Time for an ICO reality check

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1 1 DATE 1 SEPT 18 COIN CATEGORY UTILITY TOKENS MENTIONED COINS ETHEREUM TICKER ETH GOLEM TICKER GNT STATUS TICKER SNT PURPOSE MARKET INSIGHT RESEARCH ANALYST Dan Kong CAIA Riley Na Tony Kim research@coinone.com MARKET PRICE & CCDEX ETH USD $ KRW,95 JPY 1,78 GNT USD $.13 KRW 148 JPY 15 SNT USD $.3 KRW 38 JPY 4 CCDEX *As of 11 Sept 18 Time for an ICO reality check Cutting the vicious cycle of unprofessional investors & stretched promises Cryptocurrency/ICO may have lured attention as it allows retail to invest in very early stages of a corporate life-cycle which is high-risk/high-return. Reacting to the untrained market, ICO teams are producing unrealistic plans ultimately resulting in insufficient funding. Thus, many should experience delays and solvency issues over the next 3 years. Among 1 selected ICOs, Golem(GNT) and Status(SNT) were the only with relative financial stability. While overvalued names should dwindle, it is important to support projects which are indeed embracing blockchain s potential. Cultivating an accredited institutional investor society should be an effective way, in our view. Crypto investment success rate should theoretically be well below 1% Investing in cryptocurrency/ico is similar to investing in a company 3-4 years younger than what a traditional venture capital would consider a series A candidate. 11% of ICO projects have a beta product, 4% a MVP/Alpha, and 47% are funded on a mere idea. Considering that VCs record a 1% investment success rate while investing in targets with a commercial level product ready, crypto investment hit rate should be much lower. This situation may currently be magnified due to the high portion of retail investors. Large portion of projects expected to miss deadlines Many projects promise to deliver tangible results within -5 years after ICO, but this is unrealistic, in our view. The average age of companies conducting an IPO is 8.8 years. Crypto projects should need similar amount of time to produce results. Yet, 9%+ of ICOs have a history shorter than years, and Bitcoin is the only crypto with history comparable to 8.8 years. While project delays are yet a popular worry due to short history, we believe it will come under the spotlight in the near future. Market volatility will rise, creating cherry picking opportunities. Projects require USD7mn additional funding to fulfil the promised vision Imminent delay is not be a critical issue if the project has capital to survive the 8.8 years. During 17/18, c.8% of ICOs attracted around USD1mn which is in between a typical series A or B in terms of accumulated investments. As a traditional company normally IPOs around a series D, several crypto projects may experience solvency issues before fulfilling their vision. This means projects will require around USD7mn additional capital to last another 4-5 years. Formal institutional investor participation as a solution We believe a formal entrance of institutional investors is an effective way to expedite the way towards filtering out unsuccessful ideas and empowering projects which have the potential to create innovative disruption leveraging the blockchain. Key improvement this may bring include: 1) retail investor protection, ) sufficient capital injection, 3) introduction of series investment rounds, 4) management advisory to projects, 5) improvement of disclosures. DISCLAIMER Coinone does not take any responsibility for any investment done in accordance with the contents of this report. All opinions expressed in this report are the personal opinion of the authors and are provided without external influence or interference. Under all circumstances, this report cannot be adopted as a legal evidence of investment results. Copyright of this report belongs to Coinone. Neither this document nor any copy thereof may be taken or rented or redistributed, directly or indirectly, without prior written permission of Coinone.

2 Concerning timeline & solvency We are passing a chaotic period where unsuccessful ICO/crypto investments by everyday investors is no longer news. But this may not be a surprising situation when considering where crypto investment sits from the perspective of a corporate life-cycle. Through this note, we aim to help understand what this means, and search of ways to potentially improve the situation. Why crypto is controversial The cryptocurrency market has enabled retail investors to invest in extremely early stages of the corporate life-cycle. Previously, retail investors could only participate at the IPO stage and afterwards. Pre-IPO investment was limited to accredited investors such as angels, venture capital, and private equity. That said, there is no cryptocurrency currently offering a commercial level product of traditional IPO quality. Most are angel investment level MVP/Alpha products or even more pre-mature merely showcasing an idea. Figure 1. ICO/cryptocurrency investment from a corporate life-cycle perspective ICO (Crypto) Angel/Seed Venture Capital Private Equity IPO HNW / Accredited Investors (5~1 years) Retail Investors?? Investment success rate Source: Coinone Research After reviewing ICOs conducted since 14, we summarize the situation as follows. Many crypto projects have received investments equivalent to a series A or B company based on an angel/seed level product at best but are trading at a valuation comparable to a successful IPO. There is a clear mismatch here and it is critical to find a way to reduce the discrepancy.

3 3 Figure. Company age by investment stage and current status of ICO/cryptos ) Based on a product fit for Angel/Seed or less... )...funded in the range of series A or B )...but trading similar to a successful IPO Angel/Seed Series A Series B Series C Series D+ IPO Source: Coinone Research, NVCA (National Venture Capital Association) Investment success rate likely much lower than 1% An investment becomes more high risk/high return when investing at an earlier stage of a corporate life-cycle, and thus the investment success rate becomes materially lower. Based on actual statistics, venture capital historically has recorded an exit rate of only 1%, which can be seen as investment success rate, despite being professional early stage investors. Figure 3. Venture capital investment success rate Figure 4. Project maturity at ICO stage 1% 11% 11% 1% 1% 1% 1% 1% Others, 1% Beta, 11% 9% 6% 3% Crypto success rate? Alpha, 16% MVP, 6% Idea, 47% % Source: Coinone Research, NVCA (National Venture Capital Association) Source: Coinone Research, ICORating However, 4% of crypto projects have MVP/Alpha stage products which are too early even for venture capital, and 47% receive investments with nothing but a mere idea. Thus it is fair to expect crypto investment success rate to be much lower than 1% of venture capital. This situation may be further magnified considering that retail investors currently compose a large portion of the market. Time for a reality check Numerous ICO projects are currently trading in the open market at valuations comparable to that of successful venture capital exits(including IPO) despite its extreme high risk/high return nature. This might not look concerning to some. So under the assumption that these projects have laid out a sensible business plan, we focus on two points: 1) are they planning a realistic development and market penetration timeline?, and ) do they have enough capital?

4 4 Figure 5. ERC- token market cap distribution vs. 17 VC exit valuations 5% 4% 4% 35% 3% % 1% % % 9% 14% % 17% 11% % 1% Source: Coinone Research, Coinmarketcap, NVCA (National Venture Capital Association) *As of 8 Sept 18 Following a comparison between the market cap of ERC- tokens within top 3 cryptos and VC exit valuations during 17, a reality check certainly seems to be due. The ERC-s of interest have a typical valuation between USD5mn- 5mn, similar to VC exits. Projects will require more time than expected Over the past 1 years, it took on average 8.8 years after founding for companies to successfully conduct an IPO. This means entrepreneurs needed 8.8 years to make a sustainable business starting from a MVP/alpha product. We believe it is fair to expect ICO projects will require at least a similar amount of time to bear fruit. With only Bitcoin having a similar length of history, we expect significant market volatility ahead which can offer selective investment opportunities. Figure 6. Age of companies which VCs exited through an IPO 1 1-year average (8.8) Source: Coinone Research, Coinmarketcap, NVCA (National Venture Capital Association) Stretched development and commercial launch timelines are too common ICOs boomed in 17 after Ethereum popularized the concept in 14. Based

5 5 on actual data, 9%+ of all ICOs have a history shorter than years. Going into further detail, we look at 1 example ICO projects listed according to Coinmarketcap and reconfirm that all names are under years old. We also note there is no clear correlation between market cap and project vintage. Figure 7. ICO count Figure 8. Age of select ICO projects Source: Coinone Research, Coindesk *As of Jul 18 Source: Coinone Research, ICObench *As of 4 Sept 18 Based on the fact that these projects are currently valued at similar levels to IPOs which took 8.8 years to realize, we would not be surprised to see market disappointment around progress of these projects during upcoming years. We also note more specifically that many projects suggest a -5 year timeline for a meaningful result or in some cases only include the very short term outlook in their whitepapers. This goes against common sense. Timeline delay itself is not a significant issue While disappointing, IT companies frequently experience delays. In other words, it is nothing new and farfetched to think of as a critical issue alone. It may rather be a good investment opportunity if tokens with sufficient development and operational power overcorrects due to a delay in progress. Gap between ICO size and required time As mentioned, a delay in development timeline is not a significant issue, in our view. However, this is only true if the ongoing concern has the capital to survive the full 8.8 years. The median ICO size in 17 and 18 when ICOs boomed was USD8.1mn and USD1.1mn, respectively. Although it grew an impressive YoY 49%, this is still only equivalent to an aggregate funding of a series A or B venture. About 8% of all ICOs since 17 fall within this range. This suggests many projects may experience solvency problems as traditional companies normally undergo IPO around series D.

6 6 Figure 9. Median ICO size vs. accumulated funding by series Figure 1. ICO breakdown according to typical series size 1 1% 14% % 14% 5% 8 6 8% 6% 43% 4% 31% 43% E Angel/Seed Series A Series B Series C Series D+ ICO Source: Coinone Research, KPMG, Coindesk 4% 4% % 4% % Series D+ Equivalent (USD5mn+) Series C Equivalent (USD3mn-5mn) Series B Equivalent (USD1mn-3mn) Series A Equivalent (USD1mn-1mn) Seed/Angel Equivalent (~USD1mn) Source: Coinone Research, Coindesk Surely most projects do keep a certain portion of their own tokens as reserve or for other future purposes. This ratio can even be double digits, but it still makes limited difference. It will also be a challenge to build rationale for the community regarding mass selling of its own tokens. In need of additional funding for another 4-5 years of survival Most ICOs receive series A or B level investments which are conducted for 3.6 or 5.1 years old companies on average. This is 5.7 and 4. years short of an IPO. Due to increasing operational cost burden as businesses expand, ICO projects may need an incremental USD7mn to survive the additional 4-5 years, which is 7 times larger than the median initial ICO size of USD1mn. Figure 11. Company age by investment stage and current status of ICO/cryptos years 4. years Angel/Seed Series A Series B Series C Series D+ IPO* Source: Coinone Research, NVCA (National Venture Capital Association) Similar results from a project specific analysis Among the aforementioned 1 ERC- ICOs, only Golem(GNT) and Status(SNT) seem to be financially solvent. The common factor of these projects is that ETH price appreciation since ICO provided them with such luxury, not an especially large ICO. On the other hand, the remaining 8 names raise concerns.

7 /9/13 COINONE RESEARCH 7 Figure 1. Financial status of select ICO projects Cashed ETH (USDmn) Remaining ETH (USDmn) Source: Coinone Research, SANbase (as of 4 Sept 18) Necessity of accredited institutional investors As analysed, several projects will be facing severe financial difficulties over the next few years. Some projects are clearly overvalued and these should be taken out according to the market mechanism. However, there are also a good number of initiatives that have the potential to create disruptive innovation by leveraging the blockchain. We are concerned that the latter group may also reach a dead end due to cash depletion and believe this must be prevented. Transparent institutional investor participation can go a long way Among possibly many solutions, a formal entrance of prudent and transparent professional institutional investors will be an effective method. We expect this to result in the following: Retail investor protection: provides alternatives such as mutual funds managed by institutional investors compared to direct investment into high risk/high return cryptos which theoretically have lower success rates Sufficient capital injection: will be able to provide large sums of capital necessary to build up a self-sustainable business while the current retail investor focused society is unlikely to be able to fund the additional USD7mn required by the average project Introduction of series investment rounds: can conduct investment by stage according to product development, with a longer investment horizon, or also connect with traditional VCs while current ICOs go against common practice and try to raise as much as possible on one attempt Management advisory to projects: provide professional management advisory and synergy opportunities with other projects/traditional companies, which may be insightful for many projects that are composed mostly by engineers Disclosure improvement: boost in transparency as more details will be requested by institutions more frequently compared to the current status of material asymmetry of information between projects and investors

8 8 Research Analyst Dan Kong CAIA Dan is currently the Head of Research at Coinone. Before that, he was a senior Research Analyst at Deutsche Bank covering the telecom, media, and internet sectors. His team was highly ranked in the world s most competitive research survey, the Institutional Investor All-Asia Research Team Survey, including an Asia top 3 rank in 16. Dan has a Bachelor of Business Administration from Korea University, and has also completed the Blockchain Strategy Programme executive education at Saïd Business School, University of Oxford. Dan holds professional designations including CAIA (Chartered Alternative Investment Analyst), Certified Research Analyst, and Registered Fund Manager. Riley Na Riley is currently a Research Analyst at Coinone. Before that, she started her career at Daiwa Securities Capital Markets Korea and also has business development experience at a startup. Riley holds a Bachelor of Business Administration and has received Blockchain Technologies executive education from Sloan Business School, MIT(Massachusetts Institute of Technology). Tony Kim Tony is currently a Research Analyst at Coinone. Previously he was a manager at SparkLabs Accelerator and SparkLabs Global Ventures. He also held business development and strategy roles at startups in Korea. Tony holds a Bachelor of Commerce from University of Toronto.

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