Blockchain has offered a decentralized environment in which you can deal with services on a peer-to-peer basis. The users determine the rules on blockchain, and the governance of blockchain environments depends on the supply and demand dynamics. Blockchain presents a formidable improvement over the traditional top-down decision-making model followed by different centralized solutions. Similar to the new design of blockchain applications, the funding for blockchain projects must also follow some innovative approaches.
If you have an idea for a new blockchain project or startup, then you need a clear impression of the effective methods to raise funds for the project. Considering the volatility of cryptocurrencies and limited awareness about blockchain, blockchain startup funding can be quite challenging. The following discussion helps you identify some of the best methods to obtain funding for your blockchain project. In addition, you can also identify the specific implications associated with each funding method.
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Funding for Blockchain Startups and Projects
The interesting thing about blockchain project funding is that you can choose the conventional methods used for funding startups. At the same time, concerns regarding the new thought processes for raising funds for blockchain startups have also become quite prominent in recent times. How? Assume that a project receives funds in the form of cryptocurrency at a specific point of time or the desired liquidity for bootstrapping their multi-faceted applications.
In these cases, the project or the startup must develop a risk management plan. Why? What would the startup do if the value of the cryptocurrency they received in funding fluctuated? A risk management plan is essential for a startup to safeguard its operations against the rapid fluctuations in the value of cryptocurrencies.
At the same time, the storage concerns of funding for crypto project and startups would also be considerably different from that of fiat funds. You are vulnerable to risks of hacks in the case of hot wallets or exchanges. On the other hand, hardware wallets or paper wallets can introduce a diverse range of infrastructure management challenges for the project team. Therefore, you have to tread carefully while seeking funds for blockchain projects or startups.
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Methods for Funding Blockchain Projects
You can find the standard concepts for startup funding in the case of funding for blockchain projects, such as crowdfunding, venture capital funding, and angel investments. All of these methods serve as valid methods for helping startup founders raise the capital required to get their business running.
Interestingly, some of the traditional funding methods for blockchain projects have successfully adapted to the blockchain domain. At the same time, it is also important to notice the blockchain-centric funding methods such as DAOs or Decentralized Autonomous Organizations. Let us take a look at the top funding methods for your blockchain project or startup.
1. Angel Investors
As the name implies, angel investors are one of the first answers to “How blockchain projects are funded?”, particularly for startups. The approaches followed by angel investors for funding blockchain projects have become quite popular in recent years. As a matter of fact, a report suggests that blockchain angel investors have been quite active in recent years with constantly growing deal count.
Generally, angel investors work by using their own funds for startups. Therefore, they always look for projects or startups with high-risk and high-reward facilities. However, you must look for certain important factors in your search for blockchain startup funding opportunities with angel investors, such as,
Reach Out to Angel Investors
You can use different resources for finding angel investors, such as websites or professional networking. It is important that you identify the angel investors who might be interested in blockchain startups and projects. Make sure that you reach out to them with a plausible introduction to yourself and your project.
Match their Expectations
Set the perfect foundation for building your 1-on-1 relationship with the angel investor and make sure that your expectations match. You must be prepared to answer the questions of the angel investor clearly. At the same time, you must not hesitate to ask the amount of blockchain project funding you can expect from them.
The most important aspect while dealing with an angel investor for funding your blockchain startup is flexibility. You must remember that dealing with angel investors would be different than working with an organization. Remember that you have to adapt your interactions through different stages, starting from your introduction to the investment for your crypto startup.
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One of the common methods to obtain funding for crypto project refers to crowdfunding. The funding methods for blockchain projects and startups can use common choices like crowdfunding with a unique twist. For example, crowdfunding campaigns for blockchain projects can include incentive schemes for investors. Blockchain projects can promise incentives in the form of native governance or utility tokens of the project, or non-fungible tokens.
The facility of unique digital assets to the investors in your project can help in generating scarcity, thereby increasing funding. Decentralized Autonomous Organizations or DAOs have emerged as a notable example of crowdfunding for blockchain startups and projects. However, the success of crowdfunding method to obtain funding for blockchain projects depends on the following factors.
Identifying the Crowdfunding Model
Incentive-based crowdfunding is obviously an effective and the most prominent crowdfunding model for the blockchain landscape. At the same time, you must also take note of the other crowdfunding models, such as debt-based and equity-based crowdfunding.
If you look at it closely, crowdfunding is a community effort, and how effectively you can communicate your vision to the community. Communities are an integral aspect of the domain of decentralized blockchain technology as they fuel engagement and hype across different stages of a project. The approaches for engaging your community would differ in the case of blockchain startup funding with a focus on direct communication and organic marketing.
Provide a clear and precise specification of the final solution you want to deliver with your blockchain project or startup. Crowdfunding initiatives bring the expectations of multiple investors to the table. Therefore, you must ensure complete transparency regarding your project and its value for the community to avoid any misunderstandings.
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3. Investment Funds
Another formidable source for blockchain project funding is evident in investment funds. The exponential growth of the blockchain industry also accompanies the underlying impact of strong growth in hedge fund and venture capital investments. As of now, over 800 blockchain investment funds are operational and cater to the financing needs of multiple blockchain projects and startups. Interestingly, the amount of assets under the management of investment funds has registered an explosive growth rate.
The value of the assets under the control of investment funds increased to more than $21 billion in 2020 from the $190 million estimated in 2016. Therefore, you can explore a broad range of opportunities for growing your blockchain startup through investment funds. Simultaneously, you need to reflect on the following factors while choosing investment funds to obtain funding for your blockchain startup.
Recognize the Investors
The key to finding the ideal source of funding for blockchain projects rests directly in identifying potential investors for your project. You can evaluate an investment fund by taking a look at its existing portfolio. One glimpse at the portfolio of an investment fund could help you figure out whether they would be interested in your project or startup.
In addition, you need to identify the development stage of your project to find suitable investors with a relevant track record in funding through different rounds. You must also focus on whether the investment fund has an active interest in blockchain technology and startups. Does your blockchain project or startup fit the theme of the investment fund?
Reach the Investment Fund
You need to introduce yourself and your idea for the blockchain project in an effective way to the investment fund. Make sure that you present a strong case for convincing the fund to invest in your project. Investment funds rely on references for identifying valuable business opportunities. Therefore, any individual you know can introduce you to an investment fund, thereby improving your credibility.
Move through the Stages
The answer to “How are blockchain projects funded?” in the case of investment funds would refer to a clear course of action through the different stages of investment. Investment funds feature a corporate structure where startup founders have to go through multiple approvals before receiving the funds. You can have better chances of success with consistency in your business pitch while maintaining confidence in your interactions.
Familiarize with Term Sheets
The easiest way to understand funding for crypto project through investment funds would be to learn about term sheets. Term sheets are critical documents to obtain startup funding from investment funds as they document all the critical details of a deal. The term sheet would feature the investment amount, ownership structure of your blockchain startup or project, and project valuation.
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4. Incubators and Accelerators
You can also try your luck at funding blockchain startups through blockchain incubators and accelerators. The best thing about incubators and accelerators for blockchain startup funding is the fact that they don’t focus solely on raising capital. As a matter of fact, the funding from incubators and accelerators is only a fraction of the benefits they offer for your blockchain startup or project.
Blockchain accelerators or incubators offer basic mentoring for startups which helps you navigate the challenges of the blockchain industry. Furthermore, they also offer networking opportunities to help you discover new ways to drive the growth of your startup. For example, they can introduce you to investors who might be interested in your project. Here are some important factors you need to take into account while choosing blockchain accelerators or incubators for funding your blockchain startup.
Check the details of the blockchain incubator or accelerator and find whether it is the right fit for your project. Incubators are an ideal choice for startups that have an idea, while accelerators can help startups that have developed a definitive structure for their ideas.
Preparation for Full Potential
You must prepare comprehensively with a vision for growing your business with the philosophy of the incubator or accelerator. Learn how to take advantage of the opportunities to learn new skills, and develop promising business and investor relationships and networking.
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The different methods for blockchain project funding outlined here show that conventional startup funding mechanisms can work for blockchain startups. However, the traditional funding methods such as crowdfunding, investment funds, angel investors, and accelerators or incubators feature unique modifications tailored for blockchain projects. At the same time, the evolution of new and proven funding methods such as crowdfunding through DAOs serves as a formidable advantage for blockchain startups.
On the other hand, the preparation of blockchain startup owners and project founders is the core determinant of success in funding. You should have the necessary plan and outline of what you want to deliver and how it can draw profits. If you can successfully convince the investors, there are many routes for funding your coveted blockchain startup or project ideas.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!