Crypto Markets Tanking! No End in Sight with the ICO Runway Problem

Many blockchain companies that raised funds using an ICO have been suffering from a reduction in runway. This will be exacerbated by the steep drop in the market today, pushing ETH down below $170. Very few leaders of blockchain companies will admit the precarious position they are in publicly, but I have heard some off-record admittances and many more rumors. Regardless, I thought it was time to run some hard numbers and see how much runway companies who ran token sales this year may be sitting on.

We’ll take a look here at a theoretical company that raised 25 million back when Ether was over $1000 a token, and break down where the money went. I’m not picking on any particular company, just building a little example of viewing the funding in a down market.

I’ve spent the last six months traveling to conferences worldwide promoting an ICO, and I have a pretty good idea what the cost structure is to run a crowdsale. The company would have had, on average, somewhere between eight and ten percent expenses paid to companies that helped run the crowd sale, transaction costs, advisor fees and fundraising kickbacks, reducing the capital the company received to $22.5 million. There are immediate costs for exchange listing. At that time there was a lot of pressure to apply to be listed on large exchanges like Binance where the cost of application was over a million dollars, so we’ll base on this number although it may have been higher or lower, depending on strategy. Then there are the costs of wallet development and issuing the token itself, and if the are smart they would have gotten a smart contract audit as well, so we’ll allocate $500k there.

This means before development actually had started the company only had $21 million worth of ETH left in their coffers. I also haven’t taken tax into consideration here, but if taxes were owed there would be a big amount due next spring, and nobody has gotten there yet. Now let’s say for development they had a burn rate of $500k/mo, which should have given at least three years of runway at this rate, but this was while the market was going down and this amount was needed in fiat.

The calculation is even more extreme when taxes are taken into consideration as

Money Raised: $25 million as of February 1st 2017 when ETH was $1,119.37

Expenses of Sale: -$2.5 mil

Exchange Listing Fees: $1 mil

Wallet and Token Issuance: $500,000

February Total Funds post-token sale $21 million = 18,761 ETH

February Development @ $923.73/ETH $500,000 = 542 ETH

March Starting Funds: 18,219 ETH

March ETH Price: 856.01 Total Funds in dollars: $15,595,646

March Development @$614.84/ETH $500,000 USD = 814 ETH

April Total Funds: 17,405 @$397.25/ETH = $6,914,136

Less April Development @$502.88/ETH $500,000 USD = 995 ETH

May Total Funds 16,410 @670.46/ETH = $11,002,249

Less May Development 500,000 USD @731.14/ETH = 684 ETH

June Total Funds = 15,726 ETH @576.67 = $9,068,712

Less June Development $500,000 USD @520.48 = 961 ETH

July Total Funds 14,765 ETH @455.24 = $6,721,619

Less July Development $500,000 USD @435.88 = 1149 ETH

August Total Funds 13,616 @433.87 = $5,907,574

Less August Development $500,000 USD @280.39 = 1784 ETH

September Total Funds 11,832 @283.5 = $3,354,372

Less September Development $500,000 USD @209.81= 2383 ETH

October Total Funds 9,449 @233.22 = $2,203,695

Less October Development $500,000 USD @195.27= 2561 ETH

Current Funds Remaining: 6888 @$197.54 = $1,360,656

Meaning at sub-$200 ETH this company is looking at less than three months of runway, ouch!

More conservative $200k burn rate, but with calculating taxes due:

Money Raised: $25 million as of February 1st 2017 when ETH was $1,119.37

Expenses of Sale: -$2.5 mil

Exchange Listing Fees: $1 mil

Wallet and Token Issuance: $500,000

February Total Funds post-token sale $21 million = 18,761 ETH

February Development @ $923.73/ETH $200,000 = 217 ETH

March Starting Funds: 18,544 ETH

March ETH Price: $856.01 Total Funds in dollars: $15,873,849

March Development @$614.84/ETH $200,000 USD = 325 ETH

April Total Funds: 18,219 @$397.25/ETH = $7,237,498

Less April Development @$502.88/ETH $200,000 USD = 398 ETH

May Total Funds 17,821 @670.46/ETH = $11,948,268

Less May Development $200,000 USD @731.14/ETH = 274 ETH

June Total Funds = 17,547 ETH @576.67 = $10,118,829

Less June Development $200,000 USD @520.48 = 384 ETH

July Total Funds 17,163 ETH @455.24 = $7,813,284

Less July Development $200,000 USD @435.88 = 459 ETH

August Total Funds 16,704 @433.87 = $7,247,364

Less August Development $200,000 USD @280.39 = 713 ETH

September Total Funds 15,991 @283.5 = $4,533,449

Less September Development $200,000 USD @209.81= 953 ETH

Current Funds Remaining: 15,038 @233.22 = $3,507,162

Less October Development $200,000 USD @195.27= 1024 ETH

Current Funds Remaining: 14,014 @$197.54 = $2,768,326

Projections at today’s price of $170 ETH (1176 ETH per month) until year end:

11,662 ETH remaining @ $170 = $1,982,540

Tax Burden Calculation:

I’ve heard it argued at a recent ABA tax meeting that the Sec 1256 rules may apply in this scenario, that could leave the company in a terrible position:

25,000,000 Income

4,000,000 Initial Costs

2,400,000 Development

18,600,000 Net Income

16,197,200 Capital Loss (40%ST 60%LT under Sec 1256 rules)

6,478,880 Capital Loss Allowed

12,121,120 Taxable Income

$2,545,435 Tax Due @21% corporate tax rate

This leaves the company owing almost $150k beyond the cash reserves as of the beginning of the year, and when the tax is calculated they most likely will have even less funds available. Not a pretty situation.

If full capital loss is allowed the net taxable income will be $2,402,800 and the tax a more manageable $504,588. At this rate the company is looking at seven months of runway max, assuming price stabilizes at $170 and does not continue to drop (which seems more likely considering the number of companies drawing down their ETH reserves, EOS dumping large blocks, and investors likely to start redemptions from crypto funds soon.)

I don’t like to be bearish and I hope I’m wrong on this projection of prices continuing the downward trend. But the BCH fork is really pushing the whole blockchain industry into dangerous territory, and I want to try to get this information out there for others to understand and follow.