Your cryptocurrency startup should accept venture capital

Should your cryptocurrency startup accept venture capital funding? It’s a simple question, but intertwined with a network of considerations. The best ideas can’t be built on a shoestring budget: The money to build a team, develop a proof of concept, and bring a consumer-ready product to market has to come from somewhere.

If you don’t give VCs, where? Most founders don’t have pockets deep enough to fund themselves, while public token sales depend on two things: a token and a product that the mass market can get hold of. This immediately rules out a significant portion 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 avoid it altogether is one of the toughest decisions a startup will face. Whatever their choice, it will have lasting consequences.

For VC or not for VC?

While 2022 will become a bad year for cryptocurrencies, with every significant industry benchmark a fraction of the 2021 high, venture capital continued to flow. The block relationships $31 billion invested in the industry last year, $8 billion of which went into NFTs and GameFi. The report also states that 78% of all blockchain venture funding occurred in the last two years. It is clear that for a significant percentage of crypto projects, the acceptance of venture financing has never been questioned. However, not all web3 startups have gone down this well trodden path.

Even is a blockchain and metaverse company working on the convergence of mixed reality and spatial computing. It proposes using AR to embed digital objects in physical spaces, allowing NFTs to be “buried” anywhere in the real world. However, it’s not just Peer’s technology that’s new — so is its funding journey.

Founder Tony Tran was able to cover the initial costs himself before raising $14 million via a private sale of Peer’s L1 coin, PMC, to friends and family. This was done via a Reg D offering to meet SEC filing requirements. While this approach has proven successful for Peer, which is following up its private round with a public token sale, not all founders are as lucky as a small circle of HNW individuals.

Given the choice between accepting VC funding or abandoning the project, choosing the former is a no-brainer. The trick is determining how much of your company to give away and to whom.

Know your venture capitalists

VCs are meant to be involved for the long term. When they accept stock, they have no choice but to back the companies they’ve funded until it’s time for exit, which could come years later, if ever. When accepting tokens, however, as is often the case with crypto startups, VCs are only constrained by the lock-up period. When venture capital firms are aligned with the startup’s goals, they have little interest in unloading their allocation on the market at the first opportunity. But when the entire market heads south, as it did last year, less scrupulous VCs are inclined to sell anything they can get their hands on.

Retail dumping isn’t the only crime VCs are accused of; they can also jeopardize a project by being too bossy. There’s a fine line between incubating a startup and limiting it. When a lead investor shares your vision and works with you to make it happen, it can feel more like a partnership; conversely, when VCs try to micromanage or steer ship, it can suck the life out of a project.

So what’s the solution? If you can’t get your product to market without millions of dollars, venture capital is almost inevitable. That assumes your concept is good enough to whet their appetite, of course; during bear markets, VCs get understandably picky about the checks they write.

While not all startups may attract a16z, they power weed out companies that are there just for a quick turnaround. Study the landscape, talk to other teams that have secured private funding and learn from their experience, good or bad. VCs often get a bet rep, with Cobie claim that “they basically do nothing after cash. They don’t give feedback, they don’t participate in governance, they don’t even talk to the project founders after the round closes.

The reality is more nuanced. Just as VCs are obligated to invest wisely, startups should accept investments wisely. VCs can be the lifeblood of a new venture. Pick the right venture capitalists and everything below should fall into place.

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