Overview
Capital is one of the main components needed for any business or project to take off and it does not matter what type of business it is, whether it is a traditional venture or one that is developed according to emerging technologies such as blockchain and cryptocurrency.
While there is a plethora of ways that creators and developers can obtain funding today, Venture Capital funding has become one of the most popular ways. There are many prominent, wealthy investors who are scrambling to be a part of the future of digital currency, and the potential that it has in a rapidly evolving world.
Venture Capital Funds Explained
Venture Capital, also referred to as just VC can be described as private equity financing. This involves investors pooling funds together to fund start-up companies, projects, and small businesses according to the potential that these projects or companies have for long-term growth and success, providing these investors with a generous return on investment.
Venture Capital is typically derived from wealthy institutional investors as well as different investment institutions such as banks, and many others. VC funding, however, is not always based on money and capital but it can also include managerial and/or technical experience.
Venture Capital Funds and the Cryptocurrency Space
VC firms that provide funding to start-ups and a variety of crypto and blockchain projects have some similarities to mutual funds, but there are distinct differences, especially considering that VC focuses specifically on certain types of early-stage investment.
Projects and companies that receive funding from VCs will typically have high-growth potential and they tend to be extremely risky, with long investment horizons. VC firms tend to play an active role in their investments either on the board or by providing guidance.
What do Venture Capital firms consider when they invest in a project or company?
When you start a cryptocurrency project or blockchain project, you can expect that a VC will investigate every aspect of the project including the founding team, development team, business model, target market, ROI, current financial situation, and many other components.
Crypto and blockchain projects are extremely risky and there is competition between start-ups to obtain the attention of some VCs, this means that you must be prepared to deal with due diligence.
Merely conceptualising an idea is not enough to get VC interested. Where crypto and blockchain projects are concerned, investors are picky, and you need to ensure that you provide investors with something worth the consideration.
VCs in the cryptocurrency and blockchain space tend to look at some of the following:
- Extended Innovation that relates to blockchain technology is vastly unexplored, with its potential still being realised. This means that investors tend to consider projects that indicate an emphasis on innovation that will make the project stand out from similar ideas.
- Data Orientation – many investors believe that the focus of blockchain and cryptocurrencies lay in data creation, management, and sharing more than anything else, making it extremely attractive to investors.
- Projects that can solve real-world problems – There are many real-world problems, with more emerging as the world transitions to a dominant digital age, and projects that serve to solve problems will get more attention than projects that are only a novelty.
- Viable Solutions – Investors and VC funds are keen to offer to fund to projects that not only promote blockchain technology but help it reach mainstream adoption through the creation of viable solutions which are native to decentralised ledger technology (DLT).
- The use of different technologies – While the focus is on blockchain technology, some investors consider the incorporation of other technologies as a bonus, especially with the Internet of Things (IoT), Artificial Intelligence (AI), Augmented Reality (AR), Virtual Reality (VR), and many others. This attracts potential investors who favour “tech convergence).
Step-by-Step Guide to Getting Funding for a Blockchain or Crypto Project
Step 1 – Work out what your goals are
This is the first step and involves you determining what you want from your project and subsequent business, whether you want stable and sustainable growth, or whether you want your project to be the next greatest thing in the crypto space.
The main goal for any Venture Capital firm is to grow larger so that larger returns can be generated and if this is not in line with what you want for your project, then Venture Capital funding is not suited to your needs or objectives.
Step 2 – Determine the target market for your project
Whether you are just starting your crypto or blockchain project, or your project is already in operation, you must understand the overall market opportunity that exists for your unique services and/or products.
Many new projects can become too involved in comprehensive market analysis and market studies to find their niche, but this can take a lot of time that you could use trying to get your project off the ground.
It is important to compute the addressable market to help you forecast potential earnings, but not to such a degree that you lose focus on your project.
Step 3 – Work out a budget
VC is not intended to be considered a prize or a milestone on its own. VC funding is an option that allows you to raise funds for your project. You should only consider VC funding when you do not have any other funds to meet your next business objectives.
Before you consider VC funding, you must ensure that you know exactly how much you will need to meet those objectives. What you ask for must be based on this precise amount and it should not be according to what you think you may need, or what you could potentially raise.
In addition, you must hang onto as much equity as possible for yourself and future funding.
Step 4 – Understand how Venture Capital Firms make money
Venture Capital firms operate in the same way as mutual funds where there are a few investors’ funds pooled together and where a large sum is invested into start-ups and growing companies.
Fund managers can make money in two different ways, either by charging a management fee of 2% of the total fund or by taking between 20% to 30% of the returns, also known as the carry.
Step 5 – Determine the return that you can offer investors
Investment spouses will return to VC funds by making between 20% to 30% yield and supervisors of these funds are unlikely to invest if the yield is less than 30%. You must also consider that yield rates and risk tolerance will vary and change according to your geographic location.
There is a massive market in which crypto and blockchain projects compete, with a certain level of market penetration that provides them with a competitive edge over any other similar projects, or imitators.
Shareholders and start-up founders must consider traction as well as growth because they are two of the most important success factors.
Step 6 – Determine the Stage that your project is in
A crypto or blockchain project can be defined according to its funding round, either of the following:
- Angel
- Pre-Seed
- Series A
- Series, B, C, or other stages
Angel Stage
During this stage, there are many individual investors, who use private funds, and show a keen interest in high-risk and high-reward opportunities, especially those in the crypto and blockchain space.
Pre-Seed Stage
During this stage, product development is used to construct what is known as a Minimal Workplace Product, or MVP. Amounts during this funding round are typically less than 1 million ZAR.
The funding for the Pre-seed stage can also be obtained from friends, family, and early supporters, especially if you approach active cryptocurrency communities on social media platforms such as Reddit.
Seed Round
During this round, MVP is injected using “seed” which means that it can be analysed, and it could offer developers the time that they need to appraise their product-market match. This round of funding means that amounts are subsequently increased, ranging from between 1 million to 3 million ZAR.
The seed round offers start-ups the funds that they need to form a base that could yield lucrative business enterprises. These funds are also used to hire key staff, analyse the depth of the market, developing, and analyse potential MVPs.
It is important to remember to take your time during this round to find the right seed around different partnerships until you can move on to the next funding round, Series A.
Series A Round
This funding round can raise between 3 million and over 1 billion ZAR in funding. At this stage, it also means that you might have to part with some of your equity with investors joining the round, expecting to receive shares for their investment.
These investors can also join your board, and this will lead to increased pressure for your project and business to grow faster.
Series, B, C, and later stages
These are additional stages of funding that can span over years as your project and business mature. The funding in these rounds can be in tens or hundreds of millions, even billions of Rands for successful businesses.
Step 7 – Prepare the necessary documents for the VC
When you have attracted the attention of a Venture Capital Firm, you need to make sure that you have the following to present:
- Elevator Pitch – a brief pitch that will catch and hold their attention.
- Executive summary of the project that combines the pitch and an overview of technical details.
- A business plan that consists of all comprehensive details on how your project will grow, what your financial status is, how you will use funds, and how investors can earn a return.
- Presenting a Pitch Deck or a slideshow that represents key highlights of the business plan.
When you present to a Venture Capital firm never bring a Non-Disclosure Agreement (NDA). VCs will typically refuse to sign it because of all the legalities and red tape that surround it, especially when VCs sit through several pitches with similar ideas or projects.
Step 8 – Build a team of trusted advisors
Your project will start growing faster once you read the Venture Capital stage and you will start facing several important decisions rapidly. These could determine either the failure or the success of your project, and you must have a good advisory team to work with.
Step 9 – Prepare for Due Diligence
If a VC favours your pitch, the project will face exhaustive review and with due diligence, the details you provided in your pitch can be confirmed and the finer details explored.
By this stage, you must have a formal accounting system in place and have the necessary steps implemented to manage the legal requirements involved with your project.
Step 10 – Do your own Diligence
You must ensure that the VC that favours your project is the right partner for you. Even when you have done thorough research, you must dig even deeper to see how the VC’s other investments are faring and whether other project founders that received funding are treated fairly, or whether they have been pushed from their projects and businesses.
Step 11 – Get legal advice
You must rely on your instincts to decide what is best for your project, but you must make informed decisions. Many factors will determine whether you are making the right choices including the business and project structure, local laws, and many other components.
Once you have a deal with a VC, there is a mountain of paperwork to get through and it is always a good decision to get some professional legal advice.
FAQ
What is Venture Capital financing?
VC financing and funding refers to pooled investment amounts from investors who seek private equity stakes in start-ups, small, and medium enterprises that show significant growth potential.
How do VC firms operate in the crypto industry?
The cryptocurrency industry and space are still in their early stages, leaving a large amount of room for potential growth and expansion. Many VCs want to opt in for emerging technologies hoping that these projects will become the largest investment opportunities of our time.
Why are so many large VCs opening to crypto projects?
There is a lot of money that can be made in crypto and blockchain projects, with many investors trying to get in front of others.
Are there many VCs who are investing in crypto projects?
Yes, there are many VCs who are funding start-ups today.
How are Venture Capitalist Firms compensated?
They receive between 20% – 30% of profits, with general partners usually receiving an additional 2% management fee.
What are the stages of VC funding?
There are several including the Angel Round, Pre-seed, Seed, Series A, B, C, and later rounds.
How does VC funding differ from an ICO?
An Initial Coin Offering (ICO) is less regulated, does not have investor protection, and the risk reward depends on the soundness of the project, community, the development team, and other components. While ICOs are quick to both launch and exit, they are considered less trustworthy than VCs.
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