Here are the main ways for you to raise funds for your project in crypto.
Sooner or later any business comes to a point where fundraising becomes necessary for further development and expansion. At least if the business’ owner wants it to continue growing. And the crypto industry is, in fact, the easiest one in terms of fundraising – it offers more opportunities to get access to finances than any other industry. Even for projects that don’t have any direct connection to blockchain or even IT as a whole. Even construction companies are able to raise funds through crypto: for example, BitRent tried to tokenize investments in construction projects and BASIS raised funds for new construction materials production. Both companies eventually failed, but their fundraising campaigns were successful.
There are a plethora of fundraising methods used in the crypto industry. However, we will focus on the main ones and omit the more obscure variations, since most of them really differ only in nuances.
So, here are the main ways for you to raise funds for your project in crypto.
The crypto industry is the most popular sector for venture capital funds, since it offers the most potential return on their investors. Crypto startups can raise funds from both venture capital firms (Pantera Capital and Coinfund are good examples) and well-established crypto companies (for instance, Coinbase – one of the largest crypto exchanges – has its own venture capital fund – Coinbase Ventures). However, in order to raise money this way, you have to have at least the MVP ready – it is virtually impossible to sell just the idea to venture investors.
They are similar in many ways to venture capital funds, but usually are represented by private investors rather than companies, although there are formalized groups of angel investors. Angels also often take part in managing the project’s development, since it is a common practice for them to get a partial ownership of the startup in exchange for investments.
Initial Coin Offering is the most basic form of crowdfunding in the crypto industry: startups sell their tokens (in theory – tokens that have some utility within the project) to investors. ICOs were a major driver behind the crypto market explosive growth in 2017. However, 80% of startups that raised funds via ICO either turned out to be outright scams or simply failed. A lot of tokens issued during ICOs haven’t even reached crypto exchanges, so investors essentially received nothing. Due to the huge number of scam projects and lack of investors’ interest protection, ICOs are rarely used today – they were replaced by other forms of fundraising, such as IEO or IDO.
Initial Exchange Offering is similar to ICO, but it has two important distinctions. First, the exchange that hosts the IEO, allows only carefully curated projects to raise funds. Thus, the exchange’s reputation serves as an additional guarantee. Second, investors are guaranteed that the tokens they purchase will be listed on this exchange, so unlike in ICOs, they will for sure be able to at least sell their tokens. In addition, both the startup team and investors have to pass KYC and AML procedures, which also reduces the risk of fraud.
Initial DEX Offering is the latest buzzword in crypto fundraising. It is similar to IEO in that only curated projects gain access to IDO (at least in theory) and their tokens are listed on the decentralized exchange automatically. However, it is not a team of experts who select projects, but the DEX community who decides via voting whether to allow a certain project to hold IDO on the platform. In addition, all funds movements are controlled by smart-contracts, so there is no real third-party involvement. Finally, KYC and AML procedures are not required, since there is no centralized organization involved that could process them. However, the last point may change soon depending on the regulations imposed on IDOs in different countries.
It is worth noting that the aforementioned methods of fundraising in crypto are not mutually exclusive. Nothing prevents you from getting financing from a couple venture capital funds, a few angels and then launching IEOs and IDOs on multiple platforms. So feel free to use the combination of tools and methods most suitable for your situation and available resources.
CEO of Interstellar Digital PR agency, journalist, contributor.