Binance CEO: ICOs are not just good, but essential

Posted: 8 May 2018 6:40 pm
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Binance CEO Zhao Zhangpeng lays out a compelling case for freedom of ICOs.

ICOs are essential for the future, argued Binance CEO Zhao Zhangpeng in a lightly impassioned blog post. He might have a lot of reasons to feel strongly about the subject, with Binance getting its start on the back of an ICO (whose backers made a whopping return on investment), and also being dragged into a lawsuit by VC firm Sequoia Capital China after its talks with Binance fell through.

"Through my own experience, and watching hundreds of other projects at a close distance, I would say raising money through ICOs is about 100 times easier than through traditional VCs, if not more," he writes. "Now, imagine two otherwise identical locations, but one has 100 times more well-funded startups; what would their relative speed of technological advancement and economic development be? Which country will become wealthier over time? Which country will be able to collect 100 times more taxes over time? Which government will have more influence (more power) over time? For me, it is crystal clear but draw your own conclusions."

The main problem might be that ICOs are for cryptocurrency only, which has seen a lot of new projects tack on unnecessary coins as part of a fundraiser rather than go through the pains of VC fundraising.

He points to the difficulty of courting traditional venture capitalists, and spending six months devoting all one's efforts to a $150,000 angel investment accompanied by "totalitarian terms that essentially gives them absolute power and ownership of your company", compared to banging out an "awesome whitepaper about your passionate dream project and raising US$20M in 10 days, from thousands of people around the world who understand your vision, use your product as soon as it is launched, spend all day beta testing your product, or discuss with you about new neat (and sometimes useless) features that you haven’t thought about."

On the other side of the fence, he also pointed at the near impossibility of an everyday investor getting involved in a VC fundraising round. The threshold, he points out, is often millions of dollars. And even if someone is rich enough to splash that kind of money out, the company often won't take one's money directly because they are being courted by a VC fund. And because that aspiring company might get hit with vindictive-seeming lawsuits if they so much as breath in the wrong direction while the VC fund mulls it over on someone else's dime.

"Of course, you can TRY to give your money to a famous VC investor," Zhangpeng writes, "if you meet their minimum threshold for investing, which is often a few million dollars. And you are ok with them taking a 2% management fee annually. And, you are ok with not having a say in what projects they invest in. Oh, and you are ok with waiting for eight years to see how the fund does. How many eight years do you have in your life? How many VC do you know or trust? Do you really want to pay for their business class tickets and 5-star hotels?"

The cons

It's not perfect though, he concedes.

One study has reckoned that about 80% of ICO attempts are scams, but most are caught before they get too far. Another has pegged the one year ICO survival rate below 50%.

The scams, he says, are problems to be solved.

"You can’t make advancements without encountering problems. Properly dealing with issues is how progress is made."

"I still receive phone calls and SMS telling me I won a grand prize, but I need to make a bank transfer to someone first. Does that mean we should stop using phones, SMS, and banks? The same law enforcement dealing with scams in traditional industries still apply in new industries. We don’t need to re-invent the wheel here."

On the low ICO survival rate, he argued that it's just the nature of the new business beast. ICOs might even have an advantage here, he suggests, because they tend to research projects a lot more thoroughly than VCs and are simply more knowledgeable and experienced in the space.

"I find the vast majority of 'professional VCs' have no clue about the projects or field they invest in. Many of them have zero startup experience and don’t even have a basic understanding of the technologies involved their fields. Many VCs don’t use the products of the companies they invest in. They look at hundreds of projects, across a variety of industries, spends most of their time negotiating with entrepreneurs, while staying at five-star hotels and fly business all day long. Today, there are probably more of these 'professional VC funds' than there are startups."

Overall, he argues, ICOs have a significant upper hand because they are better for the founders, better for the investors and can raise more funds to offset their weaknesses. If a founder is weak in marketing skills, for example, they can better hire the talent they need rather than dedicate even more time and effort to it.

ICO regulations have been much more of a sticking point for regulators than other aspects of cryptocurrency. The downsides to innovation are already on show in the USA where countless startups are holding their breath and waiting for more regulatory clarity before starting token sales.

The post ends by pointing out that VCs are now investing in ICOs, which should clearly indicate which way the wind is blowing, and saying that "many other large organizations who are responsible for economic development and public wealth are not as nimble". The timing of the post might not be a coincidence, with Zhangpeng recently returned from Bermuda, where he praised the forward thinking regulators and the lawsuit from Sequoia still developing.

You can find his full blog post here.

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, BTC, NANO

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