Reverse ICOs: Part 1. Methodology, Incentives & Profitability | by Harry McLaverty | Medium

METHODOLOGY, INCENTIVES & PROFITABILITY _Disclaimer: I’ve written this blog primarily for content creators, media consumers, blockchain enthusiasts, VC investors, and technology

management teams (especially SoundCloud’s!). It requires a basic understanding of the __blockchain ecosystem__ and the __SoundCloud platform__ — best you run through these links before

diving in!_ In light of SoundCloud’s recent staff layoffs, I thought back to 2013 when I was an intern at Doughty Hanson — one of SoundCloud’s earliest investors. Before I started there, I

did a short stint at a consultancy firm where I learned about information research so I could hit the ground running at DH. One of the first ever pieces of analysis I completed was on

SoundCloud, explaining what the company did and how it could improve — the investors at DH took a look at it and told me that they had sent it over to the management team, I was in shock!

Since then, I wrote my dissertation on blockchain tech and have seen the ICO market skyrocket. At Convergence.vc’s Creative Industries event, thoughts were cast by blockchain leaders like

Vaughn Mackenzie (CEO, Jaak), Lawrence Lundy (Head of Research & Partnerships, Outlier Ventures) and Jamie Burke (CEO, Outlier Ventures) about how traditionally underperforming social

networks and music platforms with high product value and engagement like Twitter and SoundCloud (I’d add in Kik and Medium also) could exit through a so-called ‘reverse ICO’ to essentially

decentralise themselves. THESE ARE MY INITIAL THOUGHTS ON HOW THAT PROCESS COULD TAKE PLACE. HOW COULD A REVERSE ICO WORK? > IDEALLY, SOUNDCLOUD WOULD DEVELOP THEIR OWN DECENTRALISED 

ECOSYSTEM > AND UNDERGO A REVERSE ICO INTERNALLY. Comparing IPOs and ICOs is relatively straightforward; startups ‘IPO’ (or ‘go public’) by offering a portion of their equity to the

public markets in exchange for money, giving the company a fluid valuation. Similarly, protocols (the blockchain equivalent of startups, essentially) ‘ICO’ by offering a portion of their

tokens to the public markets in exchange for money, giving the protocol a fluid valuation. Companies undergo ‘Reverse IPOs’ as a simpler and quicker way of ‘going public’. A private company

finds a typically underperforming public company and buys enough shares to control it. They then strip away everything but the organisational structure of the public company rendering it a

shell, before completing a ‘share swap’ where shareholders in the private company swap their shares for shares in the shell company — rendering the private company public (Example: Burger

King). Similarly, I imagine that SoundCloud could partake in a ‘token buy-out’ of some decentralised protocol, and then issue a token-share swap by creating tokens that represent SoundCloud

share ownership and swapping them on a token swap platform like Swap by Consensys. This means that the company’s overall success is measured by a token price, not a share price; the

fundamental price drivers behind token prices differ from share prices which is fundamental to how the organisation would make money. (Note: if they were ‘reverse ICO-ing’ with an

organisation with a company and a foundation, they could acquire the private entity and proceed as above). IDEALLY, THEY’D DEVELOP THEIR OWN DECENTRALISED ECOSYSTEM AND UNDERGO THE SWITCH

INTERNALLY. HOW COULD SOUNDCLOUD SUSTAINABLY INCENTIVISE ALL STAKEHOLDERS WITH TOKENS? SoundCloud’s product has three main stakeholders: PLATFORM (the company), PEOPLE (the creators and

consumers that make the service what it is) and PARTNERS (the advertisers that do not create or consume). EACH ONE OF THESE STAKEHOLDERS HAS A SERIES OF ‘MISSIONS’ TO UNDERTAKE TO MAKE THE

SERVICE SUSTAINABLE, AND THE BEST THAT IT CAN BE FOR EVERYONE. > Each stakeholder has a series of ‘missions’ to undertake to make > the service sustainable and the best that it can be 

for everyone. PLATFORM MISSIONS: To keep the service running, the platform (i.e. SoundCloud) needs to reward desirable actions to drive acquisition, retention, engagement, and to increase

their token price (much like Amazon maintaining the long-term growth of its share price). These actions are what makes the product valuable and are fundamental to key metrics including THE

NUMBER OF PLAYS, DAILY AND MONTHLY ACTIVE USERS, VIRALITY COEFFICIENT AND UPLOAD FREQUENCY. PEOPLE MISSIONS: Missions for content creators and consumers are probably where you can get most

creative, and how different services could best distinguish from each other. Four ‘people missions’ that I thought of go as follows: * ADVERTISEMENT: Spend tokens to advertise and earn

tokens to be advertised to * PREMIUM CONTENT: Charge tokens for access; spend tokens to access the content * TIPPING: Reward others for content you like (especially important for independent

artists) * SAMPLING: Earn tokens if other creators earn tokens from music that samples yours (through a percentage revenue fee) — managed by storing songs on a blockchain PARTNER MISSIONS:

SoundCloud’s advertising partners will still be an important stakeholder, but in this case, people decide whether or not they want to receive the adverts making the product more useful

whilst also increasing the advertiser’s conversion rates because they only advertise to people who have a vested interest in their product or service. I IMAGINE THAT THESE ADVERTS WOULD BE

SEEDED BY THE PLATFORM WHICH THEN OFFERS CREATORS AND CONSUMERS THE RIGHT BUT NOT THE OBLIGATION TO VIEW THE ADVERT AND THEY COULD ALSO EARN TOKENS FOR SOUNDCLOUD PARTNERS TO ADVERTISE

THROUGH THEM FOR A PERCENTAGE OF TOTAL FEES. In a nutshell, this model is a decentralised and tokenised version of the On SoundCloud content monetisation programme for premier partners that

blends together all other subscriptions for both content creators and consumers and entails that unlimited upload time, advanced analytics, control tools, unlimited track access and offline

listening is offered for free whilst still building a sustainable and highly profitable business — CLEARLY ADVANTAGEOUS OVER THE OTHER MUSIC STREAMING PLATFORMS. _Note: There are a few very

smart and experienced people who have put a lot of deep thought and hard work into outlining how tokenising companies like SoundCloud could work. For more ideas on how this could work, take

some time to read work by __Fred Wilson__, __Trent McConaghy__, __Mat Dryhurst__, __Jamie Burke__ and __Simon de la Rouviere__ — great to have my work compared to people of this calibre and

expertise!_ HOW COULD SOUNDCLOUD USE THIS MODEL TO BECOME PROFITABLE? > AS LONG AS THEIR TOKEN PRICE KEEPS INCREASING AT THE SAME RATE THAT > THEY WANT TO SCALE, THEY’LL HAVE A 

PROFITABLE, SUSTAINABLE AND > ZERO COMMISSION OPERATION. One of the most exciting aspects of these systems is how they affect existing business models and lead to new profitability

pathways. AT PRESENT, WE HAVE A STRONG PRODUCT AND TOKEN THAT POWERS THE SYSTEM — THE LAST PIECE OF THE PUZZLE IS PROFITABILITY. For a solution to this, let’s draw a comparison to Amazon.

Amazon is a company that has incredibly high revenues yet is renowned for not making any money — reinvesting the majority of its profits to fund new business. It is less well known that it

also sells its shares to fund new ventures like Blue Origin. TAKING THIS TO THE EXTREME, WE MAY IMAGINE A SITUATION WHERE IT COMPLETELY SUPPRESSES PROFITS AND BECOME ENTIRELY DEPENDENT ON

THE PERIODIC SALE OF ITS SHARES TO FUND ITS VENTURES — OLD AND NEW. Looking back at SoundCloud now, we could use a similar process in our model. The company swaps their shares for tokens and

finances their operations by periodically selling a portion of their tokens on public markets — they would rely on the value of the token increasing over the time for them to grow

sustainably. AS LONG AS THEIR TOKEN PRICE KEEPS INCREASING AT THE SAME RATE THAT THEY WANT TO SCALE, THEY’LL HAVE A PROFITABLE, SUSTAINABLE AND ZERO COMMISSION OPERATION. Furthermore,

fundraising and revenue generation would now take place in the same way — selling its tokens. WHAT’S COMING NEXT FOR THE REVERSE ICO? After this case study is reviewed and rigorously tested

by blockchain pioneers, music industry leaders and equities analysis experts (unless token analysis experts already exist?), it’ll be time to think about which other services we love have an

inability to effectively monetise without advertisements or subscriptions. I’ve already thought about Twitter, Kik, SoundCloud and Medium but I’m sure there are several others that would

take interest (Tumblr, Snapchat etc?) —we know that high product utility and engagement are important but a more rigorous framework should be developed to include areas like contrarian token

utility beyond ecosystem access (potentially a direct link to APIs?). Current limitations to this model include technical detail (patiently waiting for Kin’s technical whitepaper!), a more

stable payments system (assumption: IOTA would work much better than Ethereum), and we should think more deeply about how to assess project performance now that token value has become the

new share price (there must be more metrics than MAU, DAU and number of subscribers), and we should consider exogenous factors like news cycles and partnerships. Regulation is also very

unclear, especially around governance and platform IP (potentially programmable with Agrello?). SoundCloud itself would also have to decide how its marketplace would operate e.g. do they

decide how much it costs to send an advert or what percentage of future revenues earned should be charged to sample someone else’s music — or would they manage a totally free market? PLENTY

OF FOOD FOR THOUGHT! _A BIG THANK YOU HAS TO GO TO __MICHAEL TEFULA__ AND __ANDY AYIM__ FOR BEING THE VERY FIRST PEOPLE TO REVIEW THE ARTICLE — THEIR FEEDBACK WAS INVALUABLE! THANKS MUST

ALSO GO TO TEAMS AND COMMUNITIES AT __YSYS__ (__DEBORAH OKENLA__ & __JAMES ABAYOMI OJO__), __#POCTECH__ AMBASSADORS AT CAMPUS LONDON (__ANUSHKA SHARMA__, __KATIE WU__ & __DEBORAH

OKENLA__ — AGAIN!), __OUTLIER VENTURES__ (__JAMIE BURKE__ & __LAWRENCE LUNDY__), HEXAYURT CAPITAL (__ROB KNIGHT__) AS WELL AS __FRANK E. BANKS__, __ZYSHAN KABA__ AND __WONG JOON IAN__

FOR VALUABLE COMMENTS, ADVICE AND FOR SHARING THE ARTICLE!_ _This blog post was written by __Harry McLaverty__, freelance emerging technologies and investment consultant to startups, VCs,

and other ecosystem players. I am also a co-founder and trustee at WarwickTECH and one of the four #poctech ambassadors at Campus London._ _If you’re new to emerging technologies, are trying

to find business use-cases for your existing tech, or want to converge different technologies together and raise investment from the right funds then feel free to reach out on

__LinkedIn__._ _I’d love to hear your thoughts on this topic, drop a comment below and hit the 💚 if you liked what you read!_