Every day, blockchain gains popularity around the world. Along with this progress, more and more blockchain startups are appearing on the market every day. Raising capital for blockchain startups can be difficult. Many hours spent coding, writing white paper/blue paper, and testing the team’s product are just the tip of the iceberg. Blockchain is gaining traction in the startup world. Here are a few possible solutions to help you get funding for your blockchain startup.

Private Placement

Prior to a public offering, a project owner may choose to conduct a private placement, in which tokens are offered to a few investors. A “token presale” is when blockchain startups sell tokens while their projects are still in the planning stages. 

The purpose of the token presale is to either raise money for the project’s early stages of development or for business expansion that will ultimately precede the launch of the Initial Coin Offering (ICO). 

Tokens are typically sold at a huge discount compared to their anticipated exchange listing price because token presales are extremely risky and investors run the risk of losing their entire investment if the project doesn’t produce the desired results.

Nevertheless, given the low price, investors will profit greatly if the project is successful. Because of the high risk/high reward tradeoff, token presales have progressively evolved into the main event prior to a new protocol’s public offering as investors stake their bets on making a respectable profit.

Public Offerings

To my knowledge, public offerings typically fall into one of three categories. All of them are explained in detail below.

Initial Coin Offering (ICO)

Initial Coin Offering (ICO) describes the initial instance in which a project raises money by offering its token to retail investors. ICOs, also referred to as token sales, crowd sales, and sales to the public, are a method of raising money for a new Web3 startup in which investors receive digital tokens.

However, over time, the term has acquired a new meaning and is now frequently used to describe any token offering in which the project has independently organized the sale of its tokens. 

Utility tokens make up the vast majority of tokens raised through ICOs. These are tokens that can be used within the protocol to gain access to and purchase goods and services. In an ICO, the project may also issue governance tokens, which stand for the right to decide how the project will be run. A token can have both utility and governance features, just to be clear.

This funding model is very similar to an IPO, in which investors invest money in exchange for company shares. However, as opposed to an IPO, where all fundraising documents are evaluated by the Securities & Exchange Commission (SEC) before the company issues shares to public investors, in an ICO, the project owner creates a white paper. 

So, what is white paper? It is a document that covers all the details of the project. As there is no regulator in charge of verification, the white paper’s goal is to give enough information to win over investors.

Nevertheless, a lot of projects raised money but never completed the project they had promised in the white paper because there was no regulation. Due to the fact that many of these projects turned out to be frauds run by unidentified project owners who stole investors’ money, ICOs lost favor. 

As a result, this approach’s primary drawback, along with the requirement that it incurs its own marketing costs in order to raise funding awareness among investors, was the undesirable reputation. 

IEO and IDO are two additional token fundraising options that have emerged as alternatives to ICOs. Let me explain more in the next parts of this article.

Initial Exchange Offering (IEO)

IEO is an enhanced version of ICO that was developed to address issues in the ICO market. Before selling tokens on a cryptocurrency exchange, projects in an IEO are carefully screened and evaluated. 

The exchange is in charge of assessing the project’s credibility, so in order to preserve that credibility and trustworthiness, it will need to thoroughly investigate the token issuers. As a result, cryptocurrency exchanges can stop shady projects and scams from using IEOs to raise money. Exchanges can also significantly increase a project’s exposure, interest, and credibility because they serve as mediators.

Following a profitable IEO, the token issuers pay the exchange a listing fee and a predetermined number of tokens in exchange for the use of the exchange’s platform services. Some of the most well-known blockchain projects of the present, like Polygon and Elrond, were born from IEOs.

Initial Decentralized Exchange Offering (IDO)

While IEOs addressed some issues with the ICO market, dApp proponents were left in a difficult position because the IEO process is centralized and depends on centralized exchanges like Binance or FTX. Decentralization, according to dApp proponents, could reduce fundraising costs, hasten the process, and eliminate human error and fraud. As a result, they had to come up with a replacement for IEOs.

IDOs, a decentralized variation of IEOs, was created in 2019 in response to the growing popularity of Decentralized Exchanges (DEXs), a blockchain-based peer-to-peer exchange where transactions take place directly between cryptocurrency traders. IDOs use a DEX’s IDO launchpad to make the token sale possible. IDO launchpads utilize smart contracts on blockchains and are fully automated.

The most well-known projects that were born from IDO are Solanium, BSC Pad, Polkastarter, and DAO Maker. A fundraising project is submitted to an IDO launchpad in order to raise money. The project owners are allowed to issue their tokens on the DEX if the project satisfies the launchpad’s standards (as determined by the community, the launchpad team, or the third party auditor). These evaluation procedures are significantly less stringent than the IEO procedures because they typically only examine the project code and whitepaper and do not call for the project owner’s identity to be revealed.

Are there any methods for Web3 blockchain startups to get crypto fundraising?

In addition to ICOs, IEOs, and IDOs, where most tokens raised are utility tokens, the demise of ICOs also gave rise to a new type of regulated fundraising technique called Security Token Offerings (STO). A STO is a blockchain-based issuance of securities that are backed by real-world assets like stocks, bonds, REITs, or commodities. These digital tokens, also known as security tokens, serve as the holder’s digital representation of the asset. Security tokens are considered to be securities and are subject to strict regulation by the SEC in many nations because they must be backed by tangible assets. In comparison to the ICO, IEO, and IDO markets, the STO market is consequently smaller and less liquid.

What Type of Fundraising Method is Suitable for Web3 Blockchain Startups?

Blockchain projects and startups should use private placements to raise money with tokens because they can get immediate funding and other benefits from investors without giving up ownership or voting rights. Since the companies do not need to spend time restructuring the organization and preparing extensive documentation as required for the traditional IPO, the crypto fundraising process is also significantly more efficient in terms of cost and time. 

The business or project owner can approach a number of institutional or angel investors to obtain benefits like boosting the project’s credibility, offering operational support, or assisting the business in expanding its network and ultimately creating a concrete protocol. The company can execute an IEO/IDO at a higher price than a presale round by taking these steps during the private placement stage, and they can also raise money as needed through traditional debt or equity by doing so. 

Generally speaking, it is still not advised for dApp startups to carry out an ICO because they are less reliable and more expensive than IEO/IDO. Lack of investor awareness and low credibility could prevent startups from obtaining enough funding. 

Therefore, IEO/IDO can use their own credibility and existing customer base almost at no cost, whereas ICOs require the projects to pay a significantly large sum of marketing budget to raise funding awareness. However, this is governed by the laws of each nation.

Additionally, a Web3 startup should exercise caution when raising money through both equity and token sales because it could lead to a conflict of interest between token and equity holders. Due to the fundamental differences between the factors driving equity and token appreciation, a conflict of interest has arisen. 

The generation of cash flow and anticipated company growth are factors that affect how much the equity value will increase. On the other hand, the increase in token value is correlated with its inherent demand. To give an example, a token holder might try to persuade a business to make an extravagant investment in order to boost traffic to and demand for the token. 

Therefore, a dApp startup should either raise funds via token or equity in order to avoid this conflict of interest. If not, it must ensure that the majority of investors hold the same number of tokens and shares.

In addition to the crypto fund mostly raised from venture capital, or angel investors, or investors, there is a new approach for blockchain to get both capital and support resources from a venture studio or venture builder.

For blockchain startups focusing on Web3 or NFT products, they can submit their ideas to Satom venture studio. At Satom, we will provide founders with both funds and other services like execution strategy, project planning & management, market insight & strategy, HR & Talents, fundraising, finance and accounting, and more. If you find it interesting, email us at: hello@satom.vc