Should your crypto startup accept venture capital funding? It’s a simple question, but one laced with a web of considerations. The best ideas can’t be realized on a shoestring: the money to form a team, develop a proof of concept, and bring a consumer-ready product to market has to come from somewhere.
If not from VCs, where? Most founders don’t have pockets deep enough to self-fund, while public token sales are dependent on two things: a token and a product the mass market can get behind. That instantly rules out a significant proportion of all projects including B2B, most middleware, and those that lack an onchain component altogether such as crypto marketing or apparel.
Deciding whether to take the VC pill or shun it altogether is one of the toughest decisions a startup will face. Whatever their choice, it’s one that will have lasting ramifications.
To VC or Not to VC?
While 2022 will go down as a bad year for crypto, with every meaningful industry benchmark a fraction of its 2021 high, venture capital still flowed. The Block reports $31 billion of industry investment last year, $8B of which went into NFTs and GameFi. The report also claims that 78% of all blockchain venture funding occurred within the last two years. It’s clear that for a significant proportion of crypto projects, accepting venture funding was never in question. Not all web3 startups have followed that well-trodden route however.
Peer is a blockchain and metaverse company working at the convergence of mixed reality and spatial computing. It proposes using AR to embed digital objects into physical spaces, allowing NFTs to be “buried” anywhere in the real world. It’s not just Peer’s tech that’s novel, however: so’s its funding route.
Founder Tony Tran was able to cover the initial costs himself before raising $14M via a private sale of Peer’s L1 coin, PMC, to friends and family. This was done via a Reg D offering to meet the SEC’s filing requirements. While this approach has proven successful for Peer, which is following its private round with a public token sale, not all founders have the fortune of an inner circle of HNW individuals.
Given the choice between accepting VC funding and abandoning the project, picking the former is a no-brainer. The trick is in determining how much of your company to give away – and to whom.
Know Your Venture Capitalists
VCs are meant to be in it for the long haul. When they’re accepting equity, they have little choice but to support the companies they’ve funded until the time comes to exit, which could arrive years down the line – if ever. When accepting tokens, however, as is often the case with crypto startups, VCs are only bound by the lock-up period. When venture capital firms are aligned with the startup’s goals, they have little interest in market dumping their allocation at the earliest opportunity. But when the entire market heads south, as was the case last year, less scrupulous VCs are prone to selling everything they can get their hands on.
Dumping on retail isn’t the only crime VCs stand accused of; they can also impair a project by being too overbearing. There’s a fine line between incubating a startup and throttling it. When a lead investor shares your vision, and works with you to realize it, it can feel more like a partnership; conversely, when VCs attempt to micro-manage or steer the ship, it can suck the life out of a project.
So what’s the solution? If you can’t bring your product to market without millions of dollars, venture capital is almost inevitable. That’s assuming your concept is good enough to whet their appetite of course; during bear markets, VCs become understandably picky about the checks they write.
While not every startup can attract a16z, they can weed out the firms that are only in it for a quick flip. Study the landscape, talk to other teams who obtained private funding, and learn from their experience, be it good or bad. VCs often get a bet rep, with Cobie claiming that they “basically do nothing post-cash. They give no feedback, don’t participate in governance, don’t even talk to the project founders after the round is closed.”
The reality is more nuanced. Just as VCs are compelled to invest wisely, startups should accept investment wisely. VCs can be the lifeblood of a new venture. Pick the right venture capitalists and everything that follows next should fall into place.