For blockchain entrepreneurs, initial coin offerings (ICOs) are becoming the way to go. According to statistics released by online publication Coindesk, ICOs have surpassed venture capital (VC) funding as a means for raising cash for their startups. Entrepreneurs raised $327 million from ICOs during the first half of this year. In contrast, VC funding accounted for $295 million during the same time period. Based on Coindesk data, ICOs accounted for less than half of the $500 million overall invested in blockchain startups through VC funding last year.

ICOs resemble crowdfunding​ in that they offer tokens, instead of rewards, to investors in the product or service. These tokens can be redeemed on digital platforms for currency.  Blockchain, which is the platform that underlies digital currencies, is gaining traction in established financial services institutions as a means to reduce costs and enable faster processing. This has led to greater interest among investors for blockchain startups. (See also: The Rise of Initial Coin Offerings.

ICOs are a win-win situation for investors and entrepreneurs. They offer easy access to liquidity through digital exchanges for the former and enable founders to access a much larger global pool of investors. "Obviously investors have also seen some extremely large returns in short time periods," says Alex Sunnarborg, research analyst at Coindesk. 

Another key factor driving investment into ICOs is minimal regulation. According to Sunnarborg, "a very minimal amount of instruction" has been published by government agencies regarding tokens and ICOs. Industry groups have stepped in with broad guidelines, but entrepreneurs often set their own limits. For example, some accept investments from anywhere in the world, while others accept funds only from U.S. investors. (See also: 5 Ways to Invest in the Blockchain Boom.)

The light regulation has resulted in cases of ICO funding where valuations, at first glance, seem unsustainable. As an example, Sunnarborg points to Gnosis, an ethereum​-based startup, which tripled in token value from its initial price. "When considering the investment, you'd realize that Gnosis would need a $1.5 billion market cap to net you a return of 5x," he points out. There was also the case of The DAO, an ethereum app that made investment machines based on votes, which raised over $150 million through an ICO offering last year. A hacker siphoned off $50 million a couple months after the sale, and ethereum ended up compromising its blockchain immutability to avoid similar instances. (See also: Is Ethereum More Important Than Bitcoin?)

Sunnarborg recommends that lay investors conduct due diligence before deciding to invest. In the case of blockchain startups, this means the addition of another layer to the process. While it is necessary to evaluate team expertise, technology and the product (or service), Sunnarborg also recommends analyzing the prospects of the underlying platform, such as ethereum, and the long-term growth potential. 

However, even a comprehensive evaluation may not be enough because blockchain is, as of yet, a nascent technology, and there are not enough use cases for investors to evaluate it. "Many ICOs now have raised significant funding within the last year or two and are heads down in building their projects – simply not enough time has passed for us to see if the majority will 'deliver' or fail," says Sunnarborg. (See also: What Is Blockchain and Why Should I Care?)

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