Before you correct me about the use of the old Proverb “proof of the pudding”, let me assure you, I know.
The meaning of the old proverb is: you have to eat the pudding to make a fair judgement about it. I’d like to argue that the same is true for valuation of startups, in particular those that launch via an initial coin offering (ICO). Investing in blockchain ICOs can be tricky for the following reasons:
- There is no “physical” product to test. Most likely, not a single line of code has been written.
- There are no customer reviews about the product. How do you know whether the product does what it is supposed to do AND that customers are satisfied with the solution?
- The industry is new and there are few, if any, competitors.
- Beyond a white paper and a simple wordpress site, there’s no meat: few, if any, press releases, historical posts or references to the startup.
- Whitepapers and websites are not validated or approved for accuracy by a reputable third party. (I’m all for deregulation, but let’s be honest: it can be a good thing, too.)
Add to these challenges, recent news of terrible investments: in one case, employees of the startup used ICO funding to go on vacation.
It’s easy to talk down the crypto world the way Buffet does, but let’s not forget nine out of ten startups, even in the non-blockchain world, fail.
So, allow me to provide some criteria for evaluating the legitimacy and likelihood for success for an ICO venture.
- Review the educational and professional background of the founders and key team members.
- Determine if the LinkedIn profiles were JUST created or if they have been active for a while.
- Validate relevant, professional experience (i.e. patents, press releases, details about previous startups).
- Identify if they have worked in the industry before or if they are trying something new (and gambling with your money).
- In essence, a solid whitepaper should resemble a business plan, which startups develop to obtain funding.
- Ensure that claims are backed up with good references and sources; in particular, validate claims about the “problem” which their product will solve.
- Closely review what work has been completed to-date. I explain this a bit more in the next section.
- Are they projecting their business and financial goals into the next 6 months or 5 years? The whitepaper should clearly lay out how the funding from sold tokens will be utilized.
- Look out for neglected errors in spelling and grammar.
3) Code development
Many blockchain and cryptography projects tend to be open-source, which enables savvy developers to test and validate the project. Projects are generally shared on GitHub, a repository for development projects. If possible and noted within the whitepaper:
- reference where code has been published and
- review how many times the code has been refreshed.
Be cautious when investing in blockchain ICOs – but give it a try. The best way to learn is to try… so go ahead, try the pudding.