Your ICO is Raising Too Much Money
The words “you’re trying to raise too much money in your ICO” are almost guaranteed to result in shocked silence, often accompanied by a click on the other side of the line.
But I find myself uttering this forbidden phrase with increasing frequency.
Last year, G3 Partners started supporting companies with token sales. Our first was ICON, a smash hit with grand ambitions.
They’d already developed their own interchain technology to support their vision to hyperconnect the world. They’d assembled a team of 150 people. And more than 40 companies had put their tech into use. That was all before their token sale.
Since then, crypto pundits have dubbed ICON the “Ethereum of Korea”, the company has announced an acceleration program for ICON dApp developers, and they’ve inked an agreement with the likes of LINE that could net them 200 million users.
ICON raised the Ether equivalent of $42 million and their public sale lasted all of six hours. Could ICON have raised more? Absolutely. But their CSO, Min Kim, has candidly and publicly stated many times that they felt $42 million was exactly what they needed in order to achieve their big dreams.
I want my piece of the $13 billion opportunity!
Now everyone is trying to do an ICO, a reverse ICO, a TGE or find some other way to connect their companies to the blockchain and raise cash in the meantime. Token sales have raised a collective $13 billion in Q1 of this year, with half of that coming in March alone.
While there are certainly quite a few companies raising realistic sums through token sales, the tendency seems to be toward setting hard caps several orders of magnitude higher than what they’d be able to raise through VC funding.
Moonshots make sense to some degree
Companies with ERC20 tokens have to contend with high usage fees and the high volatility of fiat currency exchange rates. Salaries still have to be paid in cash, after all. And perhaps most enticingly, there’s the fact that uninformed investors and pump-and-dump speculators are willing to throw money behind these projects.
If people are willing to put in the money, why are high hard caps so bad?
By trying to raise too much money companies:
- Are harming their credibility with legitimate investors and potentially cutting off sources of even bigger funding in the future. (VCs I’ve spoken to are bullish on blockchain overall, but extremely wary of companies raising more money than they could possibly need, based on their roadmaps.)
- Set themselves up to disappoint the throngs of supporters on reddit and Telegram who helped fuel the growth. As these people become increasingly savvy, raising high hard caps will become more difficult.
- And most damningly, they may be permanently crippling their ability to increase the value of their tokens. “If the network is flooded with tokens that don’t have a purpose because the hard cap is too high, the value of the coin will become diluted, causing a drop in the integrity and value of the network.” (FintechFans)
Don’t forget to build a product that actually works
Perhaps worst of all, if companies raise too much money, they remove their profit motive, making it more likely that they’ll just flounder on, endlessly adding features, rather than getting an MVP up and running and creating something truly useful. (I’ve worked with a few companies that created great products, got funded, and then failed due to lack of focus.)
I predict several Theranos style blow ups in the blockchain community, where mountainous expectations obscure miniscule achievements.
At G3, we’re being very careful about the projects we take on. I recently made a video covering the five criteria we use to evaluate blockchain projects: Validity, Breadth, Differentiation, Track Record and Feasibility. We typically assess these criteria well after the white paper is written and companies have decided on their token allocations, so let me offer some up-front ideas on setting a hard cap.
Hard caps and hard choices
- Make sure that every ETH, EOS or BTC you raise is tied to a specific milestone on your roadmap.
- Make sure that the amount to achieve each milestone is realistic.
- Don’t try to raise five years worth of runway. If you’re not supplementing your runway with revenue within 18 months, you’ve almost certainly failed.
When done right, token sales can truly democratize fundraising, allowing people to own a piece of the companies whose products and services they’ll use. They can also do quite well in the financial long-run. ICON’s market cap is now over $1 billion. But done irresponsibly, ICOs just cultivate more fear, uncertainty and doubt. And everybody hates FUD.