This CZ, CEO of Binance. This is my first post on Steemit, and a highly subjective one.
Last night, I was at a party in Tokyo with a few crypto guys. The host wants to do an ICO. The team, though small in number, is solid. They built and released a product already. It has a decent user base. Everything sounds good, until when I asked how much are you planning to raise in your ICO. The answer was: $100MM. My face said, "I don't like it." A discussion followed that I thought would be beneficial to share with all of you out there who wants to do an ICO or list on Binance.
A big ICO is good in many ways, at least in theory. It makes headlines, raises awareness and credibility of your project, has people awe at your awesomeness, and boosts egos. $100MM should cover all the financial needs of the project, for a long while! With sufficient funding, the project team can dare to do whatever they want, and aggressively build it into a massive empire. All that good happily ever after stuff...
But I don't like it. Here is why.
First, does your project really need 100MM?
The first answer I got from a team member yesterday was: "Yes, we will build out the entire eco-system, acquire companies..." I stopped him there. I like to see startup teams laser-focused on one task. Just my personal preference. My personal preference does influence Binance though.
Do you need all the funds NOW?
A misconception is ICO is a one-time event. You must have all the money you ever need NOW! This is simply not true. There are many ways to structure the Token Economics so that you get all the funds your project will ever need over time without having all the investors taking huge risks initially. More on this later.
Hunger
I worry a small team with $100MM may no longer feel hungry. True, the best-motivated teams should be intrinsically motivated, wanting to change the world, etc. It is also true some people can keep that hungerness even when they are rich, but not everyone can. I still want to see teams with a sense of hunger in them. I like to see 3 AM commits to GitHub from time to time.
All those aside, the key issue is Token Economics.
Maximize at ICO = Bad
I don't like to see projects realizing their max value at ICO. This is usually harmful to those projects in the long run. This is counter-intuitive to many ico-preneurs, including many in the room yesterday.
A max-valued ICO coin will only go down in price once it hits an exchange. This causes all sorts of problems that most people don't think about at the ICO stage. But as an exchange operator, I see it all the time, thankfully, mostly on other exchanges.
Say your project is worth $200M today, and you sell 50% at $100MM in your ICO. A day later, your coin is trading on Binance.com. Hype and market over-reactions aside, unless you have increased your project's worth in a day, the price won't go up further on the exchange. When price doesn't go up, it goes down. A certain number of people (short-term traders) will dump it for coins that are rising quicker. This dump causes price to go down, and when price goes down, more people (the less certain ones) will dump as well, causing a downward spiral.
Now people are losing money on your coin. Some will complain, bad-mouth you, calling you a scam, post their conspiracy theory on more social channels than you can monitor. Now your rep gets tarnished, and you are spending all your efforts managing bad PR instead of coding. Your new user acquisition rate drops due to the bad press. Your hiring becomes difficult as well. People in the office argue about what went wrong and starts to point fingers. Down it goes...
You also immediately have this heavy burden to make your project go from $200M to $400M valuation, not an easy task for most new projects.
The Alternative
Now compare this to a different scenario. Say your project is worth $200MM solid today (or however much you like to think), but you set your ICO valuation to $30MM and sell 50% for $15MM. (These are the actual numbers for Binance.com at our ICO. I think they are still very decent numbers by any measure, for just our promise to deliver.)
But you say "fk, that's dumb, I just short changed myself $85MM in ICO funds and more on valuation". If you thought this, just read on.
Of course, now because of the low valuation, everyone is trying to get a piece of your ICO. It's completely over-subscribed. Everyone is asking you for more allocation, you say, "sorry mate, you have to buy them on the exchange later." Your ICOs finishes in 38 seconds (a real record for one ICO on Binance). A day later, your coin starts trading. People rush in. No one wants to sell. Price shoots up. More traders get attracted to you instead of other coins. Now you are the talk of the town. Everyone is discussing your project. People make Youtube videos analyzing how great your coin is. With all the free positive press, users sign up to your service faster than you can imagine. (A true case with Binance again.) Within a month or so, you get into world top 10 ranking. With the user growth, your project is now valued at $300MM, and the 49% you hold is worth $150MM.
Now most of your investors made money, lots of money, 10x in 2 months. You have the user base, product, and the positive community to back it up, and is poised to grow even faster. You can slowly sell your holdings at $300MM or above valuations over time.
If you still feel stingy, you can always adjust/reduce the 50% ICO percentage, of course. But I highly recommend 50% or more for the ICO. The whole point of ICOs is to make your investors make money together with you, and build momentum!
One last bit of simple math to consider from an exchange perspective. If your coin has a circulating supply of $30MM, and 80% are long-term holders. You only need to attract $12MM more buyers for your valuation to double. If your circulation supply is $300MM, you will need to attract $120MM. If you look at trading volumes on top 10 exchanges today, it won't be hard to figure out while $12MM is quite easy to squeeze out from other coins, $120MM will take some effort. So, if you can show your coin can bring new users with $120MM of funds to our exchange, we will happily list it. Otherwise, we would have to think carefully about listing your $300MM coin, especially if your coin is new and have no trading history.
Once I explained these in detail last night, there was a sense of "oh, now that makes sense, I didn't think about it like that" flowing in the room. I think I successfully converted most of the guys in the room from "one-big-massive-ICO" to "long-term growth" mentality. I hope I can do that for you as well. It will make listing your coins a lot easier for us.
To be honest that feels like most of the ICO market aiming for a large payout instead of developing upfront and moving all the risk to the investor. It should be a growth mentality that makes the currency appreciate instead as you stated.
Czbinance, I loved this post. Great in-depth thought on the current ICO. I agree on you that you will probably gain more return on small ICOs. A lot of ICOs are overhyped, and its price just continues to drop down. This even hold true for some solid atlcoins like Zcash. By the way, what do you think about EOS, which has a unique ICO method that stretches over one year, looks like hypes over EOS have already subdued? I consider EOS a great one even with a huge ICO ?