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Embarking on the journey of building a groundbreaking Web3 startup demands more than just a brilliant idea—it requires strategic financial backing to aid growth and market penetration. This is where venture financing steps in. But it’s not just about money; it’s about aligning with partners who share your vision.

This guide is tailored to equip you with the insights and strategies needed to navigate the venture capital landscape and align with the opportunities best fit for your Crypto startup. Towards the end of this guide, we’ve also provided alternative funding methods in case VC funding isn’t currently viable for your project.

Why do Startups Seek Funding?

As a startup founder, venture financing will allow you to cover initial expenses like product development, in-depth market research, and operational costs. Funding provides the resources needed to scale your project, accelerating growth.

In many cases, funding also serve as validation, signaling to potential customers, partners, and employees that the startup has received external support and is on a promising trajectory. Additionally, securing investment will come with valuable expertise, mentorship, and industry connections from the investors involved and their partners.

When should you begin fundraising?

Startups should begin fundraising when they have a compelling business concept, and a clear vision for their product and/or go-to-market (GTM) strategy. While some founders can raise money based on their reputation alone, Investors are more likely to write checks when they are convinced that the founders can realize their vision and that the market opportunity is substantial; this means having a functional MVP (minimum viable product) and a clear vision.

Hence, founders should initiate fundraising once they’ve pinpointed the market opportunity for their product, identified how to reach their target customer base, and have a product that’s beginning to gain modest traction.

What are The Different Funding Rounds in Venture Financing?

Venture financing is characterized by stages that correspond to the specific phase of growth and development a company is experiencing. These stages are like markers on the journey of a startup, indicating its level of maturity, operational capacity, and market presence.

For instance, seed funding often kicks off the journey, fueling early-stage operations and product development. Seed round funds can be used to cover expenses including early hires, product development, marketing, and other initiatives.

It’s worth noting that the sequence of funding rounds may vary, with some companies opting to commence with Series A financing rather than beginning with a traditional seed round. This flexibility underscores how financing strategies can be tailored to the specific needs and circumstances of each startup.

The usual rounds of venture financing are as follows:

Pre-seed
Seed
Series A
Series B
Series C

To get a brief picture of the cryptocurrency projects engaging in venture financing recently, visit https://defillama.com/raises.

Exploring Financing Options for Venture Capital

Financing options refer to the specific methods and instruments for a company to secure capital during funding rounds. As a founder, understanding these options is crucial because it allows you to make informed decisions and navigate the funding landscape effectively. Different financing options come with their own terms, conditions, and implications for ownership and control.

Convertible Debt

Convertible debt is essentially a loan that can later be converted into ownership shares, typically during a subsequent funding round (i.e. you’ve secured funding from an investor in a seed round that gets converted to ownership during Series A funding). The terms, including interest rates and conversion conditions, are negotiated between the startup and the investor. Conversion is usually triggered by events like a significant financing round, or valuation threshold.

The conversion price, often set at a discount, determines how the debt transforms into equity. This method allows startups to secure funding without immediately determining their valuation, simplifying negotiations. Investors find it appealing as it offers potential equity ownership while providing the option of repayment if conversion doesn’t occur.

SAFE With a Token Side Letter

SAFE stands for simple agreement for future equity. Y Combinator introduced the “pre-money” safe in response to early-stage startups raising smaller amounts of money before a priced financing round. This tool allowed for a quick injection of initial funds, with the understanding that safe holders were early investors in future priced rounds.

As startup fundraising practices changed, larger seed rounds became more common. This led to the introduction of the “post-money” SAFE in 2018. This version calculates ownership after taking into account all the investments made through the SAFE, but before factoring in new money from a priced round. In other words, it determines the ownership of SAFE holders after all the SAFE investments have been made, but before considering additional funds from the next priced funding round, which can lead to a decrease in the ownership shares of SAFE holders.

Furthermore, unlike traditional startups, crypto startups usually produce additional assets, known as tokens, which can be used to interact with the startups decentralized app (dApp). Investors usually want access to the project’s tokens, in addition to traditional equity, and to account for this, token side letters are used to detail the proportion of equity and tokens an investor will receive.

Token side letters or warrants represent a right to future tokens. Different methods exist for managing pro-rata rights of the token supply, and you should consult with legal counsel to determine the amount of tokens to equity investors should receive.

Equity

An equity round involves determining the value of your company, which sets a price per share, and then selling new shares to investors. This process is more complex, costly, and time-consuming compared to using safes or convertible notes, which is why they’re popular in later stages. It’s crucial to hire a lawyer when considering an equity round.

This type of round involves various aspects like option pools, liquidation preferences, anti-dilution rights, and protective provisions, all of which can be negotiated. Generally, if you’ve agreed on a valuation with your investors, you’re on the right track, and a deal is likely. However, it’s worth noting that equity rounds are rare in seed rounds.

What documents do you need to engage in fundraising?

When diving into fundraising, you’ll need a couple of documents to make a strong impression on potential investors. Keep in mind that the exact documents you’ll need can depend on factors like how far along your startup is, and what the investors are looking for. However, at the core, you’ll definitely need a compelling pitch deck.

Pitch Deck

A pitch deck is like a visual storybook for your startup. It’s a set of slides that outlines the most important aspects of your business allowing you to explain your idea to potential investors succinctly.

Pitch decks should include an overview of your business, the problem it solves, and how your product or service addresses that issue. It should also cover details about the market opportunity, your go-to-market (GTM) strategy, and any significant achievements your startup has reached.

How to Determine your Project’s Valuation

As a cryptocurrency startup founder, your business’s valuation is pivotal during negotiations with potential investors. Accurate business valuations aid founders and investors in deciding whether to sell a share, exit a project entirely, or acquire a company. Usual methods to determining a startups valuation include:

1. Book Value

3. Market Capitalization

2. Discounted Cash Flows [most popular]

Accountants usually consider the valuation derived from several of the aforementioned methods to determine a fair value. However, when it comes to the arena of Web3 startups, the considerations are considerably different.

Traditional valuation methods remain relevant which account for and include examining the books, financial statements, revenue growth, and competition. But valuing crypto projects takes other factors into account and involves placing special considerations into three key factors:

Market size & market opportunity
Value capture & token design
Risk

Market Size & Market Opportunity

Market size is made up of the total number of potential buyers of a product or service within a given market, and the total revenue that these sales may generate. Market size essentially guages the breadth of the market reach.

Investors are naturally attracted to startups with the potential for rapid growth, and a sizable market signals room for significant expansion and the opportunity to secure a substantial market share.

However, while a substantial market size can be appealing, it’s worth noting that commencing in a smaller market can offer strategic advantages. By establishing a strong presence in a narrower market, a startup can effectively dominate that space before expanding into broader ones. The key lies in how you position and frame your business and it’s market opportunity.

Market opportunity is just as important as market size, as a startup that manages to address an unmet need, is deemed even more important to investors than the team and timing of their investment. If the vision for the products within your market allows you to gain a competitive edge, it will account favorably into a higher valuation.

Value Capture/Token Design

Investors show keen interest in the token and its design, as it represents a potential share in return for their investment. Projects utilizing tokens have the capacity to yield significant returns, especially within established networks.

Token’s are also examined to see what value accrues to the token holders to then equate that to what value could potentially accrue to equity holders in a normal investment. This underscores the clear relationship between value capture and token design, as the implied market value of your tokens significantly influences value creation for investors.

For bigger projects like blockchain networks that are “more at scale,” tokens can create underlying revenues generated from fees and staking on the network, they can receive much higher valuations they tend to have substantial revenues in the many hundreds of millions. With a functioning tas oken economy and viable value model where tokens are being issued, and becoming liquid, value can accrue to investors quickly, which will raise a valuation. Investors also look into the TVL on a blockchain, as it gives them an indication of the market sense reflecting the aggregate value of tokens in circulation and in reserve.

Risk

Risk assessment encompasses factors like execution, the technical complexity, and investors confidence in your teams capabilities. Execution risk pertains to how effectively your team can demonstrate their understanding of the project’s product.

With regards to technical complexity and team concerns, investors take into account what is and isn’t built yet, your perceived ability to ship the product, and whether or not you’ll have trouble hiring the team you need to get it done. The process of figuring that out could include things like speaking to the engineers on the team and others to get context.

At the end of the day valuation comes down to how well you can convince investors that you have the ability to build a business that can provide a return relative to what they’re paying for it today.

The Different types of Investors

While venture capitalists have traditionally been the primary contributors to funding rounds, recent times have witnessed a growing presence of additional investor types such as angels participating in funding rounds. Here’s a breakdown of the distinctions between the two types of investors:

Venture Capitalists

Venture capitalists (VCs) are seasoned investors representing venture capital firms. They specialize in investing capital into startups in return for an ownership share. This investment model is a form of private equity.

When dealing with VCs, be prepared for a thorough process that involves multiple meetings with collective input from various partners. It’s crucial to keep in mind that VCs evaluate numerous potential investments but ultimately choose very few, so it’s imperative to make a lasting impression to stand out in this competitive landscape.

Angel Investors

An angel investor is an individual who personally invests in startups, using their own wealth. This autonomy grants them the freedom to consider opportunities that conventional funders might view as too risky.

In contrast to venture capitalists, who rely on pooled funds, angel investors use their own resources. Moreover, while VCs typically undergo a series of rigorous checks, balances, and internal meetings, angel investors tend to rely on less-stringent decision-making processes on average.

How To Meet Investors

Hackathons

A hackathon is an intensive event where programmers and development teams collaborate on projects over a short period of time, typically ranging from a few days to a week. The goal of a hackathon is to create a functioning decentralized app (dApp) by the end of the event. Similar to accelerators, Hackathons usually feature elements including mentoring sessions, and a demo day, which are great opportunities to meet prospective investors. Venture Capital (VC) funds and Blockchain networks usually host hackathons to bring together communities of home-grown developers and cultivate new ideas and projects. Some notable hackathons include:

EthOnline
Solana HackerHouses
Aptos HackerHouses
Polkadot Hackathon
Bitcoin Bankathon

Crypto Conferences

Cryptocurrency conferences bring together enthusiasts, investors, and businesses interested in blockchain technology. These conferences usually focus on the latest developments and trends on a particular topic or technology in the blockchain space. Additionally, crypto conferences serve as a great platform for networking with potential investors. Notable conferences include:

Token2049
EthCC
Solana Breakpoint

Cold emailing Investors

If you’re unable to meet potential investors in person, do research on VCs and angels with a track record of investing in businesses similar to yours. Compile the list of Investors and send each a concise and compelling summary of your business and market opportunity. The subject of the email should either include the name of your company or your idea’s main selling point, and the details of the ask.

Within the body, you should concisely communicate:

The problem you’re aiming to solve
The proposed solution
The current stage of development
The market opportunity
Co-founders
Your role in the project

Additionally, you should include the most up-to-date pitch deck for the investor to view for more information on your project.

Alternative Methods for Raising Funds

While venture capital funding rounds receive significant attention, there are alternative methods of fundraising that offer distinct advantages. These alternative methods of funding include:

Accelerators
Ecosystem Grants
Quadratic Funding

Accelerators

Accelerators are mentor-based programs that support early-stage startups and entrepreneurs by providing a range of resources and services aimed at helping them grow and succeed. These programs typically run for a fixed duration, often around three to six months, where you’ll meet with investors and advisors that help you shape up your business idea and product. At the end of the accelerator is the “demo day” where you present progress to a group of potential investors.

Depending on the company in charge, accelerators may take different forms. Some accelerators require you to give up 5-10% equity for direct investments, while others give grant funding based on the winning pitches on “demo day.” No matter the terms, accelerators are a great way to help develop your startup, and introduce you to potential investors.

Ecosystem Grants

Many Layer 1 and Layer 2 Blockchains provide grant funding to projects looking to build on their network. Blockchains are usually in their early stages and encourage builders to use their networks which could lead to more innovation, users, and total value locked (TVL). Funding is given on a project-by-project basis which is decided by a panel of officials from the network or foundation behind the blockchain. In most cases you must submit a request for proposal detailing your idea, plans for the funds, timeline, and a proof of concept in some cases.

Here are a few blockchains that offer ecosystem grants:

Quadratic Funding

Quadratic funding is a form of crowdfunding that takes a more democratic and community-driven approach. It works by matching contributions from individuals or entities in a way that gives more weight to smaller contributions. This means that smaller donations receive a proportionally larger match, which incentivizes a broader base of supporters.

Many organizations launch quadratic funding campaigns for startups to participate in while letting their community decide who receives funding. Currently, the most popular quadratic funding platform is Gitcoin.

Tips from Crypto founders

We interviewed a few cryptocurrency founders who successfully secured funding for their projects to collect insights and sources of inspiration:

“Craft your story and craft your narrative. You want to have a vision for the world, articulate that, and make an argument as to why your company is the key to making that world happen. Your job as a founder is to make people believe that you, your product, team, and thinking can make that happen”

Tony, Underdog Protocol

“Communicate your confidence and passion about the market you’re going after. The standard response is “no” since most startups fail so share why you’re going to do better”

Marisa, Joba Network

“Network is everything!”

EvNFT, Tsunami Finance

Frequently Asked Questions (FAQ):

What is dilution, and how does it occur in funding rounds?

Dilution is when the ownership percentage of existing shareholders in a company decreases due to the issuance of new shares. In funding rounds, it happens when a startup raises more capital by selling additional shares to new investors. The ownership of the original shareholders gets diluted because there are now more shares in total, and their percentage of ownership is reduced.

Can you explain the concept of a term sheet in funding rounds?

A term sheet is like a blueprint or an outline that lays out the key terms and conditions of an investment deal. It includes details such as the valuation of the company, the amount of money being invested, the rights and preferences of the investors, and any special conditions. It acts as a guide for both the startup and the investors to understand the basic terms before entering into a more detailed and legally binding agreement.

How long does a funding round typically take from start to finish?

The duration of a funding round can vary, but it usually takes several weeks to a few months from the initial discussions to the finalization of the deal. This timeline includes activities like pitching to potential investors, conducting due diligence, negotiating terms, and finalizing legal documents.

What are some examples of successful startups that have gone through multiple funding rounds?

Some well-known startups that have successfully gone through multiple funding rounds include companies like Coinbase, Squads Protocol, and Injective Labs. They started with early-stage funding and, as they grew, they conducted additional rounds to raise more capital for expansion and development.

What happens if a startup fails to secure funding in a round?

If a startup fails to secure funding in a round, it may need to reassess its plans and financial situation. This could involve revising the business strategy, exploring alternative funding sources, or adjusting the company’s goals and timeline. It’s important for the startup to continue seeking opportunities and refining its pitch to attract potential investors in the future.

This guide was created in partnership with Joba Network. Joba is powering the future of work following COVID-19 work from home and empowering people for a more flexible future of work. Joba’s belief is that more people are working in non-traditional ways so we want to enable infrastructure for those working in these new working conditions. With Joba, you earn on-chain credentials by completing a task and earn on-chain payments which becomes your immutable work history online.

Web3 Founder’s Handbook Pt. 1: A Guide to Venture Financing & Strategic funding methods For Web3 Startups