How to make venture capital work for blockchain and crypto startups 🚨 This article is 4 years old...
How to make venture capital work for blockchain and crypto startups
3 min read
Updated: Dec. 20, 2020 at 3:06 pm UTC
Innovation across all sectors has long been supported by investors. Many of the world’s most transformative ideas were powered by venture capital, capital that’s becoming increasingly important as software continues to “eat the world”. As nascent industries like blockchain and crypto create a new class of specialized founders, specialist VCs are also claiming formidable capital to make decisive bets.
Why Work With a VC
Under the right circumstances, venture capital accelerates the disruption of industries, as well as innovation across new and expanding verticals. Venture capital is a key asset in a founder’s toolbox – a conduit for information, strategies, and most importantly, funding. A check from the right VC can add tremendous value to your efforts, and provide you with vital support across various stages of your startup’s development.
Before we dive into the reasons why to work with VCs, it’s important to outline the founder’s approach. While many founders can have different goals in mind, there are a few common truths echoed by all founders who end up seeking Venture Capital.
To extract maximum value from your relationship with your investors, the following needs to apply to you, the Founder:
- You are targeting a large or fast-growing market, or (preferably) both.
- You aim to scale aggressively and overcome your competition.
- Your operational success would greatly appreciate the value of your equity/network, and this appreciation has a high ceiling.
The weight of a good VC firm is particularly felt in the earlier stages of a company’s life, prior to any meaningful revenue or real product-market fit. As a Founder, working with the right VC will provide you with the following tools:
- Funding – the quintessential piece of working with VCs is their ability to fund your startup, giving you the firepower needed to turn a great idea into a business.
- Perspective & Recognition – a strong VC will possess a bird’s eye view that you simply cannot acquire as a Founder, especially when doing everything right. Their combined experience of working with numerous other founders will be valuable to you and your startup.
- Support – a VC’s true edge is their ability to add value to their portfolio, in turn affecting their own bottom line. Tapping into an investor’s strategies, research, and network can change everything for you and your startup.
What VCs look for in a startup
You’ve established that a VC will be a welcomed addition to your cap table. The final step is convincing a VC that your team, idea, and products are worth “X”. When evaluating opportunities, a VC focuses on the two core engines behind a startup:
The Business – market sizing, product & offering, business model, token economics (if applicable), competition, and defensibility, are all areas that a shrewd investor should want to explore deeply with the Founder. To get a check from a VC that does their homework, you should do yours. Be prepared to transmit the big picture, but also offer clear steps in that direction. If your startup is targeting an established industry (e.g the shipping industry), then keep crypto to a minimum – showcase your understanding of the target market, and explain how your blockchain product can solve problems. If your solution is entirely crypto-based, be prepared to expand on the value that’s unlocked by your network, as well as the sustainability of the project.
The Founders – without the Founder(s), a seed-stage company is almost worthless. Being genuine, communicative, and clear with institutional investors about your current (and future) situation will always yield the best results. Investors, including myself and my partners, gravitate towards founders who can attract incredible talent. Be prepared to share your hiring plans.
What to look for in a VC
Understanding & Alignment – you should expect your shareholders to deeply understand your business and connect with your mission. Misaligned investors can become a monumental burden on a small organization. Governance needs to be simple, clear, and transparent. Your investors should keep you out of trouble, not become trouble. Do your own due diligence before accepting any check. For crypto networks, aligning with your investors on token design and distribution schedules is imperative.
Value Add – as investors, we strive to be the highest value-add investor on any cap table we join. Don’t be afraid to ask an investor what they can bring to the table. Tapping into their network, expertise, and experience is the leverage that will keep you ahead of the competition. For crypto networks, investors partaking in on-chain governance, providing liquidity (if applicable), and running nodes should also be taken into consideration.
Fundamentals for Founders
Finding the right investor for your startup can make a colossal difference. In this piece, we uncovered the founder’s approach and defined institutional investors as natural allies in a founder’s journey. We outlined the core areas where venture capital makes the biggest difference (funding, perspective, and support) and offered clear points for Blockchain Founders to focus on in their conversations with investors.
As niche industries continue to redefine the models of venture capital, the fundamentals highlighted in this article are likely to remain true for the next cycle of unicorn founders.
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