What do institutional investors bring to initial coin offerings (ICOs)?

Blockchain technology has attracted global attention for its ability to protect data security and traceability. It has driven the development of practical applications in various fields, namely management science, transport and logistics, and supply chain management. Initial coin offerings (ICOs), an emerging start-up fundraising method developed with blockchain technology, are now popular among start-ups that issue initial tokens as the sole exchange medium for their planned products. In addition to the public offering stage and market stage, the pre-ICO stage is an important phase for many ICO projects. In this paper, we establish an initial coin offering (ICO) model with network effects, a common phenomenon in ICOs, to study the effect of institutional investors' participation in the pre-ICO stage of offerings made by cash-strapped entrepreneurs. We find that introducing institutional investors significantly increases the equilibrium price of tokens during the public offering stage as well as the price fluctuation of tokens over time. Meanwhile, entrepreneurs will over-issue tokens when the intensity of network externality is relatively high. Interestingly, when institutional investors' required rate of return decreases, the change in the optimal issuance is not monotonic. Under some circumstances, the lower the rate of return required by institutional investors is, the less the optimal issuance to them is, even if the network externality is high. A higher issuance in the pre-ICO stage is thus a mixed blessing that can increase the price during public offerings and reduce the equilibrium price in other stages. The negative impact is even greater when network externality is high.