How Venture Capitalists can invest in blockchain?

Tokenguard Team
June 8, 2022

The year 2021 has become successful for the whole crypto industry and brought forward several ice-breaking technologies taking cryptocurrencies to a new level. Together with the new bull run, they have made the blockchain very attractive to venture capitalists who invested a record $30 billion into crypto startups during this period.

This article aims to review the process of VC funding in crypto, what investment options are available now and what associated risks investors should be aware of.

venture capitalists blockchain

New York Times: global VCs have invested more than $27 billion in crypto companies in 2021

Stages of VC funding

What makes venture capital different from traditional investment options is the high risk and the chance to make quick profits. To select a startup with good potential, fund managers have to look through hundreds if not thousands of different projects before they find the one that would seem promising enough. With that said, the VC funding is typically divided into the following stages:

Stage 0. Pre-seed

This stage is typically set apart from the investment circle. The founders only assess their idea and they do not attract any investors from the outside as they rely on their funds or their close relatives and friends.

Stage 1. Seed funding

The startup releases the first version of its product and proves its viability to VCs. The risk at this stage is considered to be the highest, therefore, investors may require to obtain a much larger share of the future equity than in any of the following stages.

Series A: Startup capital

The term “startup” can be no longer applied at this stage as only grown-up companies with a viable product and, most importantly, a steady cash flow can apply to this type of funding. The key business goals here are to acquire more clients and grow the revenue.

Series B: Early stage

The companies that have reached this stage seek to scale their operations by attracting more customers. They have a solid customer base and hire more specialists to strengthen their teams.

Series C: Expansion stage.

Businesses expand their operations to adjacent markets, acquire new products to enhance their product line, and use the funding to create new products of their own. The risks are much lower but so is the ROI.

Stage 5: Pre-IPO stage (optional)

Mature companies may select to go public to get broader access to investors and increase their recognition. To do that, they need not only an established product and stable profits but also a strong team of lawyers to help them overcome all the potential pitfalls.

How to invest in crypto startups

Blockchain technologies enable users to exchange value with full transparency while smart contracts make the processes fully automated and eliminate the need for the third party to govern the deals. The same advantages apply to the investment processes as well. With that said, the crypto space offers the following ways to invest.

1. Initial Coin Offering (ICO).

ICOs gained huge popularity in 2017 as they have opened up a revolutionary approach to fundraising and become a good alternative to IPOs. The lack of regulation has significantly facilitated the process both for investors and companies.

However, many scam projects have taken advantage of this option, too, which resulted in huge monetary losses. At the time of writing, there are just a few platforms (e.g. Coin list) that risk similarly conducting ICOs while authorities of many countries have finally issued proper laws to regulate them.

2. Security Token Offering (STO)

Securities issued in the form of tokens on the blockchain have taken the place of ICOs. Being much better regulated, they represent a safer way for investors to make money while still keeping the advantages provided by the new technology.

3. Initial Exchange Offering (IEO)

An IEO is technically very similar to an ICO with one core difference: it is backed by a centralized exchange that scrupulously analyzes the project before promoting its tokens. This doesn’t fully eliminate the risks of scams, but significantly reduces them.

Venture capitalists who want to make profits in the crypto industry can select any of these three options. Now that the market is much better regulated, the risks are lower while the profits may still be very high.

Is it worth trying?

Blockchain has indeed expanded the horizons for digital startups as well as for VC investors providing both sides with a new option for making money and reducing the entry barriers in comparison with traditional IPOs. Now that the industry is much better regulated than in the early years, cryptocurrency projects represent a much more reliable option.

However, investors should also keep in mind the high volatility of the crypto industry as a whole. The chances to get a good ROI during Bullrun are much higher while not every startup has enough durability to live through the winter that inevitably follows the flourishing periods.