One of the areas of crypto space that lack complete clarity is large ICO fundraising hard caps.
The advantage to lower hard cap deals is a mix between avoiding massive sell pressure and riding the timing of community demand.
The problem with big raises is that if an ICO raises $200M, the is exactly $200M worth of sell pressure that investors will offload into the exchanges, or secondary markets, overtime. Furthermore, a lot of big raises do not distribute tokens for 1+ years, and by then the community has forgotten about the project.
The argument for big crypto raises is the teams say that it is the amount of funds needed to build the project. While this is a totally valid and reasonable claim, the project founders should definitely think of the consequences on the secondary market. Here are the risks of big $100M+ raises:
- Some of the investors are short-term and will sell the tokens once they’re released whether it’s at a profit or loss; they’re expecting a positive return instantly when it is trading.
- A lot of big raises do not distribute tokens for 1+ years. By then, there will be competitors and the community will expect much more from the project.
- If the token price does not perform well on the secondary project, it can be harder to recruit developers and the sentiment around the project may sour. Crypto is one of the few asset classes where the valuations are primarily first and foremost driven by waves of fans and the crowd. The liquidity for the token will also be hard without much buzz and demand for the project — which makes the foundation tokens harder to be worth anything.
The only alternative to a big raise that I see is to actually raise less money upfront but grow the community and demand for the token overtime so the foundation tokens can be used to fund the project, much like the Ethereum’s story. The ICO can be like like the “Series A & B” round, and if the project is successful, they can use their own foundation tokens to incentivize developers and fund the project’s larger roadmap.
If a project really relies on raising a large number, then the community’s expectations around technology development and adoption will be higher. One project that was particularly successful on all of these fronts was EOS. In my opinion, it’s best to leave some money on the table, and let the community determine a fair market cap valuation for the project.