ICOs can be an impressively effective funding mechanism. The basic trade-off is clear: people invest in projects they believe in, and receive tokens in exchange for their investment. Large ICO caps signal to investors that despite their high raises, they might have an even higher potential. But I think they are wrong. Here is why.
ICOs — Removing the Pain of Fundraising and Simplifying Investment
At this point, there seems to be no better way of securing funds while aligning incentives with an initial community than through an ICO, owing largely to the global investor pool curious to experiment in this new and exciting market. In fact, blockchain ICO projects have raised more than $7 Billion in the first half of 2018 and the number of ICO launches is growing at an astounding rate.
To investors, ICOs seem like a clear win: both the time-to-liquidity and above average returns are a significant and non-trivial improvement compared to conventional investing. When you can make an investment in a *solid* project at their ICO, and within 6 months receive an average of 2–3x return and liquidity, one can make few compelling arguments against such investments.
The Golden ICO Rule: Solid team, Ambitious Tech, Modest Caps
I stumbled upon Bitcoin and the blockchain space in 2013, and figured early that the fastest way of gaining an in-depth overview, was by putting skin in the game, and starting to work on some of the problems I was seeing. Thus, in 2014 I joined the NEM core team, led the business, community, and marketing efforts, and helped bootstrap the project from a mere bitcointalk post, to a global platform.
After leaving NEM, much of my focus shifted on supporting some of the world’s most ambitious blockchain teams through capital, connection and expertise — sharing some of the useful stuff I have learned at NEM. Each of these startups has brought home a valuable and sometimes painful lesson that had to be learned, yet a critical puzzle has been revealed in the process.
To the best of my knowledge, there are three things every ICO project needs to get right in order to successfully bootstrap. Bootstrapping however does not mean that it has succeeded, but rather that it has taken the first important step in the right direction. The three things are
- gather the right team
- build an ambitious technology people need
- raise a modest cap compared to your perceived value
The first two points are crucial and their importance cannot be overstated. Everything else depends on them. But the third one is new and counter-intuitive, hence much less appreciated. Overly large caps are perhaps the most common mistakes ICOs do, and it’s a worrying trend we’re seeing among ambitious ICO projects.
Beware of Perverse Incentives and Broken Token Economics
A useful way of viewing ICOs is as a first exercise in community acquisition. Thus the ideal ICO will set things up in such a way so as to attract a critical mass of its target audience.
Given the above incentives, ICOs are a potent force enabling more rapid and frictionless startup iterations. Yet one of the core premises of a high potential ICO is based on sound incentives and token economics. Should these be compromised, the ICO implodes, likely backfiring on investors.
Modest Caps: No Distractions
Large raises correlate strongly with market correction, and perhaps an even higher failure rate in the long term. Historically, the top performing blockchain startups have had modest ICO caps. Conversely, almost all large ICOs have undergone significant corrections once listed on exchanges. Usually, the larger the ICO, the larger the correction, a few going so far as to correct 90% of the price paid in the ICO.
One of the most important assets behind startups is their focus. When ICOs raise too much money from day one, much of the team’s focus can suddenly shift or simply be stolen away from building the product, to managing and reinvesting large amounts of raised capital, and losing the hunger for execution according the initial vision.
A useful heuristic would therefore be to not maximize the project value at the ICO, but rather intentionally limit the offer, filter for strategic and resourceful partners, and position it for significant long term growth.
Elrond, a Pragmatic Approach to Hypergrowth
There are lots of reasons why ICOs might fancy large cap raises, but there seems to be a high hidden cost to them. Should one maximize at ICO stage, here are a few things which would likely follow: immediate correction, bad PR, disappointed community, and a difficult path ahead. This is a cost that ultimately shifts attention from your technology and creates general distrust in your intentions.
But why not go with the better alternative? Set a reasonable target, raise a modest cap compared to your perceived value, then follow with the sale of a significant percentage of tokens. This is how you create high demand, which gives you the possibility of filtering contributors and align their strengths to your long-term interests.
At the same time, this can be seen as an incentive to select only the most excellent partners because, well, in the beginning there won’t be room for that many. It’s easy to see how network effects can kick in when you have gathered a large enough group of aligned resourceful partners to begin with.
When thinking about an ICO, this seems to me the most reasonable way to go. And yes, it’s also the way we’re approaching things at Elrond.
There will be challenges ahead, but we have committed to a long term roadmap. It is our goal to foster mass adoption under the guidance of the aforementioned principles. Our team is more focused, and the first version of our prototype is out. Our ICO and token metrics will follow.
Elrond is a complete rethinking of public blockchain architecture, solving scalability through adaptive state sharding, efficiency through secure proof of stake, and will enable EVM compliance by design. Elrond attempts to bring a 1000x improvement compared to current status quo, aiming for 10,000 TPS, low latency, and minimal fees.
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