What are the best ways to secure funding for your blockchain startup?

Blockchain operates according to its distinct set of principles.

In the realm of blockchain, a unique set of rules governs the landscape. Decentralization, where services are not reliant on a single entity but operate within a peer-to-peer network, brings forth a paradigm where supply and demand dictate outcomes. Unlike centralized solutions with top-down decision-making, blockchain's transaction fees, token prices, and network trustworthiness are determined by the market, introducing novel uncertainties and surprises previously unseen in traditional systems.

Consequently, just as developing applications on the blockchain necessitates new design patterns, fundraising in a blockchain startup and the underlying incentive layer demand fresh approaches.

For instance, if a project receives funding in the form of cryptocurrency or obtains essential liquidity to bootstrap its multi-sided applications, it must devise a risk management plan. This plan should address how the startup will handle potential fluctuations in the value of the cryptocurrency, which can often be volatile. Furthermore, storing cryptocurrency differs fundamentally from handling fiat funds. Keeping it on exchanges or in a hot wallet (a wallet connected to the internet) exposes the startup to the risk of hacking. On the other hand, managing a startup's cold wallet, such as Ledger or paper forms (disconnected from the internet), poses a distinct set of infrastructural challenges that the team needs to address or seek the assistance of custody services like Coinbase Custody.
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In this new environment, how do you secure funding to nurture an idea and transform it into a fully-fledged product?

When it comes to funding, all the familiar concepts are still relevant: crowdfunding, angel investments, venture capital funding, incubators, and accelerators are all viable methods that startup founders can leverage. Some of these funding avenues have adapted to the blockchain space, while others have remained largely unchanged. Additionally, the spectrum of approaches is expanded by blockchain-specific funding methods like DAOs (Decentralized Autonomous Organizations). In the following guide, we aim to provide you with valuable insights on how to effectively engage with each of these funding methods.
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Investment funds

The remarkable expansion of the blockchain industry is closely intertwined with the influx of venture capital and hedge fund investments. As reported by Crypto Fund Research, there are currently 804 blockchain investment funds in operation, and the assets under their management have surged from $190 million in 2016 to an impressive $21 billion in 2020. Consequently, the opportunities for startups to secure funding from investment funds have expanded significantly compared to four years ago.

What factors should you be mindful of?

1. Identify Potential Investors: Analyze an investment fund's existing portfolio to determine if it aligns with your startup's goals and development stage. Consider whether the fund has a history of supporting blockchain technology and if your project fits within its thematic focus. Matching your project to the right investor increases your chances of success.

2. Climb the Ladder: Be prepared for the hierarchical structure of investment funds. You may need to start with an analyst and work your way up to a conversation with a partner. Each interaction is crucial, so ensure your pitch is well-crafted and compelling at every level.

3. Educate Yourself on Term Sheets: Term sheets are critical documents in investment discussions as they outline the foundations of a deal. Familiarize yourself with the content of a term sheet, including investment amount, company valuation, and the proposed ownership structure for your startup. Understanding these details will empower you to negotiate effectively and make informed decisions.

Angel Investors

In the last decade, angel investors have risen to prominence in the startup landscape. Often involved in the seed stage, which marks the initial official funding round, these individuals use their funds to support startups, seeking high-risk, high-reward opportunities. The blockchain sector has not been immune to this trend, as blockchain angel investors' activity has witnessed significant growth. According to a report by CB Insights, the deal count in the blockchain space more than doubled between 2015 and 2019, reflecting the increasing interest and investment from angel investors in this innovative technology.

What factors should you be mindful of?

1. Locating angel investors and initiating contact can be accomplished through various means, such as utilizing online resources like AngelList or networking within relevant communities. It is advisable to target angels whose investment portfolio aligns well with the nature of your blockchain startup, maximizing the potential benefits for both parties.

2. Understanding the needs and expectations of potential angel investors is crucial. Engaging in open and transparent communication will help ensure that both party's visions are aligned from the outset. Be prepared to discuss anticipated returns and the timeline for achieving them. Additionally, inquire about the investor's preferred investment amount and their envisioned level of involvement post-investment.

3. Flexibility is key when dealing with individual angel investors. Each interaction and negotiation may differ significantly, and being adaptable and receptive to varying approaches will facilitate smoother and more productive engagements throughout the investment process.

Blockchain incubators and accelerators

Blockchain incubators and accelerators can prove immensely beneficial to startups, regardless of whether they are in the ideation phase or have already developed a minimum viable product (MVP). These programs extend far beyond merely providing financial support. While direct funding from an accelerator or incubator is valuable, the real advantage lies in the comprehensive support and resources they offer.

Participating in these programs grants access to invaluable mentorship, particularly valuable when navigating the uncharted waters of the blockchain industry. The guidance and insights provided by experienced mentors can prove instrumental in steering a blockchain startup toward success.

What factors should you be mindful of?

1. To embark on a successful journey with blockchain incubators and accelerators, startups must begin by actively seeking and researching suitable programs. The blockchain landscape is constantly evolving, presenting new opportunities regularly. While platforms like "incubator lists" can aid in identifying active programs, it is incumbent upon startups to determine whether their project aligns with a particular program's objectives.

   Differentiating between incubators and accelerators is crucial in finding the right fit. Incubators are ideal for startups with promising ideas that require further structuring and refinement. On the other hand, accelerators typically demand more advanced projects with a clear timeline for product development and market readiness.

2. When applying to these esteemed programs, meticulous preparation is essential. Perfecting the pitch, anticipating challenging questions, and researching the program's distinctive philosophy are prerequisites for a compelling application. Additionally, studying the profiles of past program graduates provides valuable insights into the type of startups that the program favors.

3. Once accepted into an incubator or accelerator, it's time to immerse oneself fully in the experience. These programs offer an array of benefits for ambitious founders, including networking opportunities, establishing connections with seasoned advisors, gaining valuable skills, and receiving constructive feedback on post-program strategies. Maximizing these resources is paramount to unlocking the full potential of the startup's growth and success.

Crowdfunding

As mentioned earlier, blockchain projects have access to conventional funding tools used in various industries. However, they also possess the ability to infuse distinctive elements into their funding strategies, resulting in novel and innovative approaches. ‍

What factors should you be mindful of?

1. Identify the suitable model. Although reward-based crowdfunding remains the most prevalent, with platforms like Kickstarter leading the way, other models such as equity-based and debt-based crowdfunding also exist. It is crucial to explore and understand the characteristics and suitability of each type. The European Commission provides an in-depth guide covering these various models, aiding you in making an informed decision.

2. Build a vibrant community. In the realm of decentralized blockchains, the power of communities is paramount, especially during crowdfunding endeavours. Your ability to rally the crowd and captivate them with your vision is key to success. Unlike traditional PR tactics, organic marketing and direct communication through platforms like Discord or Telegram are instrumental in engaging and exciting your community throughout the project's journey.

3. Define your deliverables. As your investors are not a singular entity, their expectations may vary significantly. To avoid misunderstandings and foster trust with your backers, it is essential to specify the product you intend to deliver. Transparency with your community not only mitigates potential risks but also strengthens the bond between you and your supporters.

Decentralized Autonomous Organization (DAO)

Similar to Security Token Offerings (STOs), the concept of DAO-based startup funding holds immense potential yet to be fully realized. Envision a decentralized investment fund where investors become smart contract participants, and their voting rights, such as selecting projects for funding, are directly proportional to their investment amounts. This idea gained significant attention in 2016 with the advent of The DAO. However, a subsequent hacking incident and its subsequent dissolution cast a shadow over the viability of an operational, investment-focused DAO.

Nonetheless, the concept of DAO-based funding persisted, and recent developments, such as the launch of The LAO, have reignited the possibilities within the realm of for-profit DAOs. As the technology and governance structures evolve, the world of decentralized autonomous organizations may still hold numerous opportunities for innovative and investor-driven funding mechanisms.

What factors should you be mindful of?

1. Before seeking DAO funding, conducting thorough due diligence is imperative. Understand the decentralized nature of decision-making processes within the organization and carefully consider the legal implications associated with receiving investment from a DAO. It is crucial to recognize that DAOs can vary significantly on the decentralization spectrum. In recent years, some entities claiming to be investment DAOs have emerged, but their structure more closely resembles centralized funds with limited community involvement.

2. To increase your chances of securing funding, actively engage with the DAO community. Since all participants are potential investors, immersing yourself in the community and establishing organic excitement around your startup can significantly enhance your prospects of successful funding through decentralized means. Building a strong rapport with the community demonstrates your commitment and vision, which can be instrumental in gaining support and funding from the DAO ecosystem.‍

Each of the funding methods discussed above fulfills distinct needs presents unique challenges and should be carefully considered when seeking financial support. As in any technology-driven industry, discovering funding opportunities requires a creative and innovative approach, and this is particularly true in the blockchain space. The ever-evolving nature of blockchain technology opens up new avenues for funding, making it an exciting and dynamic landscape for startups and entrepreneurs to explore. By staying informed, adaptable, and open to embracing novel funding mechanisms, blockchain projects can position themselves for success in this rapidly evolving sector.

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