BY Fintan Ng - October 24, 2018
EY: Startups shows slow progress towards working products
An EY report on initial coin offerings (ICOs) paints a sombre picture of blockchain startups that have raised money through this crowdfunding mechanism.
While it comes as no surprise that ICOs as a way to raise money has largely dried up by the end of the first-half of 2018, the EY report reveals the extent to which startups have failed to come up with working products, by far the main grouse of investors.
EY, which published an ICO report last December, says the early returns from ICOs are not encouraging, and compared to traditional venture capital investing, ICO-backed companies look like they offer more risk based on a number of factors including the lack of progress towards usable products.
The report shows that only 25 startups or 29% from the ones analysed in 2017 have working products or prototypes.
This is just up 13% from the end of last year. Of those 25, seven companies accept payment in both traditional fiat currency (US dollars) as well as ICO tokens, a decision that reduces the value of the tokens to the holders.
“Some projects have altogether dropped their utility tokens to focus on functionality. To become a means of payment, utility tokens have to be stable. If it remains stable, the token is of little interest to speculative investors,” it adds.
It cites Digipulse, a Latvian startup, which one year after conducting an ICO to fund a “cryptoinheritance” service, announced a shift to fiat currency payments, effectively detokenizing the business.
Noting that the startups tracked from last year “did little to inspire confidence”, it says only a small number have progressed towards working product offerings.
As for ICOs as an investment, it says investors purchasing a portfolio from last year’s startups on Jan 1 this year would most likely have lost 66% of their investment as of Sept 2.
To be precise, 86% of these ICOs are now below their listing price while 30% have lost substantially all value.
The net gains were to just the top 10 ICOs, which saw 99% of the gains with the most successful ones being startups that raised funding for blockchain platforms.
ICOs focused on blockchain-enabled applications and business ecosystems generally have performed poorly.
However, even among the successful blockchain platforms, none have been able to challenge the Ethereum blockchain network.
“The Ethereum developer community is more dominant than the nearest competing platforms,” it says.
EY says the sources of funding will likely shift away from retail investors towards venture capital and digital asset-focused investment funds who are better able to gauge and manage downside risks.
“Regulatory concerns will likely continue to limit participation of certain classes of investors in various jurisdictions (e.g., non-accredited investors in the US). We expect regulators in developed securities markets to proceed cautiously,” EY points out.
Image courtesy of EY website.