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08Nov

Venture Capital Funding in Blockchain and Crypto Projects

Image Source: Stevepb from Pixabay [lwptoc]

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;
  1. Crypto-Funds 
  2. Crypto Fund  of Funds (FOFs)
  3. Tokenized Venture Funds 
  4. 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: 
  1. Crypto-assets purchased on a secondary market,
  2.  Crypto-assets purchased in a pre-sale or ICO sale  and, 
  3.  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
  1. Solutions: VCs look at the real-life problem the project intends to solve, not an imaginary one.
  2. 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?
  3. 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. 
  4. 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?
  5. 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.
  6. Viability of The Business: is the business viable? Is it capable of meeting their expected Return of Investment (ROI)?
  7. Market Opportunities: The size of the market, the number of customers willing to use the product and also pay for it. 
  8. 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.
By Blockchain Project, Venture Capital, , , 0 Comments
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11Oct

10 Things to Know Before Starting or Joining a Blockchain or Crypto Project

Featured Image Source: MyTechDecision [lwptoc numeration="none"]

Introduction

These days blockchain and crypto is all the rage. Everyone from individuals, organizations and even governments are in a race to build the chain to rule them all. Perhaps, the best part is that decentralization has somewhat leveled the playing field, meaning even your dog can partner with you to save the world. A market projected to reach $2.3 billion by 2021 is not one to ignore. As usual, courageous entrepreneurs are entering the decentralized space with the 'next big idea' they desire to actualize, for the use of humanity and other species. Some already have some experience starting or working for traditional startups which were either bootstrapped or venture-backed. Alternative (IXO) and faster fundraising methods like ICO (Initial Coin Offering), STO (Security Token Offering), DAICO (Decentralized Autonomous Organization + ICO), etc have made it easier for entrepreneurs with even just an idea, to raise millions in a few minutes, days or weeks. However, this article is not about analyzing this fundraising route. Our focus in this article is giving you a rundown of what anyone interested in blockchain business development (BBD) should tick off their list before starting a project in the space. Let's dive in!

1. Global By Default

This is the first point of discussion because it is the first thing you recognize when you get involved in blockchain and crypto. Traditional businesses follow the classical route of starting small and then expanding as they grow, from one city to the next, from one country to the next.  For blockchain and crypto projects, even where the beginning is small, the reach is fundamentally global. In fact, blockchain founders incorporate the distributed feature of the blockchain into building their teams. Thus you’ll find that the graphic designer could be in Japan, the chief technical officer in Turkey, with the chief financial officer in Nigeria. Unfortunately, this global and distributed feature does not reflect on a gender scale. It's a known fact that the tech space is bro-dominated. The situation is worse in the blockchain and crypto space. Initially, when I got into the space in 2017, I could count on one hand females I found at events. Over time, the number increased, but still nowhere near 20% of all attendees at current events.

2. Read the Bitcoin White Paper

You are not a true believer in the space until you have read the Decentralized Bible: Satoshi Nakamoto's Bitcoin white paper. Preferably, you should read it more than once. Unless you have a tech background, chances are, like me, a major part of your first reading will feel like ancient Greek to you. But read again, and again, and again. After a while, the pieces will begin to fall into place.

3. What is Blockchain?

Anyone looking to start a project in the space must be ready to answer this question a zillion times with their own informed definition. Lip syncing another's definition just goes to show you have little understanding about what you are doing. Here's my own personal introduction to blockchain. There are tons of free online courses and other materials to help you get started.  Closely related to this question is answering for yourself the question of whether your project truly needs a blockchain? Majority of blockchain entrepreneurs simply want to ride on the blockchain hype wave, when their solutions can be implemented without a blockchain. 

4. Never Ending - 24/7

In the blockchain and crypto space, it is a never-ending market and work cycle. The fact that the space is global contributes to this. By the time you are rising in the morning, half of the crypto world has been awake for hours. So, expect to find tons of messages waiting for you at work. Moreover, the never-ending cycle runs faster than the traditional world thanks to speculation in the most volatile market in the world. Within 24hours, bitcoin could go from $8,000 to $11,000 and down to $5,000. That's how hyper-volatile and fast, time runs in the decentralized space.

5. New Business Models

Blockchain on its own is a new business model. The particular act of removing the middleman means Bob and Alice can transact together, faster and cheaper since it doesn’t go through a third party. In a traditional business model, this is usually not the case. There are several new business models being adopted in the decentralized space. Most popular, or if you will, saturated, is the utility token model. This can be used in various ways like crowdfunding for a blockchain startup, customer or employee rewards and means of gaining access to the company’s products and services. There are other models like blockchain as a service (BaaS), network fees, blockchain development platforms and blockchain professional services. I will expand more on blockchain business models in a future article.

6. Build for the Masses and Not the Techies

Unless you're a technical engineer, I bet you have no idea how your WiFi works. But of course, to get online, all you have to do is tap on the WiFi icon somewhere on your screen and perhaps enter a short password. You have zero interest in the technical details.  This same scenario, translated in blockchain and crypto will not be so simple. First, you will probably need to generate a key from your device, to be matched with a key stored on the WiFi device. Then, you might need to set up a network port, so that traffic to and from your device is properly routed. By now, you're probably already losing interest. Unfortunately, this is the average reaction of new users when they encounter blockchain and crypto solutions.  At the moment, 90% of solutions in the crypto space, including the grandfather of them all, bitcoin, are used by mostly techies. Totally explains why the first wave of people in the space was of course techies, more specifically mathematicians, cryptographers and gamers. But if you have read the bitcoin whitepaper, Satoshi's real aim was to bring financial freedom to the masses while bypassing the government. So, until blockchain and crypto projects start building for the masses and not the techies, mass adoption will continue to be a mirage.

7. Competitors are Middlemen

Virtually all blockchain businesses base the foundations of the solutions they offer on eliminating the middlemen, namely the governments, banks and those with uncensored authority. It follows that the real competitors of blockchain businesses are not even similar projects, but the middleman sought to be removed. On the other side of the coin, the so-called middlemen could also leverage blockchain to upgrade their service offerings since they are in the best position to understand the nuances of all stakeholders in multi-party transactions.

8. Must Not Code But Must Get Technical

This is especially crucial if you intend to be a founder/ entrepreneur. While it is not required that you bother with writing a line of code when you can hire programmers, it is important that your understanding of the technical aspects relating to your blockchain business idea is not shallow. Covering the basics and more will enable you to tackle questions thrown at you (by users and investors) eloquently.  This knowledge will come in handy when making decisions on what blockchain platform to build on, what features your solution should have, how to handle data integration issues, etc. Perhaps a positive downside to this is that the process of getting your bases covered could lead you down the infamous blockchain rabbit hole. More than any other tech industry, blockchain has an overabundance of available resources. 

9. Adopt New Digital Tools

While previously you were familiar with just Slack, WhatsApp, LinkedIn and Twitter. Blockchain and crypto folks spend their time on Discord, Telegram and Steemit. Fortunately, they work similar to what you’re already familiar with, so worries there. In the startup world, users are able to directly interact with founders. For blockchain and crypto founders, the accountability bar is higher, although they could be pseudonymous. Founders in the space can expect to be summoned to a social hearing (packaged as AMA) to answer to community queries, as is common on CryptoTwitter.

10. A Decade-Old, But Still Early

A favorite comparison in the space is likening the blockchain era to the internet era of the '90s. Some say the ICO bubble is the equivalent of the dot.com bubble. Whether any of these assertions are true or not is yet to be determined. However, what is certain is the fact that the technology is still in its early stages.  For this reason, enthusiasts and businesses in the space should devote more attention to education over speculation. Moreover, the more Satoshi converts, the larger the market size. Education and adoption rates will always tally.

11. Funds, Funds, Funds

Okay, I know I said 10, but FINT is benevolent! After all, you need to know the cost of what you are getting into upfront. So we have added four more points. Like every other startup project, an entrepreneur needs funds to start a blockchain and crypto project. Fortunately, alternative fundraising methods are available in the crypto industry. Ranging from the (bubble-burst?) ICO to DAICOs and even IFOs (Initial Futures Offering). There are also venture capitals like a16z which have set up crypto funds specifically for blockchain and crypto projects. Several other projects also chose to go the bootstrapping route. I dare say a blockchain and crypto project needs more funds considering that talent, especially blockchain programming, is scarce. And a huge chunk of available funds go to research and development. These are generally uncharted waters, someone needs to take the risk.  Experienced blockchain talent comes at a premium. The average salary of a blockchain programmer starts from between $80,000 - $100,000, depending on the type of company and country. Blockchain programmers are not the only cost to prepare for. Other costs like use of a blockchain platform, team (and miners) compensation, shipping the product (solution) and marketing are equally to be prepared for.

12. Spam and Scam

If you previously had a laissez-faire attitude to your digital security before entering the space, then you should be near paranoid in blockchain and crypto. Hackers target crypto companies because they want to take advantage of the pseudonymous feature when asking for ransom or making away with the loot. You do not want to start a project, raise funds and then enter the spotlight for the wrong reasons: a hack.  There are several measures that could be adopted to detect and handle spam and scam, but generally, the most important is when the humans involved are appropriately equipped defensively. 

13. Legal Uncertainty

Blockchain raises tons of brand new questions that were not existing several years ago. Each country and government have diverse reactions to these legal questions. Some have adopted a strong unfavorable approach, some are on the fence, trying to monitor the developments. While a courageous few like Switzerland, Malta, and Kenya have a favorable stance and approach, either through sandboxes or policies and regulations. On this point, working with a lawyer who understands blockchain is crucial. But also helpful for you to be conversant with the basics.

14. Protect Your Intellectual Property

On this point, I gladly direct you to an article written by our Head of IP. Although the article focuses on protecting your IP in a pitch competition, which is common in the decentralized space, by the way. She also succinctly addresses why you should even bother with protecting your IP. You should note however that by default, the blockchain and crypto space is community-driven using open-source software. On the other hand, there are also patented solutions by legacy businesses like IBM, Microsoft, and new startups like Hedera Hashgraph. It’s a wrap-up! Are there other points you would like to add? Please, drop them in the comments! From all that has been discussed, it's obvious the blockchain and crypto space is a vibrant interesting one. Like I always emphasize, the system that wins tomorrow might not be the blockchain, however, it would have the fundamental feature of decentralization. So, joining now is your best chance at being a pioneer and not a spectator.   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.
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