Blockchain is ushering in disruption in various industries. Even big multinationals like IBM and Deutsche Bank are working on their own blockchain projects, hoping to maximize the technology’s capabilities, such as immutable records and smart contracts. Pharmaceutical giants are also banding together to use blockchain to secure their supply chains and prevent drug fraud.
Yet despite the upsurge in adoption and amid the rise and rise of Bitcoin, not all of blockchain’s applications are being used by established companies. Token sales, for instance, have become a major funding method for many startups. And, on that score more than $3 billion in start-up funding has been raised through token sales this year alone. Still, many companies seem to shy away from them.
But there are exceptions. Take, for example, messaging platform Kik, Hamburg-based fintech NAGA Group AG with its ecosystem and virtual reality (VR) platform Ceek, who have turned towards token sales to accelerate their respective growth.
Boosting Innovation & New Capital
In today’s hyper competitive business environment, companies have to continue innovating. They should always be driven to provide better products and services to customers. Otherwise, it is easy to fall into the trap of stagnation.
There is a long list of companies such as MySpace or Zynga that made huge splashes during their heydays, but eventually fizzled out as new and better services emerged.
It is not enough to be good at one particular thing anymore. Today the trend is to consolidate products and services to be part of ecosystems through which customers can perform a variety of activities.
To do this, businesses may have to gain expertise, add infrastructure as well as improve their systems and processes. This is where additional funding comes in. The more top-notch resources they can put into development, the greater the chances are for the effort to succeed.
Despite being valued at over $1 billion and getting investments from giants like Tencent, 8-year old messaging platform Kik held a token sale last September, which raised $100 million from the event. The goal was to acquire additional funds to develop a blockchain-based developer platform for its messaging app. Having such a system in place allows it to compete against Facebook Messenger.
Then there is Naga, a European-based fintech group, which was founded in 2015, which was taken public on the Frankfurt Stock Exchange (Deutsche Boerse) in July 2017 and as of this November had a market capitalization of around €300 million. It has already enjoyed success with services such as trading social network SwipeStox and virtual marketplace Switex.
In operation since early 2015, the SwipeStox trading platform is utilized by more hundreds of thousands registered users and today facilitates several over 200,000 transactions each month with more than $4 billion transacted.
However, the fintech game is also headed towards building multi-functional platforms and ecosystems.
In order to quickly move in this direction, Naga decided to hold its own token sale. And, to date they have raised almost $16 million out of the $20 million they were planning to raise in the sale.
The Naga Token will serve as the currency of Naga’s ecosystem that consists of a crypto wallet, a trading and investing platform, a virtual goods marketplace, and a financial education academy. Proceeds from the sale will be used to develop and commercialize these various services.
As a VR platform that targets the entertainment industry and also founded in 2015, Ceek enables artists to create VR experiences for their fans and audiences. It has already worked with several industry giants and headlining acts to power VR events through their hardware and software.
Currently the company is working on a VR event destination using blockchain technology, which will also provide artists and acts easy access to blockchain functionalities such as token and virtual merchandise creation. To accelerate that development, Ceek is set to run its token event through December 2017.
Tokens & Encouraging Product Use
In addition to raising capital, token sales also enable companies to encourage investors to become future users of these ecosystems. Some might simply consider tokens to be tradable assets on crypto exchanges. However, tokens can actually serve specific purposes in the context of the company’s products and services. Investing in such tokens essentially is comparable to getting early access to discounted store credits.
In the case of Kik, its Kin token is a general-purpose cryptocurrency that can be used in chat, social media, and mobile payments. Further developments would also use Kin as a means to facilitate all financial and economic transactions on the platform. Like other cryptocurrencies, it is also tradeable over exchanges.
It should be noted here that investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.
For Naga, the Naga Token can be used by token holders to transact across its various services. For example, users would be able to spend the token on financial instruments on SwipeStox or trade virtual items on Switex. Utilizing the token would also allow users to receive bonuses and discounts compared to using fiat – traditional currencies.
Ceek will also be using its own token to power its “entertainment metaverse.” Users can spend their tokens on Ceek’s Virtual Mint that would allow them to create their own virtual tokens, which can be then used as tickets to VR events and virtual items that could be traded as merchandise. Ceek will be running its own protocol, which is claimed to be cheaper to use compared to other blockchain platforms.
Managing Impressions & Perception
Despite these benefits, there are various reasons why many established companies may be avoiding token sales. To start with, token sales require preparation and technical expertise. And, some may not be prepared to make such an investment.
There is also the issue of perception. Token sales are now popularly associated with tech and blockchain start-ups. Others, especially non-tech organizations, may think that blockchain and crypto tokens are not relevant to their line of business.
In addition, there is also a slight negative connotation associated with the activity especially in light of failed and fraudulent token sales. And the regulators in the U.S. and elsewhere have been casting eye over them.
Some might even view established companies to be greedy if they attempt to secure additional funds in such a manner since they assume that the business should already take care of itself.
However, token sales still fundamentally serve the purpose of traditional funding and public offerings and according to some industry folk should not be viewed as a “strange departure” from the practice. Additional capital can improve a company’s capabilities by leaps and bounds. But of course it requires being deployed correctly, just like blockchain technology itself, to reap benefits.
Furthermore, token sales could actually be part of the company’s blockchain adoption strategy.
That said, as Charles Hoskinson, a former Ethereum co-founder, who in 2015 founded IOHK, a leading blockchain R&D company, noted: “A token has to have a right to exist, it has to perform something and serve as having some form of a utility or it has to be part of a broader plan. It cannot just be used to capitalize an endeavour.” And, as he has said in a Bloomberg interview people are “blinded by fast and easy money.”
However one refers to them, token sales present a value transfer mechanism. But as Hoskinson from Boulder, Colorado, underlined: “It does not replace basic business principles such as due diligence, use of funds, quality of the management team, what the business plan is and how to execute on the project.”
Fot its part, NAGA has already been using blockchain for Switex. According to Yasin Sebastian Qureshi, a founder and executive director of NAGA: “Since there is an opportunity to build towards an ecosystem, creating a crypto token to power the ecosystem’s economy was the logical thing to do.”
Qureshi, a 44-year old German based in London and also founder of Varengold Bank AG with a background in algo trading, hedge funds and investment banking, added: “Any potential negative stigma can be managed and addressed as long as the company’s intentions, vision, purpose and sale mechanics are communicated clearly to the public.”
In fact, early success could be a powerful differentiator to inspire investor confidence. Other token sales only have minimum viable products or even less to show. Ceek, for instance, has already developed the hardware and software that are central to their service.
Companies might do well to investigate how blockchain can help take their business to the next level. Among its possible uses is for the creation of custom crypto tokens, which could be used to drive their product and services or used as alternative forms of store credit or rewards points.
Many companies are not yet leveraging this use case, but the ability to put up significant capital without the associated burdens of a public offering or venture funding should not be overlooked. Having the resources to accelerate expansion could be the difference in thriving and surviving in today’s market.
By Roger Aitken (www.forbes.com) 03/12/2017