The Hidden Costs of Initial Coin Offerings

Jeffrey J. Bussgang; Ramana  Nanda

Article | Harvard Business Review (website)

The Hidden Costs of Initial Coin Offerings

Abstract

In recent years, much has been written about how the Blockchain is poised to transform traditional industries such as banking, real estate, and healthcare. More recently, it has gained attention as a way to finance new ventures, through what is known as an Initial Coin Offering (ICO). Less noticed, though, is ICOs appear almost antithetical to the standard approach to financing a risky venture. Structured experimentation, popularized by Eric Ries' The Lean Startup, has been widely embraced as the gold standard for how to approach the commercialization of radical new ideas. From Boston to Beijing to Bangalore, entrepreneurs and investors rattle off the importance of designing focused experiments to test hypotheses in a capital-efficient fashion in order to achieve product-market fit. But ICOs substantially limit the benefits associated with such staged experimentation, for three reasons.

Keywords: Initial Coin Offerings; Business Ventures; Entrepreneurship; Finance;

Format: Electronic

Citation:

Bussgang, Jeffrey J., and Ramana Nanda. "The Hidden Costs of Initial Coin Offerings." Harvard Business Review (website) (November 7, 2018).

In summer 2017, Victor Santos, CEO of AirFox, considered whether to pivot his startup towards a new product built with blockchain—a quickly growing technology at the time. AirFox was an early stage startup that sold Software-as-a-Service (SaaS) to small telecom companies. AirFox was generating revenue and had a pipeline of interested customers, but it was running low on cash. In addition, Santos was finding it difficult to secure further venture capital investment. In the meantime, blockchain protocols were growing in popularity in technology circles and many blockchain projects were securing investment via Initial Coin Offerings (ICOs). Santos and his team brainstormed a new business, which would launch a new blockchain currency to facilitate financial services for unbanked and underbanked customers in emerging markets via their smartphone. Santos had to decide whether to go forward with the new plan despite regulatory risk, execution risk, and vocal opposition from some employees and investors.

In late 2016, Paris Wallace, the CEO of Ovia Health, and the rest of the company’s co-founders faced a difficult decision about the best way to grow Ovia Health’s revenue. Founded in 2012, Ovia Health specialized in mobile and web applications in the women’s health space. After building a strong user base with its original app (Ovia Fertility, which helped women conceive by tracking ovulation and other factors), the young company launched a second app, Ovia Pregnancy, which helped women have a healthy pregnancy by tracking various health metrics. Ovia Health’s apps were free to use, and most of the company’s revenue came from charging advertisers to host ads on its native advertising platform. Wallace believed that the family benefits market was a promising growth area, but he was not sure of the best way to enter the market. Recently, a top health benefits provider had offered Ovia Health a multi-million-dollar contract, but Wallace wondered whether Ovia Health could create a better family benefits solution by turning down the contract and selling directly to employers’ HR departments. Participants will need to examine how Ovia Health evolved its strategy over time and decide which growth opportunity was the better choice.

Case | HBS Case Collection | January 2018 (Revised January 2019)

ZappRx

Jeffrey J. Bussgang and Olivia Hull

In October 2015, ZappRx founder Zoe Barry is deciding between two business models for her health technology start-up. Her product, a software application that aims to expedite the prescription fulfillment process for patients with rare diseases, has attracted interest from specialty drug manufacturers who wish to build an exclusive platform for patients taking their medications. But Barry, against the advice of her management team, is considering an alternative business model, which would open the platform up to all manufacturers in a given disease area. Instead of financing product development through individual contracts, the comprehensive platform would be free to doctors and pharma alike and financed via an aggressive fundraising strategy and through the sale of the prescription data collected on the app. Barry is willing to take the risk, but her management team is staunchly opposed. Which path should ZappRx take? The case is a window into the early go-to-market and business model decisions that an entrepreneur must make, in this case in the face of pushback from her own management team. The case also provides a detailed picture of the specialty pharmaceutical industry and challenges students to think about target customer identification and talent management in a start-up environment.

Keywords: Speciality Drugs; Hub Services; Pivot; Speciality Prescriptions; Health Care and Treatment; Customization and Personalization; Online Technology; Business Model; Decision Choices and Conditions; Pharmaceutical Industry; Massachusetts;

Citation:

Bussgang, Jeffrey J., and Olivia Hull. "ZappRx." Harvard Business School Case 818-001, January 2018. (Revised January 2019.) View Details

Cite View Details Educators Purchase

Faculty & Research

The Hidden Costs of Initial Coin Offerings

Abstract

Citation:

About the Authors

More from these Authors