Blockchain

What Investors Look For In A Startup – Crypto Fundraising

Tokenguard Team
October 27, 2022

Any successful startup faces the necessity to attract external funds to keep its business model viable and the product growing. Thanks to blockchain, the process now has become much simpler than it used to be in the past.

But for someone who hasn’t been studying this technology in detail, the approach may seem difficult at first glance. Also, starting something entirely new always requires a lot of research which is hard to accomplish alone. Besides, regular news about various scams in this industry makes investors reluctant to part with their money. As a result, the whole enterprise may look unrealistic.

The best part is that your company doesn’t have to be knowledgeable in blockchain to raise money with its help. Neither does it have to relate to IT in general. Some good examples are non-profit organizations. These are World Food Program, Unicef Australia, and the Alice Crowdfunding Platform.

In this article, you’ll learn everything about the most popular fundraising methods, and the tactics to draw the attention of VCs around your project.

Let’s get into it!

Top 6 ways to raise money on blockchain

You don’t have to use all of these methods to attract funds to your project. Read those below to understand which one would be useful in your specific project and make research on similar startups to find the best-case scenario.

Venture capital

Venture capitalists (VCs) have always been particularly fond of the crypto industry. The reason for that is the high potential return on the investment that one may get if a startup is successful in the long term. 

Some of the most famous VC companies investing in startups are Pantera Capital, Paradigm, and Alameda Research. Large crypto companies such as Binance and Coinbase operate their own funding reserves in search of new stars, too. 

Yet, it may be a challenge for small companies with no capital to grab their attention. VC organizations work with projects that already have an outstanding product or service and teams of real experts. One must have some funds at hand to get all that. As a result, you may find yourself in a vicious cycle.

Angel Investors

Luckily, there are many other options that early startups may look up to. Angel investors represent one of them. Unlike VCs which usually operate with other investors’ funds, angels contribute their own money. In return, they will expect to get a solid stake of your business and the profits it generates.

On average, one angel contributes between $5,000 and $100,000 to a single startup. The sum is not that big, as you may see. Yet, it may serve as a good starting point and help your project get going. Also, keep in mind that these are usually “one-time-use” investors. They will be looking for a way to exit via IPO or larger investors whenever a chance shows up.

There are some databases where angel investors look out for investment opportunities. Such platforms as PitchSee and Angel Investment Network offer such an opportunity.

Cryptocurrency crowdfunding

Instead of onboarding a single investor or a small handful of those, a startup may raise funds via crowdfunding with “every little help”. Dozens if not hundreds of investors may participate. At the same time, they don’t have to be accredited investors and may contribute quite a small sum each.

Investors buying utility tokens or other digital assets of a project and in return, the startup may provide their supporters with many rewards and incentives. Thanks to blockchain, all these processes are transparent and traceable. There are four key methods to run a crowdfunding campaign for a blockchain project: ICO, STO, IEO, and IDO.

Initial Coin Offering (ICO)

This crowdfunding method became popular in 2017. In fact, ICOs became one of the major factors contributing to the growth of the blockchain industry that year. In comparison with traditional IPOs (Initial Public Offering), the process was much simpler and cheaper. Some early investors managed to get high ROI with their help.

Yet, the blockchain industry resembled the wild west at that time as it had practically no regulations. Startups were literally drunk with the feeling of total freedom. As a result, more than 80% of ICOs turned out to be a scam. This led to heavier regulations and had a negative effect on investors’ interests.

Now only a few platforms such as CoinList or CoinSchedule dare to conduct such a form of fundraising. Startups have to pass a thorough scoring process to get to the white list.

Security Token Offering (STO)

A large number of disappointed investors made authorities of some countries look for a solution. In 2018, the first attempts to regulate this mess came out. This is how STOs came into existence.

Authorities typically define security tokens as securities represented on the blockchain. At this, these tokens fall under the same regulations. Companies that want to attract investments in this way have to pass a thorough examination and prove their reliability to the local government. Still, the process is much simpler and less costly than with traditional IPOs. 

This makes entry easier but obliges companies to follow regulatory standards and give more precise financial projections.

Initial Exchange Offering (IEO)

After the incredible success of ICOs, centralized exchanges spotted a good opportunity. They have decided to take this unregulated money flow under their control. IEOs, also known as launchpads, are very much like ICOs with a few key distinctive features.

First, exchanges curate the whole process of fundraising. This implies thorough scoring of every project. This is quite reasonable as its success or failure will affect the reputation of the facility. Second, the exchange lists the tokens of the projects. Thus, investors get a guaranteed way of exit after the event. 

Exchanges charge their own fee for the listing. The good news is that there is still a chance to get through for free. For example, Binance users may vote with their BNB tokens for their favorite projects.

Initial DEX Offering (IDO)

IEOs have provided investors with some level of security. But still, many cryptocurrency enthusiasts argued that this is yet another centralized solution. A centralized exchange may also fail to spot potential fraud and thus let its users down.

In 2019, the first decentralized exchanges (DEXs) powered by liquidity pools came forward. Unlike IEOs which are controlled by a single entity, IDO launchpads rely on smart contracts and are fully automated. Now it’s up to the DEX community, the launchpad team, or third-party auditors to ensure projects’ security and reliability.

NGRAVE: The Crypto Funding Hype Cycle. The fundraising methods in the cryptocurrency industry constantly evolve in order to solve the previous pitfalls.

Everything You Need To Know Before Reaching Out to Investors

Assume you’ve defined which method of fundraising fits you best. The next step is to get investors interested in your project.

Spoiler: Your pitch deck is what you need to spend most of your time on to get investors’ interest.

1. MVP

The first and most important aspect is a minimum viable product or, shortly, MVP. Many of the ICOs that sparkled and failed in 2017 had nothing but bare ideas behind their belts. As they raised some funds they fell for the temptation to get away with the easy money. 

This made investors more cautious. Now serious funds wouldn’t even talk to a project with no product, let alone invest any money in its development.

2. A problem-solving product

Make sure your product solves a real problem of your audience. It’s one of the key aspects to pay attention to. You need to consider the awareness of the audience before you’re offering the solution to their problem. If you’re in the first stage of the market and your product is innovative, you need to deliver your message as simply as possible, or you will be misunderstood.

Also, the number of people with such a problem should be sustainable. You may find a nice group of blockchain developers with a serious inconvenience deploying virtual servers on some platforms. But you would hardly be able to sell your tool to anyone. These are the three key components that eventually make up a great product.

3. Competitive advantages

Aside from solving problems, your product should also stand out from its competitors. Make thorough market research. Find the teams that do something similar and study how they position their solutions. How can your product beat them? What is it so special about it that they don’t have? These are very important questions to answer before you get any further.

4. Strong business plan

Not only you should have a good product at hand. You should also have detailed business and marketing plans for its further development. 

First, define a clear goal of what you want your product to be in, let’s say, a year. After that, specify the milestones you need to achieve on your way toward this goal.  

The key characteristic of the final goal together with all the milestones is tangibility. Your potential investors will want to know the real numbers that you aim to achieve together with the means that you will need for that.

5. A passionate team with relevant background

The management team’s expertise is yet another important aspect that investors will look at. Do your team members have any successful projects behind their shoulders? How long have they been operating with blockchain-based solutions? The more details you disclose about each member, the better. Also, it would be nice to provide the links to their Linkedin profiles.

Another important characteristic is how you work together as a team. Show investors how you cooperate with each other and how you solve different problems on a daily basis. The higher the level of your coordination, the better. Finally, you should all be quite passionate about what you do. The team that doesn’t have an inner flame wouldn’t be able to reach real heights.

6. A nice pitch deck

Combine all the elements mentioned above into a nice and clear pitch deck. This is a presentation that provides a brief overview of your business. It helps investors make an investigation at the initial stage. 

Regardless of the funding method, don’t try to describe every single detail of your project in this document. Remember that its primary goal is not to sell. The pitch deck should get investors to move to the next step of the negotiation process. Here’s what it should include:

  • Your mission, vision, and value proposition
  • Your target audience
  • The problems that your product solves
  • The technical solution to these problems
  • The key features of your product and what benefits they provide
  • The revenue model and the business plan
  • The development roadmap
  • The team
  • Funds’ distribution
  • The list of competitors

Also, you can include slides about your partners and screenshots of your product. Remember to keep the narrative simple and concise.

7. Security Audit. 

Last but not least, investors pay great attention if your product is secured. It’s quite easy to make an error in the code with such complex programming languages as Solidity. Hackers may identify the errors, take advantage of vulnerabilities and drain your project’s funds. Hire a third-party company to audit your smart contract, it will help you to prevent your project from unwanted hacks. 

Unbiased specialists can take a look at your code and make sure that it doesn’t contain any bugs. Such an audit would serve as another selling point and convince your supporters of the security of their money.

Tokenguard offers smart contract auditing services to companies operating with blockchain. Our team of experts can help you identify potential risks before the launch. We offer an automated smart contract auditing solution. It would be useful if you want to get a general picture of your smart contract security. For a more thorough analysis, you can apply our manual auditing services.

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