Looking back at 2017, it is undeniably clear that it was the year of the initial coin offering (ICO).
In all, more than 230 companies raised over $3.7 billion by creating and selling their own tokens, or digital currencies, in 2017, with the likes of Bancor and Tezos raising amounts as high as $200 million.
Founders love ICOs, as they allow them to tap into the current demand for digital currencies, and raise funding without giving away any equity in the business. In capital-starved Africa, this is a very attractive proposition indeed.
This potential saw a number of African companies launch ICOs towards the end of 2017, though degrees of success varied.
The ICO of South African blockchain consultancy Ekasi-bucks was an unmitigated failure, but the likes of property investment platform ProsperiProp and fintech startup Wala raised decent amounts of money – $200,000 and $1.2 million respectively – despite falling well short of their initial targets.
In 2018 we have already seen the largest African ICO yet, with a Nigerian remittances startup raising $7 million from a host of investors in over 60 countries.
Adeoye Ojo, co-founder of SureRemit, said ICOs were a valid way of African tech startups raising funding.
“African companies, the same as other companies globally, can raise capital for their projects through ICOs while at the same time distributing their tokens. What’s most important is to have a solid project and good use case of blockchain technology,” he said.
Tricia Martinez, CEO of Wala, said she considered the startup’s ICO to be a success in spite of falling well short of its $30 million target.
“For one, it enabled us to issue a token that supports zero-fee instantaneous micro-transactions. Dala is specifically designed for the emerging market consumer. We can now fulfill the Wala mission in zero-fee financials services to bring 3.5 billion consumers into the financial system,” she said.
Initial coin offering provides funding alternative
Martinez said, as a mobile financial platform operating in emerging markets, crypto had always been on Wala’s roadmap.
“Over the last few years we have been focusing on the product and launching with banks because we strongly believe that banks are part of the financial revolution. However, we believe that a completely new token is needed in order to support the provision of financial services to emerging market consumers. It is for this reason that we decided to issue Dala,” she said.
Martinez is convinced ICOs are – and will remain – a strong alternative route for startups looking to secure funding in Africa.
“There are some incredible companies in Africa who would have a great use case, but tend to shut down because there is hardly any early-stage funding here,” she said.
“It is a massive continent, but VC funding is not big yet and entrepreneurs cannot afford to wait. That is why you see some companies in San Francisco trying to run an Africa-focused company. Token sales provide a very interesting channel for African startups as long as there is a compelling use case.”
This view is shared by ProsperiProp founder and CEO Llew Morkel, who agreed that seeking venture capital for a good idea was an “uphill battle”.
“For starters, when you approach a VC company you should know that you are just one project of many competing for investment. The application process is time-consuming and often, if you make it through the initial purge, you are required to commit to allow them exclusive access to your concept for a period while they evaluate your business plan etc. If they then decide to not invest you may be months down the line with nothing to show for it,” he said.
“An ICO allows you to pitch a concept or a product and get an instant answer: “yes” or “no”. This attracted us.”
Challenges remain for startups looking to raise money in this manner, however. Llew Claasen is managing partner of Newtown Partners – which invested in Wala and has run a handful of ICOs already – as well as executive director of the Bitcoin Foundation.
He says there is still a debate about the legal status of the tokens, especially in terms of whether or not they are counted as securities in the U.S.. There are other challenges too.
“Other issues include being able to stand out in a very crowded market for token issuances and the difficulty to getting tokens issued on major exchanges at this time, which means that there is no secondary market for many new tokens,” Claasen said.
It is still early days, and the road ahead is not straight or smooth by any means, but the early successes of African ICOs suggest it is an avenue many other companies may choose to go down in the months and years ahead.
Tom Jackson is co-founder of Disrupt Africa, a news and research company focused on the African tech startup ecosystem.
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