- Crypto Fundraising Types and Rounds
- How is Token Fundraising Different from Equity Raising?
- Who invests in crypto fundraising?
- Final Thoughts for Crypto Fundraising
Any company eventually reaches a point where raising money is essential for growth and expansion. And the cryptocurrency sector is proving to be the go-to model for fundraising since it provides more chances and this sector is less regulated as compared to the traditional finance and equity sectors. Now, even construction firms can raise money using cryptocurrencies; for instance, BitRent tried to tokenize investments in construction projects and BASIS raised money for the creation of new building materials.
Crypto Fundraising Types and Rounds
The crypto fundraiser is similar to equity fundraising in terms of the rounds of funding. It begins with like a pre-seed round, where family and friends deploy capital into the project. After pre-seed, the project moves on to the seed round, which is the initial investment and is then followed by series A, B, and C rounds. In the case of Draper Labs, they have raised a total of $300 Mn from series A, B, and C rounds as per the data by Blockchain.com. Notable investors like VY Capital, Lightspeed venture partners, and DST Global led these rounds.
The primary methods for you to raise cryptocurrency for your project are listed below:
Since it offers the greatest potential return to investors, the cryptocurrency sector is the most popular one for venture capital funds. Venture capital firms and well-known crypto businesses can both provide funding for cryptocurrency entrepreneurs. For instance, Coinbase, one of the largest crypto exchanges has its own venture capital fund; Coinbase Ventures. It is very impossible to sell simply the idea to venture investors, thus to raise money through this method, you must at least have the MVP ready. Most of these investors ask for a minimum MVP built and traction on the product.
While there are established angel investor clubs, they differ from venture capital firms as they represent private investors rather than businesses. Since it is customary for angel investors to receive a portion of the startup in exchange for their investments, they frequently participate in project management and bring with them valuable advice, guidance, networking opportunities, and visibility.
The most fundamental type of crowdfunding in the cryptocurrency sector is known as an initial coin offering, in which entrepreneurs offer investors tokens that, in principle, have some utility within the project. ICOs played a significant role in the cryptocurrency market’s spectacular expansion in 2017. However, 80% of firms that acquired money using ICOs either ended up being total frauds or failing. Investors essentially earned nothing because many of the tokens released during ICOs haven’t even made it to cryptocurrency exchanges. ICOs are often used with caution nowadays due to the abundance of fraudulent projects and lack of investor interest protection; instead, alternative kinds of financing, like IEO or IDO, have taken their place.
Initial Exchange Offerings and ICO are similar, yet they differ in two crucial ways. First off, only carefully selected initiatives are permitted to raise money on the market that houses the IEO. The reputation of the exchange acts as an additional assurance as a result. Second, unlike with ICOs, investors are assured that the tokens they buy will be listed on this exchange, ensuring that they will at the very least be able to sell their tokens. Additionally, investors and the startup team must pass KYC and AML checks, which lowers the chance of fraud.
Initial DEX Offering is the newest fundraising fad in cryptocurrency. Similar to IEO, only vetted projects are allowed access to IDO, and their tokens are automatically listed on the decentralized exchange. But instead of a panel of experts choosing projects, the DEX community casts a vote on whether to approve a particular project’s request for IDO on the platform. Furthermore, no actual third party is involved because smart contracts regulate all money transfers. Finally, since there is no centralized institution engaged that could process them, KYC and AML procedures are not necessary. The final item, however, could soon change following the laws that various nations have imposed on IDOs.
How is Token Fundraising Different from Equity Raising?
Token fundraising and equity fundraising are two completely different methods of raising capital for a business or project. When it comes to fundraising for cryptocurrencies, there are certain essential elements that the investors demand. The projects need to look at the law of land and choose the right jurisdiction, tokenomics is another vital element that needs to be taken care of. In the end, it’s also important to choose your token sale model – the soft and hard and hidden caps and the dynamic ceiling. The minimum amount that your project must raise is known as the “soft cap,” and the maximum amount that your project can raise is known as the “hard cap” before it expires. Before the fundraiser starts, the caps are determined. Investors cannot determine the capitalization of a hidden cap until the allocation has been decided. Hidden caps can be rigid or soft. You also need to choose the right exchange after performing thorough due- diligence.
There are several key differences between crypto fundraising and equity fundraising:
Crypto fundraising is often subject to fewer regulations than equity fundraising, as it is a relatively new and rapidly evolving field. There are certain geographies where there are crypto-friendly laws, like EL Salvador. Dubai in another case has become a crypto capital Equity fundraising, on the other hand, is typically subject to a wide range of regulations, including those related to the sale of securities.
Equity investors are typically entitled to certain protections, such as the right to vote on certain matters related to the business and the right to receive a share of the business’s profits. These protections may not be available to investors in a crypto fundraising campaign. Only in the case of DAOs, when these crypto investors get a share in voting rights. With the help of governance tokens, it is possible to raise money without reducing equity, allowing all interested parties to have a vote on how the project is run.
Investors in a crypto fundraising campaign may be able to earn returns through the appreciation of the cryptocurrency or token they purchase, as well as through the use of the cryptocurrency or token in the project’s ecosystem. Equity investors, on the other hand, typically earn returns through the appreciation of the value of their ownership stake in the business and the receipt of dividends or other distributions.
Who invests in crypto fundraising?
There are a variety of different investors who may be interested in participating in a crypto fundraising event. These can include individual investors, venture capital firms, hedge funds, and other financial institutions. Some investors may be attracted to the potential returns that a successful ICO can generate, while others may be interested in supporting the development of a particular project or technology.
According to a report by outlook, there are currently more than 300 crypto funds that are actively deploying capital. Some of the biggest crypto VC funds are
Block Media Labs
It is a venture capital investment firm that provides money and business advice to crypto companies. Along with offering financial support, the company aids new cryptocurrency ventures with their business plans and even assists them in choosing the right board members.
An American hedge firm with a focus on cryptocurrency and by AUM, it is the biggest cryptocurrency hedge fund in the world. Dan Morehead launched the company in 2003 and investing in blockchain and digital asset companies since 2013.
Sequoia specializes in investments at the seed, early, and growth stages in private technology firms, including those in the clean technology, consumer internet, cryptocurrency, financial services, healthcare, mobile, and robotics industries.
Binance Labs –
Binance Labs finds and supports successful blockchain entrepreneurs, startups, and communities. It also invests in and finances business ventures that support the expansion of the broader blockchain ecosystem.
Investment banking company Dragonfly Capital has offices in Charleston, South Carolina, and Charlotte, North Carolina. We concentrate on the unique requirements of small- and middle-market company management and owners.
Final Thoughts for Crypto Fundraising
Crypto fundraising has revolutionized the way startups raise capital. With the advent of Initial Coin Offerings (ICOs) and Initial DEX Offering (IDOs), startups can now bypass traditional funding routes and connect with a global pool of investors. Despite the challenges and risks associated with the cryptocurrency market, the benefits of fundraising in this manner are significant, including increased accessibility, low barriers to entry, and more efficient fundraising processes. With the continuous growth and maturity of the crypto market, it’s likely that more and more startups will consider crypto fundraising as a viable option for their fundraising needs.