The Importance of Risk-Management for Startups
The crypto-ecosystem is still relatively new, and therefore, has many new startups, some that might succeed, and many that will fail. Statistical data show that on average 90% of startups fail, meaning that in a new industry such as the blockchain-related one, failing rate must be even higher.
Nevertheless, this doesn’t mean crypto-startups can’t be successful, but rather that risk management is crucial for succeeding in this industry. With the latest trend of raising funds through ICOs, many companies have had relatively easy access to funding, and this often resulted in reckless spending or company failure. In 2017-2018 alone, more than half of ICOs failed to raise the full amount they planned, and another huge portion failed in the following months, according to at least one parameter, such as product release and token price stability.
What is essential to success?
The question that arises is, where are all these startups going wrong, and what needs changing? The answer to this question might not be straightforward, but there are many simple things that can be done.
Firstly it’s essential that funds raised justify the cause. We have seen in the last years many projects raise huge amounts of funds without a clear product or objective. The latest example of this is blockchain project Polkadot. Polkadot previously raised $145M via token sale in October 2017, and due to miss-management and some funds being frozen due to a parity wallet bug, is now looking to raise an additional $60M, bringing the total value of all its tokens to $1.2 billion. Regardless of the project, it’s hard to justifying such huge costs, especially when already established companies in the industry, such as Coinbase, raised an amount in the neighbourhood of $300M.
Secondly, how fund are managed is probably even more important than the amount raised. Most token sales are raised in cryptocurrencies such as Ethereum, Neo and Tron, and therefore have huge exposure risks. If a startup is raising funds to develop a product or service, it might take up to a few years, and could mean that a stable revenue stream could be years away. This makes fund management even more crucial, as most firms end up without funding before the product is actually ready. With coins prices being so volatile, it’s essential that companies have strategies in place to mitigate this risk, such as selling a portion of the raised funds if prices drop below a certain level.
Additionally, although ICOs have fewer legal and compliance restrictions, it doesn’t justify not providing clear updates and roadmaps to their ‘investors’. In the crypto-ecosystem, we have seen many projects with interesting Whitepapers and proposals, that after raising funds, have shown little to no communication (from the team), showing a lack of professionality. Regardless of having legal obligations towards your investors or not, it’s still imperative to inform the community with news and development updates about the product or service being developed.
In conclusion, crypto-startups should try to minimise unnecessary costs, at least until becoming profitable and justify them to their investors. Communication and trust built between the company and the community are key for the future success of the firm.