Initial Coin Offering (ICO)
To fund blockchain startups, the founders do ICOs to sell tokens to potential users as a future right to use the application.
Generally, to start a technology business, there’s some initial funding required to build the product. Generally, this is done using conventional ways like VC funding or bank loans. The VCs give money and they take some ownership in the company.
There is another way of funding, called crowdfunding. Instead of asking a few VCs and/or banks to give you money, you ask a large number of people to fund your startup and in return, you either give them stake or a right to use your application.
One way of doing crowdfunding is by doing an Initial Coin Offering, better called ICO. In blockchain applications, the developers create tokens so that their users can spend them to use the application. Selling these tokens is a way for the developers to get paid for their work.
In an ICO, these tokens are offered in advance, as a future right to use the application when it is ready to use. To do an ICO, the founder of a blockchain startup generally writes a white paper to detail their idea and its implementation. If the users find the application useful, based on this whitepaper, they purchase tokens to use this application in the future. This purchase of tokens helps the founders to get initial funding to build the application.
If the application becomes successful then the tokens have a lot of demand. The users who acquired these tokens in the ICO can then make profits by selling them at higher prices because of the demand.