Venture Capital Funding in Blockchain and Crypto Projects

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Introduction

Capital is key for any business to take off, be it a traditional form of business or businesses built on emerging technologies. Blockchain and crypto startups have available several fundraising methods ranging from traditional Venture Capital funding to the decentralized model of fundraising such as Initial Coin Offering (ICOs), Security Token Offerings (STOs), Initial Exchange Offerings (IEOs), Initial DEX Offerings (IDOs), etc. ICO is the most common fundraising method in the blockchain space. With about 875 projects raising approximately US$6.3 billion in the year 2017, while $19.2 billion was raised in 2018. Despite the huge success of ICOs in 2017 and the early part of 2018, this mode of fundraising faced a downward slide in the later part of 2018 because of fraudulent activities, which the crypto community now refers to as crypto winter. The need to regulate ICOs and protect investors who want to invest in crypto-based projects from fraudsters in the blockchain space saw the birth of STOs. STO is a more regulated process of raising funds in the blockchain space and it also created awareness to the public on ICOs and its shortcomings. An ICO is essentially an unregulated tool used to raise funds for blockchain or crypto-based projects. The shortcomings of ICOs had given rise to STOs and IEOs. IEOs are ICOs with a new layer of intervention and regulation that attempts to ensure value and mitigate risks for participants. STOs, on the other hand, have such a high barrier (must be accredited by Security Exchange Commission) for investors to participate in that they are not a viable option for fundraising.

What is Venture Capital?

Venture capital is a form of private equity financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from wealthy investors, investment institutions such as investment banks or other financial institutions. This type of funding does not always take monetary form, it can also be provided in the form of technical or managerial expertise. Venture capital is provided in the interest of generating a return on investment (ROI) through an eventual exit such as a Merger and Acquisition (M&A), or Initial Public Offering (IPO) of the company.

Origin of Venture Capital

The origin of Venture capital can be traced back to the 19th century, Venture Capital only developed as an industry after the Second World War ( WWII). Georges Doriot is considered the "Father of Venture Capital". In 1946 he founded American Research and Development Corporation (ARDC) he raised a $3.5 million fund to invest in companies that commercialized technologies developed during WWII. ARDC's first investment was in a company that had ambitions to use X-ray technology for cancer treatment. The $200,000 that Doriot invested turned into $1.8 million at the exit stage when the company went public in 1955.

How it Works

Start-up seeking to raise venture capital is required to make a research for VCs after which they submit a business plan. The business plan does not necessarily need to be bulky but should be clear about the business. If interested, the VC or angel investor also performs due diligence, which includes;

a thorough background check of the company's business model,
products,
management (team)
operating history etc

After due diligence by the VC, parties (investor and entrepreneur/founder) then negotiate the investment deal.

Venture Capital in Blockchain and Crypto Projects

Venture capital financing is not limited to traditional businesses. The rise of awareness in crypto-assets has given many VCs a new opportunity to reinvent VC financing by leveraging the ICO fundraising model and incorporating it into traditional VC models of financing.

Types of Venture Capital Funds in Blockchain and Crypto Projects

The rapid growth of the crypto market has awakened the interest of Venture Capitalists in blockchain and crypto projects. The new opportunities opened with significant liquidity and financial flexibility offered by crypto-assets. Venture Capitalists (VCs) are gradually diversifying their portfolios by creating hybrid funding models or launching crypto-centric funds to directly invest in blockchain start-ups, crypto projects etc. These new hybrid funding models are;

Crypto-Funds
Crypto Fund of Funds (FOFs)
Tokenized Venture Funds
Reversed ICOs

Crypto Fund

VCs raise a pool of capital from investors and establish a separate fund (crypto fund) to invest in a blockchain start-up’s equity and, or crypto-assets. These investments may include:

Crypto-assets purchased on a secondary market,
Crypto-assets purchased in a pre-sale or ICO sale and,
Blockchain tech start-up equity.

The crypto fund can invest in one or more of the above-mentioned projects. This investment process involves setting up a separate fund or raising capital from investors which included accredited investors, fund of funds or other investors who are comfortable with investing in the crypto space.

Tokenized Venture Fund

A tokenized venture fund is also known as a ‘tokenized fund’.This is a newly-created funding structure that takes the ICO model and applies it to the ownership structure of the fund. It enables the venture capital fund to launch its own tokenized securities offering to raise funds from a larger pool of investors and investors in the fund in return can trade their equity tokens of the fund on a crypto-exchange as soon as the tokens are listed. The rationale behind a tokenized fund is to provide liquidity for investors and eliminate long-term capital commitments.

Reverse ICOs

VCs also exploit the liquidity of cryptocurrencies as a means of exit for venture capital investments that is rather than waiting for the start-up to mature to the stage that it can go public through an IPO (Initial Public Offering) or other conventional exit strategies, VCs may engage in ‘reverse ICOs’ to help them get a faster return, and the funds can be reinvested into another crypto project. An example of a VC that has explored this method is KiK.

Fund of Funds

This type of financing, a venture capital fund sets up a crypto-fund to invest in other crypto-specific funds. This allows for greater diversification of risk by investing in multiple funds simultaneously an example is the Union Square Ventures (USV) that has invested in six crypto funds. Although some VC firms have taken illiquid assets and issued tradable crypto-assets that give investors rights in these assets (“asset-backed tokens”), others have raised capital for tokens which provide its investors with rights to a portfolio of VC backed companies or real estate while some crypto firms have started venture capital arms, focusing mainly on projects relating to blockchain technology and crypto-assets.

What VCs Look out for in Blockchain and Crypto Startups Before They Consider Funding

VCs lookout for the following in blockchain or crypto projects before funding. Blockchain startups and/or entrepreneurs are encouraged to work on these points before pitching VCs

Solutions: VCs look at the real-life problem the project intends to solve, not an imaginary one.
Team: They look at the key team members background, experience and reputation. They would want to find out if the team was formed a few months ago without any relevant experience to the blockchain or project or have they been working on the project for a long time and have relevant experience?
Community and Institutional Support: VCs check out the crypto community such as Github, BitcoinTalk, Telegram, etc to see whether the project is supported or criticized by the community. If the project’s community on Telegram or Github is showing no development progress, dead or closed, the blockchain project most likely has failed or will to do so within a short while. If the project is designed to create solutions for example, in the power sector, VCs will look out for institutions in the power sector that are in support of the project.
The Technology and Project: It is highly recommended that startups understand the technology behind the project. How feasible it is. If it is innovative? Is blockchain necessary for the project? There are many projects in the market that try to solve a problem where blockchain is not needed. VC investment in such projects may not happen. VCS may also ask if the team already have a minimum viable product and what stage is the development of the product?
Investors and Network Investors would want to know Who is backing the project? If they are Friends, family, institutions? Do the founders or entrepreneurs have their own money in there? Who’s talking about this project, and where? Telegram, LinkedIn, Facebook, press and news sources, etc.
Viability of The Business: is the business viable? Is it capable of meeting their expected Return of Investment (ROI)?
Market Opportunities: The size of the market, the number of customers willing to use the product and also pay for it.
Market Strategy and Cost: How the entrepreneurs intend to break into the market and the cost implication of entering the market.

These and many more are what the VCs look out for before they stake their funds.

CONCLUSION

Although fundraising is a necessity for blockchain and crypto startups, the channel employed by the entrepreneur or founder determines the sustainability and success of the business. ICOs may be a faster way of raising funds, but does not guarantee the sustainable growth of a blockchain project while VC process of raising fund may be slow because of what the VCs need to investigate before they commence the funding deal, it provides long term investment and success in the growth of the project. Here is a list of blockchain VC firms that may interest you. Feel free to check up on us in our Telegram Group or our Telegram Channel if you have questions. We look forward to engaging you. You're also welcome to interact directly with the FINT Team. Join our Telegram Group: https://t.me/FINTConsulting or our Telegram Channel: https://t.me/FINTChannel. See you there. DISCLAIMER: This article is written for educational purposes only and should not be construed as legal advice. Consult a lawyer for tailored legal advice.

Marketing for Blockchain and Cryptocurrency Projects

Starting a blockchain business or project usually begins with a great idea. Thanks to the blockchain technology, a lot of traditional industries are joining the revolution. New businesses are being born, and new projects are shaping the way information is stored or used. But wait a minute, after starting the great idea what happens? Most blockchain-based products die out because they leave out marketing. The place of marketing in any business cannot be overemphasized. The error most tech-savvy startups make is that they ignore the potency of marketing. Although a traditional industry, marketing has experienced a lot of changes over the years, and it still plays a huge role in the success of any business or project. We will be looking at the potholes blockchain businesses are likely to get into when it comes to marking. Also, we shall take a look at the various marketing strategies blockchain and cryptocurrency projects and startups can adopt. Why Blockchain Projects Get Lost in the Marketing Maze One of the biggest mistakes some blockchain and cryptocurrency businesses and startups make is to assume that their big idea will wow the market. Great! You have a great idea to revolutionize the market, but how do you plan to convince the people that your product is better than what they have been used to? As a result, a lot of project launch into the market with just great ideas and no marketing strategy In the same vein, the ICO mentality has affected a lot of projects when it comes to marketing in the crypto and blockchain space. During the ICO boom of 2017 and 2018, it was not uncommon to see an ICO project launch a website, carry out loads of press releases, and then fade away. Some of the mistakes blockchain and crypto-based startups and projects are likely to make include; Not Carrying out a Proper Research Most projects are just great ideas for solving problems where there is a working solution. So, there is no real market. Going about Branding the Wrong Way The ICO mentality has affected a lot of projects and businesses. To some, all that is needed for a successful business is a website, a logo, a blog post, and social media promotions. But branding goes way beyond that. Starting Too Late It is not surprising to see a lot of projects put off marketing until their next product is released. One lesson we can learn from Dan Larimer the CTO of Block.One, the company in charge of EOS is marketing even when the product isn’t on the ground. Voice, a social media platform based on EOS is yet to be launched, but a lot of branding is ongoing. Ignoring the Need for Marketing While some crypto startups feel that hiring a PR firm will solve all their woes, others ignore it totally. Some projects would instead focus on building a community on Telegram or Reddit than taking dedicated efforts to brand and marketing. The Potency of a Marketing Strategy for Your Startup So, we now know the errors most businesses make when it comes to blockchain marketing. However, there is more to it than knowing your faults. What exactly is marketing, and why does your crypto-based project need it? Marketing goes beyond advertising. Although the term ‘marketing’ makes it seem like it is restricted to just getting sales. Marketing encompasses everything from branding to sales. The four Ps of marketing are Product, price, place, and promotion. However, most blockchain projects focus more on promotions than on product. So, what exactly can a cryptocurrency startup focus on Product instead of promotions? After you successfully convert that great idea into a product, you are expecting to make sales right. Marketing follows the following steps; Awareness: first, you have to bring your products to the knowledge of your potential customers or users. Consideration: Even after getting your product out there, your potential customer has to consider utilizing your platform, product, or solution. Trials: Now that they have considered your product, they will undoubtedly want to give it a trial. Now, no matter how great your marketing strategy is, you must have an equally great product. Loyalty: Loyal customers are one of the most critical assets of any business. The aim of all your marketing strategy is not just to bring in new customers but to also ensure that existing customers remain loyal to the brand. Therefore to make sales, a cryptocurrency business has to pay attention to branding. Branding includes everything from the company’s logo to the public image of the company. And this is why it is vital to have a strategy. Branding Lessons from Binance When it comes to successful brands, Binance should be somewhere at the top. One of the largest cryptocurrency exchanges in the world, Binance has grown from a China-based exchange to a global brand. What did they do differently? Build a Great Product: Binance had a great exchange, and its features for ak for the company. The Binance exchange is easy to use, and its discount on its native token, BnB, makes it an attractive option. Also, binance is always creating additions to its products. Have a Brand Story: Binance has a brand story that most users can relate to. Changpeng Zhao the CEO of Binance always reflects the brand story, and this is reflected in the brand goals. Binance is among the first exchanges that partnered with an African country as the company spreads crypto education across the globe. Build a community: Binance has successfully built a community of loyal customers. The exchange even holds competition within its community. It celebrated its two year anniversary by asking that its community members participated in a video competition. Target Specific Markets: binance recently launched its crypto lending solution on its platform. The exchange also launched its futures trading. All its products reflect user experience. That is to say, the company addresses the feedback it gets from its community and transforms them into solutions. Conclusion One take-home lesson for cryptocurrency and blockchain projects and businesses when it comes to marketing is ‘focus on branding.’ While it is essential to focus on your visual identity, building a brand that can speak for itself goes beyond what publicity and press releases can do. Also, while creating your brand, it is crucial to make sure it is unique to you. You may want to consider taking action toward protecting your brand’s intellectual properties. Finally, now that the excitement of the blockchain is waning off, people are looking forward to real solutions. Blockchain and cryptocurrency projects cannot afford to overlook marketing at this time. Feel free to check up on us in our Telegram Group or our Telegram Channel if you have questions. We look forward to engaging you. You're also welcome to interact directly with the FINT Team. Join our Telegram Group: https://t.me/FINTConsulting or our Telegram Channel: https://t.me/FINTChannel. See you there. DISCLAIMER: This article is written for educational purposes only and should not be construed as legal advice. Consult a lawyer for tailored legal advice.

Tag - blockchain Business