Crypto Capital: Strategies for Raising Funds for Blockchain Startups

Strategies for raising funds for blockchain startups need more than traditional investment channels like venture capitalists and angel investors. Identifying key players that support this business vertical is not challenging, and you’ll likely find several reputable investors.

Statistics expect the blockchain industry to gain a valuation of $18.42 billion in 2023, with a projected CAGR of 62.4% by 2030. It will also interest you to know that as of 2023, the blockchain ecosystem has more than 1,000 companies.

This fintech revolution has resulted in several unusual approaches to fundraising now available to founders. Strategies for raising funds for blockchain startups include Initial Coin Offerings (ICO) and security token offerings (STO). You can also consider Initial DEX offerings (IDO) and initial exchange offerings (IEO).

Read ahead for more information that will help you understand these options in detail and how to run funding campaigns.

Understanding Blockchain Technology

Blockchain or distributed ledger technology (DLT), as it is also called, is a continuously growing chain of blocks. Each block contains a set of data or ordered records that maintain the original history of the digital asset without altering it in any way.

Blockchain is much more than just Bitcoin or other cryptocurrencies. It is a distributed database that records and tracks anything that has value. Founders considering setting up a DLT startup should be aware of the risks associated with a sector still in its infancy stage.

Before you dive in, make sure to develop the right groundbreaking technology with an expert skill set to back it. You’ll also ensure that you inject funding into the startup at the precise development stage when it’s poised to scale quickly.

Also, be aware that blockchain is a market-driven industry subject to cryptocurrency fluctuations. This is why you’ll need exceptional risk management, complete with contingency plans, to deal with unexpected changes. Storing crypto is unlike conventional funding, and holding the currency in hot wallets opens up hacking risks.

Although the full potential of this industry is as yet untapped, you will be able to secure funding. Use the optimum approaches, and you can ensure long-term success for the new venture.

Strategies for Raising Funding for Blockchain Startups – Initial Coin Offering (ICO)

An ICO or Initial Coin Offering is one of the basic options for acquiring funding for the startup. You might consider ICOs as the equivalent of IPOs of the fintech vertical. Founders who intend to develop a new application, service, or crypto coin deploy this method to attract investors.

Using this strategy involves a precise step-by-step process starting with confirmation that an ICO is the appropriate funding strategy.

Step 1 – Determine the Feasibility of an ICO

An Initial Coin Offering (ICO) is not necessarily appropriate for every DLT startup. Although initiating an ICO is much easier as compared to an IPO, founders should confirm whether their tokens have actual value.

Sometimes, the only objective for issuing the ICO is to facilitate the sale. Or use them as a strategy to work around the stringent regulations associated with an IPO. That should not be the purpose behind the ICO.

Ensure that the token has an actual use case before offering it to investors. Also, confirm that the strategy is a good fit for your business model and startup strategy. Most importantly, prepare for the possibility of losing the investment if the startup fails.

Step 2 – Hire & Retain Expert Talent

Technology startups have a slim chance of success without the best expertise and talent in the industry. You’ll need to put together a top-notch founding team for every aspect of the blockchain startup.

Think developer skills and specialists in Blockchain Architecture, Cryptography, Data Structures, Smart Contracts, Programming Languages, and Distributed Systems.

You’ll also make sure the professionals you hire have a robust grasp of cryptography and security principles. They should also understand how the blockchain practices integrate well with your company’s environment and goals.

Simply ideating and creating an MVP that provides value is not enough. Your team must include marketing and advertising professionals, accounting and bookkeeping personnel, human resource managers, and expert testers, for starters.

Also, make sure to hire advisors who are experienced in managing strategies for raising funds for blockchain startups. They’ll also assist you in other aspects of business management.

Investors viewing your pitch to evaluate your startup as a viable investment opportunity will likely focus on the team. Your company’s tech success relies entirely on the core talent driving it.

Step 3 – Checking for ICO Regulations

Check with your legal advisors for information regarding the ICO regulations pertaining to DLT startups. ICOs are legal in the country. However, you may have to get your offering registered with the U.S. Securities and Exchange Commission (SEC).

For that, the startup must pass the Howey Test that confirms the ICO is an investment instrument. Once you get this stamp of approval, you’ll mitigate the potential risks investors face. These risks include hacking incidents, fraud, losses, legal issues, technical glitches, and manipulation.

Step 4 – Crafting the White Paper

You’ll create a white paper that describes the problem your startup will solve. The paper is a critical marketing document that talks about how the blockchain solution or app will solve that problem.

A white paper is a lot more than just basic marketing material and sales pitches. Instead, it includes technical information based on real facts and data. It provides credible proof of how the solution is superior to existing products in the market.

Your asking amount or the amount of funding you need and a roadmap detailing the milestones through yearly quarters also feature in the paper. Also, detail the founding team and the specific skills they bring to the table.

How the tokens will be distributed, including the percentage available to investors versus the percentage available to the general public–this is important information you’ll convey through the paper.

Any other fundraising information that investors may require is clearly mentioned. The objective behind the white paper is to build confidence in the minds of investors that the startup has what it takes to be successful.

The success of your fundraising efforts largely depends on targeting the right source of funding. If you need more information on how to find investors for your startup, check out this video I have created.

Step 5 – Work on Your Online Presence

A well-designed website is a digital storefront for any company and more so for a blockchain startup. Publish all the relevant information about what your project is all about and the value it provides to users.

You’ll also make the white paper available for reading so potential investors can learn about the company. Any other content you publish, like blogs and service pages, raises awareness for the tech community as a whole.

This strategy is also effective for providing regular updates about the ongoing activities in the company. Social media promotions and hiring crypto influencers will also gain visibility for the startup. Getting listings on tech directories and ICO pages will entice investors to take an interest in offering funding.

Step 6 – Present a Token Sale

You’ll kickstart the fundraising process by offering a token sale. Investors can trade future crypto tokens for cryptocurrencies that carry liquid value in the open market. Typically, founders sell a fixed percentage of the ICOs to external participants and save another portion for the company’s needs.

You can choose from different types of ICOs, such as fixed-rate models sold in Capped or Uncapped Auctions. Hybrid models are also available. Startups may also have a presale or private ICO sale for investors and community members before offering to the general public.

At the end of the private sale, your ICO is now ready for launch. Investors can purchase tokens with fiat currency or a digital currency the startup has specified earlier. ICOs are essentially shares in the company or an ownership stake.

However, the key differentiator is that companies need not give up equity to raise funding, as in the case of IPOs. The lower barrier of entry also makes it far easier to attract investors.

Possibly, the best advantage is that launching ICOs is quickly done, and the process is accomplished within a few days. On the downside, the risk factor is higher since the project could fail and the startup could go under.

Security Token Offerings (STO)

Investors looking to add a layer of security to ICOs can instead opt for Security Token Offerings (STO). STO token sales carry legal assurance since they are regulated by SEC laws, thus securing the investments. Typical regulations include Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements.

STOs are more flexible because blockchain entrepreneurs can structure them according to their core business goals. On the downside, compliance with regulations adds to the costs and time taken to launch STOs.

Further, issuing STOs limits your targeted investor pool to high-net-worth or high-income entities. In other words, accredited investors. However, the backing provided by legal regulations compliance makes it an attractive investment opportunity.

Getting experienced advisors and legal assistance to manage the STO issue is always advisable.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Initial Exchange Offering (IEO)

The Initial Exchange Offering is one of the more secure strategies for raising funds for blockchain startups. The process is similar to ICOs and enables investors to purchase tokens in the new venture using funds directly from their exchange wallets.

The key difference here is that the funding occurs on an accredited cryptocurrency exchange. Startup founders can ensure that information about their tokens is available to any investor on the exchange.

Conducting transactions on a reputable and credible platform safeguards investors’ funds. Secure backing from the crypto exchange enables higher funding supporting the blockchain ecosystem.

The BitTorrent Token (BTT) launch by Binance Launchpad started the first IEO in January 2019. The initial offering attracted funding worth more than $7.1 million and sold out within 15 minutes of the release.

How to Launch the IEO

Launching an Initial Exchange Offer follows some of the processes similar to an ICO. Here’s how:

1. You’ll start off by identifying the market gap your product can fill. You’ll also determine the project’s feasibility, onboard a talented team, and identify the project’s USP. Also, tick off all the boxes to ensure that the project is likely to stand up under verification from the exchange.
2. Build a Minimum Viable Project or initiate the development process. Having the MVP is one of the requisites for approval from the exchange.
3. Select an appropriate exchange that is reputable and secure. Some of your options include Bittrex, KuCoin Spotlight, Binance Launchpad, and Huobi Prime.
4. Create a detailed white paper and include extensive search results and verifiable information. Talk about the problems your products will solve and the talent driving the innovation.
5. Determine the asking amount you hope to raise from the funding round. The maximum number assures investors that you have a concrete objective for raising money.
6. Develop tokens through blockchain platforms like NEO, Ethereum, EOS, or any other. You’ll also work out the number of tokens to offer and a process for assigning value to them.
7. You are now ready to offer your tokens on the exchange. Typically, your chosen platform will have stringent selection criteria and a set of regulations you must comply with. Expect due diligence checks, various verifications, and Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures.

A successful IEO not only helps you acquire funding for the project but is also a robust marketing tool. Your startup will benefit from credibility-driven traction and the ability to generate sales quickly.

Initial DEX Offering

Blockchain startup founders can consider raising funds through the DEX or decentralized exchange, which is essentially a peer-to-peer platform. Investors can purchase tokens and pay in crypto funds.

The key difference is that the transactions and fund transfers rely on smart contracts. You’ll eliminate third-party intermediaries and the need for KYC or AML compliance procedures. Entrepreneurs and their investors deal directly without the need for personal identification.

The only requirement is a digital wallet address where the ICOs are deposited. Sushiwap and Uniswap are some of the most popular DEXs running on the Ethereum blockchain.

In Conclusion

Innovative startups developing blockchain technology need unusual funding sources that support the niche. To ensure success for your new venture, you’ll approach investors who operate in the crypto ecosystem.

Deploy these strategies for raising funds for blockchain startups not only to acquire investment. But also to gain credibility that your venture has what it takes to succeed.

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