A recent study by Kostovetsky and Benedetti suggested that only 44.2% of the companies that ran an ICO were still active 120 days after they ICO ended. This time frame is significantly lower than with traditional startups, as according to Bureau of Labor Statistics a bit more than 50% of small businesses fail in their first four years. While there are many similarities between ICOs and startups when it comes to evaluating them as investments, they do require a different approach in many areas.
Investing in equity vs. investing in tokens
With traditional startups, your main focus in investing should be evaluating the risk-adjusted estimated ROE according to fundamentals of the venture, such as business model, validation, market opportunity, team members and their past track records. In ICO investing you have to figure out the value drivers of the token price, as after the initial hype of the project fades the tokenomics have to support long-term price appreciation. Positive token mechanisms you should be looking for are for example dividends or airdrops to token holders, token buy-back and burn programs and discounts on services paid with tokens.
Comparison to similar companies vs. comparison to all ICOs
While there are numerous startup valuation methods that are used by investors around the world, any new startup will be compared to similar companies or competitors in the industry to see where they stand at in terms of how valuable the company actually is. When a new ICO announces their token sale, they are not compared to similar ICOs only, but to all possible ICOs in terms of token economics and other factors that can be benchmarked. In the eyes of ICO investors, it doesn’t matter that much which industry the project is going to be in when their hard cap and total project valuations are evaluated, because investors will compare those values to values of previous and ongoing ICOs that they have come across.
Established investment frameworks vs. no established models
As startup investing has been around for many decades, there are established frameworks business angels and VC’s use to evaluate them to make sound and informed investment decisions. ICOs have been around only a few years, and while many companies, analysts and crypto influencers have developed their own rating models, there are no common agreed frameworks or models most of the investors would agree on. On the other hand, many of the criteria that are evaluated in a startup, can also be useful when rating an ICO, especially if your investment horizon is for the long-term.