In any new marketplace, advisors are key. This is especially true in the still-developing blockchain ( ICO ) industry, where a lack of knowledge and understanding can seem an insurmountable barrier to investment.
Early advisors in Initial Coin Offerings (ICOs) frequently came from within the blockchain community. These advisors become a shorthand way of demonstrating credibility for token investors. On any ICO website, the unnaturally long list of crypto advisors sought to indicate that the offering was likely to succeed. Advisors become the equivalent of blockchain due diligence.
However, as blockchain moves mainstream, and ICOs are maturing, tokenizing assets and services is attracting attention from more traditional investors as a new way of providing capital from a distributed pool of investors.
For these investors, real-world industry advisors can make or break an ICO. Are they representative of the industry? What is the value of the personalities behind the business? Do they reflect where the company is placed in the vertical? Because decisions made here have critical implications for ICOs, advisors, and investors alike, it is helpful to consider the perspectives of each.
For the ICO, consider which of the following the potential advisor brings to the relationship:
- Business experience: An advisor with business experience in a related industry can be an asset for an ICO, although startups at the beginning of their ICO journey may have difficulty getting interest from established advisors such as these. A subject-matter expert (SME) will have extensive experience in an area related to the ICO. A SME advisor is particularly important when the ICO is proposing to disrupt another industry. Professional business advisors often charge high fees, however, so an ICO must carefully gauge the experience they bring to the table.
- Blockchain experience: Blockchain is still an evolving field, so it may be hard to find an advisor with experience that will allow them to provide useful guidance on matters such as tokens, regulation, and governance.
- ICO experience: Individuals who have successfully launched an ICO are in high demand as advisors. For the best chance of finding an advisor who has ICO experience, companies will need to identify someone who has worked on a similar project. Advisors who have worked on a regulated offering are ideal.
- Investor networks: Some ICOs choose to work with advisors based solely on their access to investor networks. These advisors are generally compensated with a percentage of token sales. An ICO should ideally not work with only this type of advisor, as their goals may not always be aligned with those of the company.
Andrew J. Chapin, one of the founders of benjacoin.com, has listed four key elements that he looks for when deciding which ICO projects to advise¹:
- A real product: The startup must offer an actual product and a compelling reason why a new token is necessary. Projects that issue tokens solely to raise funds should consider using an established token such as BTC or ETH.
- People behind the project: What is the history of the key players, and have they worked together before? If so, were their previous projects successful? Most importantly, does the founder have relevant industry-based experience?
- Good governance: The team behind the ICO must be aware of the need for good governance, and they must show that they will act fairly and ethically with investors.
- Real value: The advisor must be able to deliver value to the ICO. In terms of interest, knowledge, and experience, they must be a good fit. The ICO wants an advisor who is actively involved, not just a name on a web page.
According to Diana Adachi, CEO at Pegasus Fintech, the most important element that advisors should look for is participation in a platform by other industry users: “All projects need at least two or three key anchor tenants. Without these tenants, the project will face an uphill battle for success, and funds received will be disproportionately spent until this level is reached.”
Here are some questions that investors should ask when evaluating ICO advisors:
- Who are they? Advisors should have relevant experience that allows them to provide useful advice to a company issuing an ICO. Investors looking at disrupting ICOs should expect to see highly experienced SMEs on the advisory team. Name-only advisors serve primarily to bring publicity.
- Where do they currently work? Assess whether the advisor currently has a financial stake in the ICO. A professional advisor should have a good track record of working with similar ICOs.
- What is the advisors’ history? A first-time advisor may lack experience; an advisor who has worked for many ICO projects might be on board simply for name recognition value and offers little practical value. A lack of experienced advisors may indicate the startup is still in the early stages of development, while a range of advisory experience may indicate that an ICO is successfully building on the expertise available to it at each stage of its development.
- What specific assistance can the advisor(s) provide? Determine whether the advisory panel can address legal and regulatory issues in addition to technical concerns.
It is evident that there is much overlap between these perspectives, and by considering all three, potential investors can also gain valuable insight into the ICO itself. There is little doubt that investors who clearly understand the relationship between advisors and the ICO projects they work with will be better able to make sound investment decisions.
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