Institutional Evaluation of Token Generating Events

Background on TGE’s

TGE’s (also called initial coin offerings, ICO’s, token sales or airdrops) are seemingly everywhere.  Small teams of developers, serial entrepreneurs, major companies, money hungry scammers and now even governments are all having TGE’s and for the last year have found no shortage of funding. Over four billon dollars and counting have stuffed the coffers of these ventures.

At any given time, an investor can choose from as many as 50 ongoing TGE’s at various stages of pre-sales or public sales to participate in. Although under the watchful eye of the SEC, the landscape remains largely unregulated and the trends shift with the blink of an eye.

The returns may sound astronomical but there is a tremendous amount of risk associated with it.

This post aims to shed some light on a very opaque market and offer some guidance on what a fund is looking for when it decides on whether to invest in a TGE.

Consider the marketing

 There is an entire cottage industry that has emerged to market TGE’s for a successful raise. The incentives may be aligned between the marketing firms, the investors and the founding team, but as an investor you will have no way to know this.

Capital structures, vesting schedules, side deals and compensation packages will not usually be available to the public. You should assume the obvious.  The founders need to raise capital and the marketers have been hired to effectively do so. Great marketing efforts may translate to a strong performance of the token after the raise, but that is not what the marketers were hired for.

Therefore, don’t buy into the marketing and don’t believe the hype. Everyone will tell you they are oversubscribed!

Discounts and early investment

 Who doesn’t love a deal? And, even more so, on paper a 30-50% discount seems tremendously appealing. However, remember ICO’s that are the most successful trade regularly at 5x, 10x, even 20x or more the ICO price.   It is important to understand what you are giving up for that discount; even in crypto there are no free lunches.

The market conditions and perceived compliance with future regulations can change in days or weeks.  Is it wise to lock capital for months in such a landscape?

There is no clear answer here, but each opportunity must be evaluated with the thought in mind that you can almost always come in at a later date and at a higher price when more information is available.

Avoid FOMO…. Even if you pass on a pre-sale there is almost always a public sale around the corner.

The exception to this is projects that are so well received by the professional investment community that the pre-sale will hit a hard cap.  In turn, the public sale will be greatly restricted in availability and size. As an individual, if you are given access to an opportunity, chances are than it is not this popular.  Projects this popular generally never even become offered to the public until there is a small restricted public sale or free air drop to promote adoption.

The Technology: Isn’t this what it’s all about anyway!

What is the product and why does the market need it? What is the addressable market?

Simplify and distill what you are evaluating in order to answer these questions.

Technology can be massively complicated, but the crypto market is young and relatively immature. No one can tell you what blockchain and crypto currency markets will look like in the future with certainty.  The best one can do is to identify things the market currently values and needs.

Does the product address one of these needs or values? Does the product create infrastructure that allows others to address these needs or values in the future?

If these questions are hard to answer then chances are the opportunity is outside of your understanding and, as in any investment, if you can’t understand an investment how can you properly evaluate it. The risk goes up!

This doesn’t mean that pie in the sky projects can’t raise and perform well.  Instead, it is meant as a guideline to reduce risk. If the market needs the technology, the project has a better chance at wide adoption.

Further, one should go on and evaluate what technology has been built to date by the project. In the tech bubble, IPO’s raised astronomical sums pre-revenue and, at the time, this was a game changing concept.

TGE’s have taken this to the next level and some have raised millions of dollars without a single line of written code. A focus on what has been built will shed light on the technical prowess and dedication of the founding team to the mission they have set out to accomplish.

The Team

 The TGE market in its current form has been around for a little less than a year.

During this time, the conditions and trends for raising capital have made major shifts. The perceived best practices to stay on the right side of an un-clarified regulatory environment have created more legal work than law firms can deal with. Lawyers and service providers choose their clients not the other way around!

You are betting on a team that has the ability to deliver on their technology footprint while at the same time navigating these turbulent waters.

What is the team’s track record and background, what is their history working together, who are their service providers and who is advising them?

None of this can be discounted as you evaluate their ability to conduct a successful TGE and then further and more importantly to build the technology.

Safety First

 You have done your homework and have decided to participate.

Proceed with caution; nefarious actors are merciless in the space.

Hacks, thefts and scams are everywhere and the methods used to conduct them evolve daily. Cloned websites, fake social media accounts and fake contribution addresses are just a few of the ways people are taking advantage of others.

If you are unsure of the validity of information, ask someone from the project you are looking at. The team and staff are there to conduct a safe TGE.  They have every incentive to help you navigate the waters safely.

Be skeptical and double and triple check to make sure you are doing business with the correct people.