are aware of Initial Public Offerings (IPO), by watching movies or reading articles. With the introduction of bitcoin the 21st century brought about a new phenomenon known as Initial Coin Offerings (ICO).
Initial Public Offerings
Let us start by discussing IPO’s. Every company that today has a turnover which is north of a billion dollar started off small, maybe with nothing more than a few thousand dollars. This money could have been received from a friend or a family member or could be somebodies personal savings. As the company grows this money soon turns out to be inadequate and the company needs to go public.
Going public means that the company sells off its shares to common people with the help of investment banks. Shares refer to ownership in a company when somebody buys shares of your company they tend to own a certain percentage of the ownership of the company.
Let us try to understand this using an example, let us presume that you open a company that makes video games. You decided to take money from your parents and friends so that you can hire graphic designers, character designers etc and pay for the deployment of the game. Once the game goes into the market, it can either be a success or a failure. Let us presume that your company starts growing rapidly, you start making more games and start selling them under a common name which is your company name.
Soon, you will have your company go public and the money earnt from selling the shares can be used to paying off your original investors (Your family members) or you can offer them some shares in your company.
The fact that people own shares of your company doesn’t mean that they own the assets of your company, those assets still belong to your company itself but these people who own shares play a key role in the functioning of the company. They can make decisions on hiring and firing of executives, they can also decide against product launches. These shareholders receive dividends (part of the companies profits) if and when they are distributed.
In simple words, an initial public offering refers to the selling of shares to the public in the form of parts of ownership in the company itself and this is achieved through investment banks whos glimpses we have seen in movies such as ‘The Wolf of Wall Street’.
Initial Coin Offerings
Many start-ups are now building entire businesses on blockchain technology. But instead of turning to public stock markets or venture capital to fund their company, businesses are turning to cryptocurrencies.
In the past year-and-a-half, the so-called initial coin offering (ICO) has been on the rise. It’s a new method of funding for start-ups in which new digital tokens or coins are issued.
An initial coin offering is essentially a fundraising tool. Firstly, a start-up can create a new cryptocurrency or digital token via a number of different platforms. One of those platforms is Ethereum which has a toolkit that lets a company create a digital coin.
Then the company will eventually do a public ICO where retail investors can buy the newly-minted digital tokens. They will pay for the coins with other cryptocurrencies like bitcoin or ether (the native currency of the Ethereum network).
Unlike other fundraising methods such as an initial public offering (IPO) or even venture capital, the investor doesn’t get an equity stake in the company. If you buy shares in a public firm, for example, you own a small slice of it. Instead, the promise of an ICO is that the coin can be used on a product that is eventually created. But there is also hope that the digital token will appreciate in value itself — and can then be traded for a profit.
ICOs raised $3.8 billion in 2017. But already so far this year, companies have raised in excess of $12.4 billion, according to CoinSchedule, a website which tracks the data.
Which is Better IPO or ICO?
While both have their own benefits, it is safe to say that they are very distinct from each other. While one is a regulated form of fundraising, and another is a free form of fundraising.
In terms of a more modern outlook, ICO’s are gaining steam and are slowly becoming the most sought-after fund-raising mechanisms amongst blockchain backed startups. ICOs are currently headed towards a huge market cap which is absolutely astounding because the concept came into existence only a few years ago. A potential investor must do thorough background research be it an IPO or an ICO.
Regardless of how long IPOs have been around for, companies nowadays are looking for a quick and stress-free way of raising funds for their firms. ICO offer that. Hence, as blockchain technology becomes more and more advanced, it is fair to say that ICO will continue to rule the crowdfunding world as they represent the future of crowdfunding for startups.
It is up to the company as to which method they want to choose, IPO’s give security to the investors as they pass through a regulatory authority, furthermore, IPO’s tend to be a liability for the owners of the company since the decision making process shifts from the owners to the public.
ICO’s, on the other hand, are unregulated and hence lack the necessary security but instead, they give a strong sense of security to the owner of the company since ICO’s do not redirect the ownership of the company to multiple parties.
In my opinion, ICO’s are much better than IPO’s for the current flow of events since they have a better chance of survival and give the necessary rights to the original owner of the company itself rather than the company being torn down by multiple owners and investors.