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Framework for

In-house Due Diligence

on Pre-ICO Startup

© Denis Dovgopoliy

https://www.linkedin.com/in/dennydo/

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Introduction

We experience the ICO boom, and 80% of all projects that launch ICO look like scam. The rest projects still play a risky game, which becomes even more complicated because of regulatory authorities (IRS, SEC, etc.) and KYC/AML.

The framework is set to run a Due Diligence process for projects that launch ICO. Since the procedure requires a lot of resources it makes sense to run the Due Diligence for projects, where you are going to invest above $50,000 getting no more than 5% of the whole token emission during ICO. If you invest less you should be aware what game you play.

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Introduction

The framework focuses on the Due Diligence procedure for projects that emit cryptocurrency to cover project needs (utility coins). It is assumed that the currency has no value outside of the services the company provides. Investing in the currency becomes attractive due to the service value.

Therefore we distinguish two types of investors:

  • Investors who expect the price of the cryptocurrency will increase in medium/long-term comparing to fiat money and leading cryptocurrencies.
  • Investors who are going to use the service and are ready to invest in it to get more opportunities.

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Goals

The framework is intended for:

  1. recognizing scam features while ICO
  2. assessing risks of ICO
  3. comparing announced goals of ICO with the real capabilities of the project

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Contents

  1. Team
  2. Project
  3. PR/Marketing/Community
  4. Market
  5. Whitepaper
  6. Blockchain technology
  7. Characteristics of ICO
  8. Investors

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  1. Team

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  1. Team

1.1. Founders

We analyze the team of founders and consider the following points:

  • How public are team members? (to make sure that ICO is not launched by “virtual people”)
  • How much does their skill set match their project? (along with understanding Blockchain technology they should know the business for their project)
  • Do they have positive experience in other projects? (success, failure, indicators)
  • How long do they know each other? What do they have in common?
  • What is their credibility in the community? (both in blockchain and domain expertise)

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  1. Team

1.1. Founders

1.1.1. Social networks

1.1.1.1. Facebook (we verify if a person is real, how long he/she uses their account, if he has real friends, colleagues, relatives)

  • Registration date
  • Number of friends
  • Number of followers
  • Number of posts
  • Information about family and private life
  • Posts on professional topics
  • Commenting
  • Posting frequency

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  • Team

1.1. Founders

1.1.1. Social networks

1.1.1.2. LinkedIn (we verify if a person is real, how long he/she uses their account, if he has real employers, colleagues, partners)

  • Registration date
  • Number of connections
  • Skill set
  • Relevant experience
  • Number of common connections
  • Number of followers
  • Number of posts
  • Education
  • Detailed CV
  • Posts on professional topics
  • Posting frequency
  • Reviews (especially on the skill set)

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  • Team

1.1. Founders

1.1.1. Social networks

1.1.1.3. Instagram

  • Registration date
  • Number of followers
  • Number of posts
  • Information about family and private life
  • Posting frequency

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  • Team

1.1. Founders

1.1.1. Social networks

1.1.1.4. Crunchbase

  • Connection with projects
  • Media mentions
  • Participation in conferences
  • Country of residence

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  • Team

1.1. Founders

1.1.2. Connections with criminal entities, blacklists, bases:

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  • Team

1.2. Advisers

We analyze the team of advisers and consider the following points:

  • How public are advisers? (to make sure that ICO is not launched by “virtual people”)
  • Do they have positive experience in other projects? (success, failure, indicators)
  • Do they really take part in the project? They are not celebrities-for-hire, are they?
  • What is their credibility in the community? (both in blockchain and domain expertise)
  • How many projects have they supervised? How many projects do they observe at the same time? Have they ever been exposed in scam projects?

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  • Team

1.2. Advisers

1.2.1. What makes us consider someone as an expert:

  • His/her own implemented projects
  • Participation in other projects
  • His publications
  • Articles/interviews about him
  • Participation in conferences

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  • Team

1.2. Advisers

1.2.2. Social networks

1.2.2.1. Facebook (we verify if a person is real, how long he/she uses their account, if he has real friends, colleagues, relatives)

  • Registration date
  • Number of friends
  • Number of followers
  • Number of posts
  • Information about family and private life
  • Posts on professional topics
  • Commenting
  • Posting frequency

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  • Team

1.2. Advisers

1.2.2. Social networks

1.2.2.2. LinkedIn (we verify if a person is real, how long he/she uses their account, if he has real employers, colleagues, partners, if the projects he is involved are present in his profile)

  • Registration date
  • Number of connections
  • Number of common connections
  • Number of followers
  • Number of posts
  • Mention of the project in his profile
  • Is there projects he added to his profile, but he is not mentioned on the project website / whitepaper
  • Is there projects where he is mentioned on the website / whitepaper, but he hasn’t added them to his profile on LinkedIn
  • Detailed CV
  • Reviews (especially on the skill set)

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  • Team

1.2. Advisers

1.2.2. Social networks

1.2.2.3. Crunchbase

  • Connection with projects
  • Media mentions
  • Participation in conferences
  • Country of residence

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  • Team

1.2. Advisers

1.2.3. Connections with criminal entities, blacklists, bases:

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  • Team

1.3. C-Level

We analyze the non-founding execs and consider the following points:

  • How high is the level of their expertise in the market the company is focused on?
  • How much does their skill set match their position and the market?
  • Do they have positive experience in other projects? (success, failure, indicators)
  • Do they really take part in the project? They are not fake VIPs, are they?

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  • Team

1.3. C-Level

1.3.2. Social networks

1.3.2.1. Facebook (we verify if a person is real, how long he/she uses their account, if he has real friends, colleagues, relatives)

  • Registration date
  • Number of friends
  • Number of followers
  • Number of posts
  • Information about family and private life
  • Posts on professional topics
  • Commenting
  • Posting frequency

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  • Team

1.3. C-Level

1.3.2. Social networks

1.3.2.2. LinkedIn (we verify if a person is real, how long he/she uses their account, if he has real employers, colleagues, partners, if the projects he is involved are present in his profile)

  • Registration date
  • Number of connections
  • Number of common connections
  • Number of followers
  • Number of posts
  • Mention of the project in his profile
  • Is there projects he added to his profile, but he is not mentioned on the project website / whitepaper
  • Is there projects where he is mentioned on the website / whitepaper, but he hasn’t added them to his profile on LinkedIn
  • Detailed CV
  • Reviews (especially on the skill set)

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  • Team

1.3. C-Level

1.3.2. Social networks

1.3.2.3. Crunchbase

  • Connection with projects
  • Media mentions
  • Participation in conferences
  • Country of residence

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  • Team

1.3. C-Level

1.3.3. Connections with criminal entities, blacklists, bases:

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  • Team

1.4. Integral evaluation

Besides the quality of the team we evaluate:

  • What makes them be together?
  • How long do they know each other?
  • Are they geographically in the same location?
  • Have they already had common projects?
  • Do they try to cover up the scam?
  • Can they build a company together?
  • Who will leave after the ICO is done?

And do not forget about reference calls!

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2. Project

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2. Project

While analyzing a project, we run a traditional Due Diligence procedure, which all investors do. Most often projects reveal very little information about corporate structure in their documents.

We have to know:

  • Who are the founders of the project? (sometimes a team is not divided into founders and executives)
  • When was the company founded? The story of the company’s foundation, is there any evidence of it in mass media (interviews/articles)?
  • Is there a logical and clear link between the previous experience and the current project?
  • What is known about the jurisdiction where the project is registered? Is the company incorporated?
  • Does the product already exist?
  • Are there any users? What is the number of downloads? What about ratings, сonversion, сhurn rate?
  • Is there revenue?
  • Does the project have confirmed relationship with technological partners? (the project is mentioned on their website and other platforms)
  • Are there any corporate clients/sales channels? (proofs are needed)
  • Can the project be implemented without Blockchain as effectively as with it?
  • Has the project raised funding before? What was it spent on?
  • How much money is the project going to spend on ICO and what are the sources of it?

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2. Project

It is extremely important to understand how Blockchain technology is integrated into the project as there are two types of projects:

  • A project that uses Blockchain technology as a payment tool
  • A project that can hardly or cannot exist without Blockchain technology

In the first case investors just accept risks realizing that any other fiat or cryptocurrency can be used instead of this payment tool.

We explore the second type of projects to find out whether the usage of Blockchain technology makes the project over complicated or not.

It also makes sense to check out if the project is feasible. Blockchain is not a solution for all, but a lot of founders don’t think about it.

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3. PR / Marketing / Community

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3. PR/Marketing/Community

Currently every dollar invested in the marketing of ICO yields from $20 to $200 during ICO. Besides the ICO budget we are also interested in how efficient its usage is.

Fundraising during ICO is possible due to two investor audiences especially when they intersect.

The first audience consists of people who already own cryptocurrency and the task is to compel them to exchange their coins to coins of the project. They may know almost nothing about the business and its industry, but they should understand how and why the project coins will grow in value. For such people the liquidity of traditional cryptocurrencies is not high, so they will easily exchange them to take part in clear and attractive business. Commonly they own a small coin portfolio that they purchased during various ICOs.

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3. PR/Marketing/Community

The second audience is potential users of the service. They participate in the ICO driven by two motives:

  • Rational: they want to get more services for their money, which means they expect that the coins will go up and they will benefit as users.
  • Emotional: they want to give the project team an opportunity to build a service or a product using their funding.

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3. PR/Marketing/Community

The evaluation of each audience, and especially the zone of their intersection, makes it possible to predict the success of the ICO itself, as well as the demand for the service. It makes it possible to indirectly assess the potential for the growth of the coin rate in the short-term (within the ICO at pre-sale, sale and post-sale, first trading) medium-term (as the user base of the project grows) and long-term.

The audiences are connected, therefore they are important as each in itself, as well as their mutual influence. Participation of iconic investors in ICO gives a good signal to institutional investors, on the other hand a large audience of the project and the ability to work with it gives a good incentive to institutional investors.

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3. PR/Marketing/Community

3.1. Audience of the project

Access to a traditional audience:

  • Any of the founders have a Celebrity status
  • The ability to attract other industry and external celebrities to ICO
  • Personal channels of communications of the founders (followers in social networks)
  • Audience of existing projects, to which the founders have access
  • Availability of databases of potential users:
    • Mailing lists
    • Groups in social networks
    • Channels in Youtube
    • Groups in messengers
    • Controlled media

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3. PR/Marketing/Community

3.1. Audience of the project

Strategy of communications:

  • Formalized strategy
  • Messages
  • PR: access to media, bloggers, opinion leaders
  • SMM
  • Planned advertising campaigns: traditional media, specialized media, PPC (with special attention to USA, China, Japan, South Korea, Russia)
  • Executors: internal project team, contractors (verification of successful cases, availability of relevant industry expertise)

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3. PR/Marketing/Community

3.1. Audience of the project

The visibility of the project is checked.

Traffic volume:

  • Similarweb
  • Alexa
  • Google trends

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3. PR/Marketing/Community

3.1. Audience of the project

The visibility of the project is checked.

Social media (accounts, tags, mentions):

  • Facebook
  • Twitter
  • LinkedIn
  • Crunchbase
  • Angel.co
  • Slack
  • Telegram
  • Reddit

Do not forget to pay attention to the tone of mentions.

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3. PR/Marketing/Community

3.1. Blockchain community

If the previous section is easy to understand and is done traditionally by any investors at the stage of Due Diligence, in this section everything is slightly more complicated. Blockchain community is young and rather closed, contacts of its experts are often not in the public domain, there are not a lot of websites.

What pay attention to:

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3. PR/Marketing/Community

3.1. Blockchain community

Team profiles:

Are there any celebrities or significant experts from the Blockchain community? If any, then we check if it's a dedicated person, isn’t he a celebrity-for-hire? How he is involved in the project, whether he participates simultaneously in several projects (this is acceptable for advisers, mentors and investors, but it is not acceptable for founders or c-level executives)

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3. PR/Marketing/Community

3.1. Blockchain community

We track the accounts, profiles and project references on the following websites:

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3. PR/Marketing/Community

3.1. Blockchain community

We track the accounts, profiles and project references on the following websites:

Keep in mind that this list should be updated over time with new websites as they emerge rapidly due to increased demand to the topic.

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4. Market

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4. Market

In this section we pay attention to the following:

  • Availability of the market information
  • If it’s available we compare it with open data and recheck all sources

The main parameters that are important to us:

  • TAM
  • SAM
  • SOM
  • GAGR
  • Go to market strategy
  • Potential market share
  • Detailed analysis of the competitors
  • USP
  • Value

Sources of information: Crunchbase, CB Insights, PrivCo, DataFox, Owler, Tracxn!, Mattermark, Quandl, Gartner, BCG, McKinsey, Deloitte

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5. Whitepaper

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5. Whitepaper

A whitepaper is considered to be an important source of information. We evaluate whether it has all the data to make a decision.

A bad sign is when the whitepaper is not detailed and specific, and the essence of the project is not clearly defined in it.

There is no standard for a whitepaper format, and this document can be very different in various projects. Anyway it should be prepared thoroughly and its volume should be sufficient to contain all the data on the project. It must be well-designed, proofread, not contain errors nor inaccuracies. At the same time we should understand that scammers count heavily on this document, investing thousands of dollars into its production. If a professional team has been hired to write it, it can be really good. General recommendations: if a whitepaper looks excessively good, then you need to pay more attention to re-checking the facts. The same should be done if a whitepaper looks untidy.

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6. Blockchain Technology

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6. Blockchain Technology

While conducting a superficial due diligence, we usually do not have enough knowledge to audit the technology. That’s why we expect that the community will check everything that can be checked. Therefore, we assess the understanding of how well the emission is designed by three factors:

  1. Availability of all the information in the public domain:
    1. https://github.com/, https://bitbucket.org/, https://www.coingecko.com/en and regular updates of the code (appraisals, comments)
    2. Availability of annotations and manuals within the code
    3. Matching of functioning of the smart contract and the description in the Whitepaper and on the landing page
  2. Discussion about details on field-specific forums
  3. Tone of voice and conclusions of the discussion

What else matters:

  • Consensus Algorithms,
  • Scalability,
  • Governance structures,
  • Openness (private, public, consortium),
  • Transaction throughput,
  • Block size, state channels, sharding,
  • Fees, privacy (zero knowledge proofs, cryptography),
  • Degree of decentralisation

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7. ICO

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7. ICO

From the point of view of the ICO itself we analyze the following parameters:

Business Model & Token Design (utility or equity)

TGE

  • Transparency
  • Parameters (volume, price, discount, time)
  • Criteria for success
  • Cap
  • Acceptable currencies
  • Min and Max purchase
  • Wallets
  • Distribution of tokens (how much goes to a team, how much to sell, distribution among issues)
  • Whether the timeframes for TGE are correctly chosen, how they correlate with the product strategy and go-to-market strategy
  • Escrow
  • Use test

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7. ICO

Use of fund

Listings and Wallets support

Legal Setup and Audit

Security Audit

The experience of the team of lawyers who did the legal setup and the availability of their comments (summary) about what was included in the legal analysis

Availability of the Howey Test (SEC) and its results (we examine it in details and take into account who did it)

Availability of the Family Resemblance Test and its results (we examine it in details and take into account who did it)

Availability of the Risk Capital Test and its results (we examine it in details and take into account who did it)

How KYC / AML procedures are implemented

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7. ICO

We avoid any ICO where:

  • The token transfers ownership or equity in the company
  • The Token transfers the right to get a share in the profitz or a share in the assets
  • The token provides the holder with a status of a creditor

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7. ICO

We’ve been working on an important methodology for evaluating the potential for growth of the price of the token in the process of the project development:

Estimation of the equilibrium price of the token, based on the increase in the number and volume of transactions in the system according to the parameters determined in the Whitepaper and by the volume of the issue

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8. Investors

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8. Investors

If the company did acquire iconic investors (one of the 85* crypto hedge funds) during the preliminary negotiations, most likely it will be written on their website.

During the ICO itself, you can see the amounts that are transferred to the wallet and their sources. It's easy to trace the affiliation of such wallets - they usually do not hide.

However in the past it often happened that the company placed a logo of the fund on their website, which had no connection to them.

In any case, the amounts that exceed 1000 ethers or 20 bitcoins should be tracked - it can say a lot during the presale.

Actual list of ICO and Pre-ICO Funds you can find here https://docs.google.com/spreadsheets/d/1BVGXdP_cR5hO6sdQlTSB-r6qs7xQqYF342FQ9hehT5Q/edit#gid=849898236

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* The number is valid at the time of writing of this presentation

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9. Thanks:

I want to say thank you for following guys for contribution:

Slavik Fokin: https://www.linkedin.com/in/slavikfokin/

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Feel free to send your comments and feedback to denny.do@gmail.com

https://www.linkedin.com/in/dennydo/

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