Crypto tokens, ICOs, and what founders need to know

Executive overview

Most startups should not do an ICO. Token networks only make sense when parties refuse to trust each other and won't accept a central intermediary either — a narrow set of use cases. Tokens are infrastructure for exchanging value without middlemen, not a fundraising shortcut for any startup with an idea.

The core insight: tokens solve trustlessness, not fundraising — and confusing the two is where most ICOs go wrong.

Andy's entrepreneurial path before CoinList

• Started web design and marketing businesses in high school as an alternative to mundane jobs
• Founded the Stanford Bitcoin Group in 2012 after being convinced by a professor; initially sceptical
• Left Stanford in 2014 to build Sidewire — a platform for expert political discussion without noise
• Sidewire wound down in 2017: quality supply never converted to retention; users wouldn't form the habit
• Lesson: raising from aligned, high-quality investors made a difficult wind-down survivable

What tokens actually are

• A token is a scarce digital asset representing ownership of a network no single party controls
• Tokens are infrastructure for exchanging value, as the Internet is infrastructure for exchanging information
• Valuing "a token" is as meaningless as valuing "a website" — the specific use case and design matter entirely
• The Filecoin example: staking, verifiers, and proof-of-space-time create a trustless file storage market with no intermediary
• Incentive alignment is the core mechanism: every party is rewarded for honest behaviour, penalised for bad behaviour

ICOs — what they are and who they are for

• An ICO (initial coin offering) distributes tokens for two reasons: raise development capital, and seed early network participation
• Some networks literally cannot function without a token — Filecoin requires it for payment and staking
• CoinList has supported five token sales; turned away ~2,495 out of 2,500+ inbounds
• More money raised via ICO than venture capital in 2018 YTD — Andy reads this as alarming, not positive
• No training data yet on what makes a token succeed; investors are flying blind and over-allocating

When a token is the right fit (today)

• Best fit: parties that distrust each other and will not accept any central intermediary
• Poor fit: businesses where users already trust the intermediary (e.g. Airbnb — users trust Airbnb, so a token adds little)
• Building a token network is extremely hard; tooling is immature; Augur took three years from ICO to launch
• Token networks vs. equity: token holders have no formal relationship to the company — no updates, no lockups by default
• Incentive misalignment risk: token investors can dump at 10x with no obligation, hurting price and project

ICOs vs. equity — key differences

• Token investors own part of a network, not a claim on company cash flows
• No mandatory investor updates, board rights, or signature requirements
• Vesting and lockup schedules are beginning to appear, converging towards venture norms
• Staged fundraising rounds (seed, Series A equivalents) are emerging in token markets
• Future possibility: asset-backed security tokens representing startup equity, traded with higher liquidity

What good investors look like

• Aligned with your actual goal — a $10M/year business needs different investors than a $10B swing
• The interaction feels right when things are positive; if it doesn't, it will be worse when things go wrong
• Value-add matters but is not mandatory; alignment and capital can be sufficient
• Do reference checks on investors — ask to speak to founders they've backed, including ones they didn't suggest
• Founders almost never do this; it is one of the highest-leverage steps in closing a round well

The future of blockchains and tokens

• Likely outcome: a small number of blockchains, a large number of tokens built on top of them
• ERC-20 tokens on Ethereum are the existing template: tokens that run on a shared chain, not their own
• Asset-backed tokens (equity, real estate, gold) could expand the token universe dramatically
• Network upgrades require user alignment, not company diktat — users can fork if they disagree
• The entire space is less than a decade old; predictions carry wide error bars