Guest Blog Post by Mateusz Rzeszowski
Blockchain plays by its own rules.
A decentralized environment where we’re dealing with services not guaranteed by a single provider, but a peer-2-peer network, blockchain is governed more by the laws of supply and demand than any of the top-down decision-making we’ve come to expect in centralized solutions. Whether it’s the transaction fees, token prices, or the trustworthiness of a network, the market decides on all of those factors, introducing previously unseen uncertainties or unexpected surprises.
As a result, similarly to how developing applications on the blockchain requires new design patterns, fundraising in a blockchain startup and the underlying incentive layer require new thought processes.
For example, if at any point a project receives funding in the form of cryptocurrency, or receives needed liquidity to bootstrap their multi-sided applications, it’s going to need a risk management plan. In case the value of the cryptocurrency fluctuates, a startup needs a contingency on how it will manage oftentimes rapid movements. Additionally, storing crypto is fundamentally different from fiat funds. Keeping it on exchanges or in a hot wallet (a wallet connected to the internet) means facing the risk of being hacked. Managing a startup’s cold wallet like Ledger or even paper forms (disconnected from the internet), on the other hand, brings a whole range of infrastructural challenges a team needs to deal with or turn to custody services like Coinbase Custody.
What are the ways of funding an idea to grow it into a product in this new environment?
When it comes to funding, all of the standard concepts are present: crowdfunding, angel investments, venture capital funding, incubators and accelerators, etc., are all valid methods startup founders make use of. Some of them have developed in specific ways to adapt to the space, while others remain mostly unchanged. The range of approaches to be taken into consideration is broadened by blockchain-specific funding methods like DAO’s (Decentralized Autonomous Organizations). The following guide seeks to provide you with useful tips on how to interact with each of those methods.
The blockchain industry growth correlates strongly with venture capital and hedge fund investments. According to Crypto Fund Research, 804 blockchain investment funds operate today, and the amount of assets under their management has grown from $190 million in 2016 to over $21 billion in 2020. The opportunities of having a startup funded by an investment fund are consequently vastly broader than 4 years ago.
What to look out for?
Angel investors have become increasingly prominent in the startup world in the past decade. Usually investing during the seed stage (the earliest official funding round), these individuals operate using their private funds and are typically interested in high-risk, high-reward opportunities. Similar to investment funds, blockchain angel investors’ activity has grown rapidly in the past years, more than doubling the deal count in years 2015-2019, according to a report by CB Insights.
What to look out for?
Whether your startup is just an idea or a minimum viable product, incubators and accelerators are worth considering as they’re never confined to exclusively raising capital. In fact, direct funding coming from an accelerator/incubator often pales in comparison to other benefits. For their participants, such programs often offer fundamental mentoring which is especially useful when dealing with as new and unusual an industry as blockchain technology. In addition, the networking possibilities open new ways of growing a startup even after leaving the incubator, not to mention the typical introductions to investors that such programs offer.
What to look out for?
As was previously mentioned, blockchain projects can use funding tools widely available elsewhere but can often add unique twists to the equation: take the recent ChainMonsters Kickstarter campaign. This particular Flow-supported project created an incentivization mechanism using a distinct aspect of blockchain technology: non-fungible tokens. By giving out unique digital assets to its backers, ChainMonsters managed to generate scarcity and greatly encourage funding.
What to look out for?
Similar to STOs, DAO-based startup funding is still an opportunity waiting to be popularised. The idea here is as follows: imagine a decentralized investment fund in which investors are smart contract participants whose voting rights, e.g., deciding which project to fund, directly correspond to the amount they have invested. The idea gained traction in 2016 with the creation of The DAO, but its subsequent hacking and dissolvement have damaged the prospects of a functioning, investment-focused DAO. However, the concept didn’t die, and with the recent launch of The LAO the world of for-profit DAO’s may still have much to offer.
What to look out for?
All of the methods mentioned above serve different needs, pose various challenges, and can be considered when looking for funding. In the end, finding opportunities has always been a creative endeavor in the technology sector, but it’s even more so with blockchain where unique funding approaches add to the uniqueness of the field itself.
Guest Blog Post by Mateusz Rzeszowski
Blockchain plays by its own rules.
A decentralized environment where we’re dealing with services not guaranteed by a single provider, but a peer-2-peer network, blockchain is governed more by the laws of supply and demand than any of the top-down decision-making we’ve come to expect in centralized solutions. Whether it’s the transaction fees, token prices, or the trustworthiness of a network, the market decides on all of those factors, introducing previously unseen uncertainties or unexpected surprises.
As a result, similarly to how developing applications on the blockchain requires new design patterns, fundraising in a blockchain startup and the underlying incentive layer require new thought processes.
For example, if at any point a project receives funding in the form of cryptocurrency, or receives needed liquidity to bootstrap their multi-sided applications, it’s going to need a risk management plan. In case the value of the cryptocurrency fluctuates, a startup needs a contingency on how it will manage oftentimes rapid movements. Additionally, storing crypto is fundamentally different from fiat funds. Keeping it on exchanges or in a hot wallet (a wallet connected to the internet) means facing the risk of being hacked. Managing a startup’s cold wallet like Ledger or even paper forms (disconnected from the internet), on the other hand, brings a whole range of infrastructural challenges a team needs to deal with or turn to custody services like Coinbase Custody.
What are the ways of funding an idea to grow it into a product in this new environment?
When it comes to funding, all of the standard concepts are present: crowdfunding, angel investments, venture capital funding, incubators and accelerators, etc., are all valid methods startup founders make use of. Some of them have developed in specific ways to adapt to the space, while others remain mostly unchanged. The range of approaches to be taken into consideration is broadened by blockchain-specific funding methods like DAO’s (Decentralized Autonomous Organizations). The following guide seeks to provide you with useful tips on how to interact with each of those methods.
The blockchain industry growth correlates strongly with venture capital and hedge fund investments. According to Crypto Fund Research, 804 blockchain investment funds operate today, and the amount of assets under their management has grown from $190 million in 2016 to over $21 billion in 2020. The opportunities of having a startup funded by an investment fund are consequently vastly broader than 4 years ago.
What to look out for?
Angel investors have become increasingly prominent in the startup world in the past decade. Usually investing during the seed stage (the earliest official funding round), these individuals operate using their private funds and are typically interested in high-risk, high-reward opportunities. Similar to investment funds, blockchain angel investors’ activity has grown rapidly in the past years, more than doubling the deal count in years 2015-2019, according to a report by CB Insights.
What to look out for?
Whether your startup is just an idea or a minimum viable product, incubators and accelerators are worth considering as they’re never confined to exclusively raising capital. In fact, direct funding coming from an accelerator/incubator often pales in comparison to other benefits. For their participants, such programs often offer fundamental mentoring which is especially useful when dealing with as new and unusual an industry as blockchain technology. In addition, the networking possibilities open new ways of growing a startup even after leaving the incubator, not to mention the typical introductions to investors that such programs offer.
What to look out for?
As was previously mentioned, blockchain projects can use funding tools widely available elsewhere but can often add unique twists to the equation: take the recent ChainMonsters Kickstarter campaign. This particular Flow-supported project created an incentivization mechanism using a distinct aspect of blockchain technology: non-fungible tokens. By giving out unique digital assets to its backers, ChainMonsters managed to generate scarcity and greatly encourage funding.
What to look out for?
Similar to STOs, DAO-based startup funding is still an opportunity waiting to be popularised. The idea here is as follows: imagine a decentralized investment fund in which investors are smart contract participants whose voting rights, e.g., deciding which project to fund, directly correspond to the amount they have invested. The idea gained traction in 2016 with the creation of The DAO, but its subsequent hacking and dissolvement have damaged the prospects of a functioning, investment-focused DAO. However, the concept didn’t die, and with the recent launch of The LAO the world of for-profit DAO’s may still have much to offer.
What to look out for?
All of the methods mentioned above serve different needs, pose various challenges, and can be considered when looking for funding. In the end, finding opportunities has always been a creative endeavor in the technology sector, but it’s even more so with blockchain where unique funding approaches add to the uniqueness of the field itself.