Though I do have a little investment experience, I am no investment professional so don’t take this method as gospel, it is simply the method personally I use. I have been working with a simple valuation technique that I think cuts through a lot of the BS. I would appreciate any feedback if you think its flawed or could be improved. Apologies if the the following seems pretty obvious but it could be useful to people who have never looked at things this way before.
So let me create a hypothetical ICO for use as an example:
Facebook are going to create the FaceToken. FaceToken is to be tied to the social media platform. Token holders will receive 1% of advertising revenue from the platform distributed proportionate to holdings.
Facebook are going to create 10,000,000 tokens in their ICO, Facebook (the distributor) will hold 500,000 tokens and the remaining 9,500,000 tokens will be available for issue. 1 ETH will buy you 300 tokens.
The fist thing we need to do is ascertain what the ICO issuer is valuing their business at. This is quite simple. Get the price per token. Todays ETH price is $287.86, there are 300 tokens per ETH.
Value placed on each token = $287.86 / 300 = $0.96 (rounded for simplicity)
Next we can simply get the effective market capitalisation. This sum is essentially what the token distributor is saying the business is worth. This is done by multiplying the price set for each token by the total circulation of tokens.
Valuation of business = $0.96 * 10,000,000 = $9,600,000
Now you have to decide if you think the business is worth $9,600,000
A Good Deal
If Facebook decided to do an ICO based on the above terms I would cash in every asset I have and even borrow money to buy as many of these tokens as I possibly could, Facebook is worth actually worth $500 billion, and generates $26 billion a year in advertising revenue. If you spent $960 and bought 1,000 of these Facebook tokens you would own: 1,000 / 10,000,000 = 0.01% of the tokens.
Your share of Facebook’s annual revenue would be: 0.01% of 1% of $26 billion = $26,000
Not bad for a 1 time $960 investment to receive an income of $26,000 every year for as long as Facebook survives. That figure would grow as advertising revenues will likely grow also.
Now in reality it is highly unlikely that such a great deal will ever arise and if it did I would be looking for the catch or suspect some sort of scam but the fundamentals point to 300 tokens per ETH to be a cheap buy in for the business presented.
A Bad Deal
Dave Social Ltd. is issuing this token sale instead of Facebook. Dave has just 6 months programming experience, no business experience but has a great idea for how to make a new platform that is better than Facebook. Dave has a couple of friends who will be on his development team and plans to work on this project 3 days a week, most weeks. He has no working platform at this time but has a long list of ideas, plans and even some drawings he made in the pub.
I would not invest in this, this business is clearly not worth $9,600,000
Beware of misleading pricing, Dave Social could offer 30,000 tokens per ETH, meaning each token is costing only $0.0096 per token, this might seem quite cheap but if the total supply is increased to 1,000,000,000 tokens then the business is still being valued at $9,600,000 and you will still only own 0.01% of the total tokens if $960 were invested. So still as bad a deal as the previous example.
In reality all ICO’s will fall somewhere in between these 2 examples. You just have to value them using this method and then decide if you think the idea, team, community and product or service is worth that valuation.
I hope this is useful, if there are any questions or something is unclear then please let let me know.