Author: Zhao Changpeng
Source: Steemit
On July 24, Binance founder CZ posted on Twitter a long article he wrote six years ago titled "I Don't Like Big ICOs". The large ICO mentioned in the article claimed to raise $100 million through ICO, but the current market value of the project is less than $1 million.
CZ said it was a good group of people, but they were probably distracted by too much money. Start small and then move on to big things, not the other way around.
In the article, CZ explains in detail that it is not a good thing in the long run for a crypto project to raise a large amount of money with a high valuation at the beginning, although this is generally considered an achievement of the founder. Binance does not like such projects either. The article also gives us a glimpse into CZ’s thinking on Binance’s choice of listing coins, and this idea continues to this day.
For entrepreneurs who are eager to make a difference in the crypto world, this article may be worth reading.
The following is the full text:
I am CZ, CEO of https://www.binance.com. This is my first post on Steemit and a very subjective one.
Last night I was at a party in Tokyo with a few other crypto enthusiasts. The host wanted to do an ICO, and the team was small but strong. They had already built and released a product, had a decent user base. Everything sounded good until I asked how much money you were going to raise in the ICO, and the answer was: $100 million.
My expression was “I don’t like it.” A discussion ensued that I thought would be useful to share with anyone thinking of doing an ICO or listing on Binance.com.
At least in theory, a large ICO has many benefits. It can make headlines, increase the visibility and credibility of your project, make people in awe of your greatness, and boost self-confidence. $100 million should cover all the funding needs of the project for a long time! With sufficient funds, the project team can do whatever they want, actively build it into a huge empire, and all of these seem like happy things...
But I don’t like this. Here’s why:
First, does your project really need $100 million?
The first answer a team member gave me yesterday was "Yes, we will build the entire ecosystem, acquire companies..." I interrupted him. I like to see startup teams focus on just one mission. This is just my personal preference. However, my personal preference does affect Binance.
Do you need all the funds now?
One misconception is that an ICO is a one-time event. You must have all the money you need now! This is not true. There are ways to structure a token economy so that you can get all the money you need for your project over time without exposing all investors to huge risk upfront. More on this later.
hunger
I worry that a small team with $100 million might not be hungry anymore. It's true that the most motivated teams are intrinsically motivated, want to change the world, etc. It's true that some people can maintain that hunger even with money, but not everyone can. I still want to see hungry teams. I like to see code commits to GitHub at 3 a.m. from time to time.
All that aside, the key issue is token economics.
ICO Maximization = Bad
I don’t like seeing projects maximize their value at ICO time. It’s usually detrimental to those projects in the long run. This is counterintuitive to many ICO entrepreneurs, including many of you who were here yesterday.
The biggest ICO coins only go down in price once they hit exchanges. This creates all sorts of problems that most people don’t think about during the ICO phase. But as an exchange operator I see this all the time, luckily mostly on other exchanges.
Let's say your project is worth $200 million today, and you sold 50% of it in your ICO for $100 million. One day later, your coin is traded on Binance. Putting aside hype and market overreaction, the price will not rise further on the exchange unless you have increased the value of your project in one day. If the price doesn't rise, it will fall. A certain number of people (short-term traders) will sell it in exchange for coins that are rising faster. This selling will cause the price to fall, and when the price falls, more people (less sure people) will also sell, creating a downward spiral.
Now, people are losing money on your coin. Some people are going to complain, say bad things about you, call you a scam, and post their conspiracy theories on more social channels than you can monitor. Now, your reputation is damaged, and you’re spending all your energy managing negative PR instead of writing code.
Your new user acquisition rate drops due to the negative press. Hiring becomes difficult. People in the office start arguing about what went wrong and start blaming each other. And so on…
You also immediately have the task of taking the project valuation from $200 million to $400 million, which is not an easy task for most new projects.
Another option
Now compare this to another scenario. Let’s say your project is now worth $200M (or whatever you deem it to be worth), but you set your ICO valuation at $30M and sold 50% for $15M. (These are actual numbers from Binance at the time of their ICO. I think these are very good numbers by any measure for what we’ve committed to).
But if you’re thinking, “WTF, this is stupid, I lost $85 million in ICO funding and valuations,” then keep reading.
Of course, now everyone wants a piece of your ICO because of the low valuation. It's completely oversubscribed. Everyone is asking you for more allocations and you're saying, "Sorry, man, you'll have to buy it later on an exchange."
Your ICO is completed in 38 seconds (a real record for Binance’s last ICO). A day later, your coin starts trading and people flock to it. No one wants to sell, and the price soars. More traders are attracted to you than to other coins.
Now, you are the talk of the town. Everyone is talking about your project, and people are making Youtube videos analyzing how great your coin is. With all this free positive coverage, users are signing up for your service faster than you could have imagined. In a month or so, you are in the top 10 in the world. With the growth in users, your project is now worth $300 million, and your 49% stake is worth $150 million.
Now, most of your investors have made a ton of money, 10x in 2 months. You have a user base, a product, and active community support, and are ready to grow at a faster pace. Over time, you can slowly sell your holdings at a valuation of $300M or more.
Of course, if you still feel stingy, you can adjust/lower the ICO ratio by 50%. But I strongly recommend ICO ratios of 50% or higher. The whole point of an ICO is to get your investors to make money with you and build momentum!
There is one last bit of simple math to consider from an exchange perspective. If your coin has $30 million in circulation, and 80% of it is long-term holders. You only need to attract another $12 million in buyers to double your valuation. If your project has $300 million in circulating supply, you need to attract $120 million. If you look at the current volume on the top 10 exchanges, it's easy to squeeze $12 million out of other coins, while $120 million will take some effort.
So if you can prove that your coin can bring $120 million in new capital and new users to our exchange, we will be happy to list it. Otherwise, we will have to think carefully about listing your coin with a market cap of $300 million, especially if your coin is new and has no trading history.
Last night, when I explained these issues in detail, there was a feeling of "Oh, that makes sense, I didn't expect that" in the room. I think I succeeded in converting most people in the room from a "big and all ICO" to a "long-term growth" mentality. I hope I can do the same and it will make it easier for us to list your token.
