Blockchain and cryptocurrencies continue becoming more and more popular, and startups in this field appear almost every day. However, it’s not enough just to have an idea for the crypto business. Implementing the idea often requires a whole team, as well as a lot of time for coding, writing white paper, and testing. It’s a long run and the company needs funding to support the development. Many startups are fading into oblivion due to a lack of funding, so it’s important to think about finding sources in advance.
Bootstrapping is a great option as you don’t depend on anyone, but at the same time it is quite limited and risky since founders bet their assets for startup success. Taking a loan for a cryptocurrency startup can be a daunting task since it requires a lot of paper-work and previous cash flow. For most startups with no cash flow and only the idea, it may be difficult to get approved for loans. But there are other ways to raise funding that may help startups to become the next big thing.
Crowdfunding is one of the traditional ways to raise funds that can be both an excellent primary and secondary source of funding. Plus, crowdfunding can help with building a great community and finding an audience before the network launch.
Before starting a crowdfunding campaign, it is worth determining what kind of reward bakers will receive. For example, handwritten letters, mention on the startup’s website, early access to some product, or even percent of shares in the company. Managing the crowd may create certain difficulties, so this aspect should be thought out in advance.
With the right approach and the right idea, crowdfunding can help raise a significant amount of funds. Recently, the US regulator SEC even raised crowdfunding limits that can make it easier for crypto startups to raise funds and rely less on venture capital. However, major crowdfunding platforms such as Kickstarter and Indiegogo have a number of limitations. For example, crowdfunding campaigns are available only to residents of a limited number of countries, and fund projects also can only residents from particular countries. Plus, they’re not crypto-oriented, so cryptocurrency startups should also look at other crowdfunding platforms as well.
At first glance, ICO looks a lot like crowdfunding, but it still has a number of important differences. In an ICO, the startup creates tokens that crowdsale participants can exchange for cryptocurrency, usually Bitcoin or Ethereum. When a startup reaches its fundraising goals, the tokens are distributed to ICO participants. If a project didn’t reach it, participants should receive their funds back. These tokens are not shares, they can be used in the future to gain access to some features in the blockchain network or can be sold for a better price. That is why ICO participants are usually called investors, not backers like in crowdfunding.
Usually, regulators consider ICOs like IPO analog, so they should be regulated. But still, the legal framework regarding ICO is under discussion in many countries. That is why ICOs are banned in some countries or considered as selling unregistered securities. ICOs can bring tens of millions of dollars to a crypto startup, but it may create additional difficulties for the project if it falls out of favor with the regulator.
ICOs have helped many crypto startups in the early stages, but now this method of raising funds has not the best reputation. During the 2017 crypto boom, fraudsters used the ICO model to scam investors. There were a lot of fake projects that copied existing whitepapers, didn’t develop any blockchain networks, and did not return cryptocurrencies after fundraising regardless of the outcome.
Over time, the ICO idea evolved into IEO or Initial Exchange Offering. The main difference between IEO and ICO lies in accessibility. Anyone can participate in ICO, while IEO is only for users of a particular exchange. So it limits the potential audience but IEO seems more secure for users than ICO. Also, it simplifies the investments since users can, for example, purchase Ripple (XRP) and use it to buy startup tokens on the same platform. Crypto startups must be prepared for going through due diligence before asking for IEO because it is not in the exchange’s interest to issue dodgy tokens with zero potential.
Venture investment is one of the most popular ways to raise funds among tech startups, which include blockchain and crypto projects. Startups usually pitch their business idea to venture capital companies and angel investors to get seed funding. But in most cases, the idea is not enough and investors want to see “numbers”.
Before investing in a startup, investors try to investigate everything about the company: founders, team, business model, current startup’s financial situation, etc. There is even competition between startups for venture capital attention, so startups should be prepared for due diligence.
Venture capital companies usually invest in startups to get equity in the company. Startups should keep in mind that after fundraising venture investors get significant control over the startup and often influence its development. Therefore, if a startup wants to remain independent, then venture capital may not be the best choice. But if the implementation of the idea and finding a reliable source of capital comes to the fore, then venture funding becomes an excellent solution for startups.
Startups may not only concentrate on one way of raising funds, a lot depends on how big the idea behind the startup is and what has been done already. To evaluate a situation and make a decision, sometimes startups turn to various advisors who understand the industry, know use cases, and can help in finding potential clients and investors.