The Pre-Selling Problem with ICOs

ICOs (initial coin offerings) are being mentioned everywhere. They shut down multiple crypto currency exchanges yesterday and are being blamed for the fall in Ether’s price. Technical issues aside, ICOs are no different than crowdfunding sites like Kickstarter. Yes, there may be novel ideas that seem really cool, but until your selfie drone producing company builds the product (they went bankrupt), you have spent money on a pre-sale. 

From Dan Norris’s book “The Seven Day Startup”:

Pre-Selling is a Flawed Experiment

Pre-selling your product before it exists is often touted as the answer to startup validation techniques that don’t work. This is how pre-selling works.

You make an offer for people to pre-purchase your product at a discount.  People are getting a good deal, but since the product isn’t live yet, they accept that they might have to wait a while and are happy to make that compromise. 

There are a few reasons why this approach is often not the way to go:

Your goal at this stage in the business is to test your assumptions. Making overly generous offers is only testing whether or not someone wants to pay you the heavily discounted amount. It doesn’t test your real offer and is therefore a flawed experiment.

Although ICOs do present a good way to cultivate ideas. Writing a white paper and having people buy into your proof of concept doesn’t replace the need to iterate and pivot. There are startup that take 5-10 years to get off the ground and produce the kind of money ICOs collect in one day. There’s a difference between producing something through the process and another thing to produce when your meals, rent, and salaries are already paid for.