An Ultimate Guide to Raising Funds in Web 3.0 and Crypto
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The crypto winter goes on, and uncertainty dominates the present-day bullish sentiment in the crypto market. Yet, even with a dwindling market cap of leading cryptocurrencies, crypto projects are still attracting investment. A blockchain platform AltLayer has recently secured $15 million in Series A funding this year. A US-based Web3 gaming startup Argus Labs got $10 million in June 2023, and the CryptoGPT project also raised $10 million for its expansion to the Asian market. These are just a few cases of successful crypto fundraising, happening even amid the global downward trend in the industry.
This observation suggests that Web 3.0 and traditional methods of fundraising are complemented, and in many cases substituted, with innovative DeFi-facilitated crypto investments. We’ve teamed up with Majinx experts to explore fundraising opportunities and strategies in Web 3.0, with a specific focus on the growing cryptocurrency industry. Here, we share the tips and tricks for fundraising in crypto for 2023-2024 to help you get crypto investments and enter Web 3.0 with successful, well-funded blockchain business ideas.
Key Industry Highlights
- The number of crypto fundraising deals in Q3 2023 constituted 222, with a total investment pool allocated to these projects at the amount of $1.61 billion. The figure is almost one-third lower than the Q2 investment pool and a three-quarter decrease compared to the Q3 2022 statistics.
- Blockchain development enjoys the highest popularity among investors, with roughly one-third of invested funds ($515 million) going to blockchain projects in Q3 2023.
- The DeFi sector attracts investors, with Binance Labs and Coinbase Ventures being at the forefront of this sector’s financing.
- The highest share of investments in Q3 2023 was allocated to early-stage crypto startups.
Understanding Web 3.0
In a nutshell, Web 3.0 is the new vision of the World Wide Web based on the principles of decentralization, AI/ML use, connectivity, and user utility. Its main philosophy is user participation in the process of Web development and distributed ownership of digital data. Peer-to-peer transactions lay the foundation of interactions in Web 3.0, which is realized through the use of blockchain-powered applications and systems. Decentralization and permissionlessness also grant ultimate control over user data to users instead of tech giants, and blockchain-related privacy gives users protection from exploitative advertising and profiling.
Traditional Funding vs. Crypto Funding
Digital transformation inevitably changes the ways projects secure investments and get funding. Though traditional funding methods still work in the Web 3.0 space, they are often complemented with more robust and flexible crypto funding approaches. Here is a quick breakdown of each method’s pros and cons for projects seeking investment.
Traditional investment in digital projects is securer and more transparent for all involved parties, but it is also slower and more rigid. It may take weeks, if not months, to settle all terms and agree on the progress of funding. Things are different in the crypto space, with most projects and investors enjoying the flexibility of using both traditional equity and crypto tokens for investment. Another benefit is the speed of decision-making; provided that the investor is committed to a business idea, the investment procedure can be accomplished way faster in Web 3.0 than it usually takes in regular fundraising.
If we talk about financing ways and methods, most blockchain investments are done by venture capital and angel investors. Crypto projects may also potentially attract some crypto-focused foundations and development funds, while traditional institutional investors like large banks or hedge funds are only starting to consider this industry because of high risks and uncertainty.
The best thing about Web 3.0 fundraising is that projects can apply for different blockchain grants, hackathons, and other programs encouraging blockchain development. If the project is built on one of the popular blockchains, it makes sense to apply to that blockchain’s foundation for crypto grants (many ecosystems finance startups to stimulate activities in their protocols and platforms).
Still, crypto funding also comes with notable drawbacks and downsides, which mainly relate to weak projects, a poorly skilled founding team, and high selling pressure. The specifics of fundraising in crypto tokens can also add complexity, as it involves a long and challenging due diligence process on the investors’ part associated with the deteriorating investment climate over the past year. Web3 products are also characterized by complexities in user acquisition and high user churn rates (e.g., projects that experience market crashes quickly lose not only investors but also dedicated users).
With all these peculiarities of the Web3 niche, one should understand that it’s harder to acquire funding in 2023 than it used to be one or two years ago, and the amount of allocated funds is typically smaller than before. The funds a project can collect at the seed round are determined by many aspects – the current market situation, investor trust in the product, uniqueness of used technology and solution, and the estimated budget for the product’s development and launch. With these financing considerations in mind, the teams should build products that are not overly complex and have reasonable budgets.
Crypto Startup Lifecycle Stages
Every crypto startup should go through a specific set of stages before it matures, gains a solid reputation, and gets listed on the world’s well-known exchanges and platforms. At first, it has to pass the initial preparatory stage, which involves the product’s concept development, tokenomics design, and marketing. In this phase, the project’s concept and business model are formulated to guide further stages of development.
Then comes the token sale stage, which actually serves the fundraising goals and determines the project’s further development path. The early seed round is followed by the private sale round, each of which is aimed to raise finance for the project. Some projects also include a strategic round and round A into the token sale phase, and the final stage of this lifecycle stage is a public token sale (ICO).
Once these phases are successfully covered, the project may qualify for listing on a crypto exchange. This transition ushers the project’s maturity with the project’s full-scale release and creation of varied practical uses for its native token in the Web3 space. After the project gains more attention from users and investors, with successful use cases accumulating in its portfolio, the team can expect solid partnerships and greater investor interest, followed by more listings and broader token circulation.
An Overview of Cryptocurrency Fundraising in 2023
Crypto fundraising takes many forms, and each of them is divided into specific rounds and stages. Here is a breakdown of the most popular fundraising approaches.
Token Sales and Initial Coin Offerings (ICOs)
In a nutshell, an ICO is a fundraising approach that presupposes selling the project’s native crypto assets to investors to raise capital for that project’s development. ICOs used to be a very popular fundraising technique during the early boom of crypto projects, as the early sale of tokens was done in lucrative terms, with investors quickly getting immense ROI as the token’s circulation and demand grew.
Types of Funding Rounds for your Startup
|Funding Round||Pre-Seed||Series A||Series B||Series C|
|Stage Focus||Proof of concept/Prototype||Revenue Growth||Growth||Large scale expansions|
|Common Elements of Growth||Hiring||Development, Operations, Branding and Marketing||Hiring, Market, expansion, Buying, Buisnesses||Acquiring buisnesses, international markets|
|Amount of Investment||$10-$1mm||$10mm||$15-$25mm||$50mm|
However, this fundraising method won’t suit products at the seed round of finance collection, which are only at the germinal stage of development and need investment for the product’s development and engagement of target audience that could potentially contribute to ICO-, IDO-, IPO-type of sale.
Security Token Offerings and Regulatory Compliance
STOs are a method of fundraising in the crypto space that presupposes the issuing of tokenized real-world assets. The physical assets are regulated by securities legislation, which does not spread on tokens and makes their use more flexible. The major benefit of this approach is liquidity improvement; security tokens can represent tiny fractions of non-fungible and illiquid assets like real estate or exquisite works of art.
STOs address the limitations of ICOs in terms of fundraising by offering tokens with a more stable price pegged to real assets instead of a highly volatile and unpredictable cryptocurrency. That’s why STOs are treated more positively by both investors and regulatory bodies.
Decentralized Finance Fundraising Platforms
One of the secrets to get investments for your project is to turn to DeFi fundraising platforms. These are most commonly referred to as crowdfunding resources since they operate on the principle of retail investor engagement in promising startup financing. Such platforms encourage peer-to-peer lending, which is much more accessible than traditional finance for most startups.
They are convenient and user-friendly, laying a strong foundation for Web 3.0 industry development and support from crypto enthusiasts. However, the main drawbacks of this fundraising model are the need to expose your commercial idea at the early stage of its development (which raises the risk of intellectual theft) and the challenges of fundraising for non-consumer projects.
Non-Fungible Tokens as Fundraising Assets
NFTs can also become an effective fundraising tool for crypto projects. Some non-profit organizations organize NFT charity auctions and partner with celebrities to create limited-edition NFT collections and finance their activities with those NFT sales. The pros of using NFTs for fundraising are the exemption of NFT assets from US tax law and the formation of a sense of belonging to the project with NFT ownership. Yet, this model also has drawbacks, such as, for instance, the need for technical infrastructure supporting NFT transactions and the deteriorating user interest in NFTs.
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Strategies to Get Investment in Crypto
To make your fundraising strategy for a Web 3.0 or crypto project more successful, please consider the following recommendations. Here, we cover the main parameters that affect your chances of securing investor funds.
Create a Workable Product
It doesn’t make sense to seek investment before you have a working product with tangible value; your business idea should offer a concrete solution to an existing problem or user’s pain point. To generate such a product, you should first identify the problem you want to solve, analyze the competitors, and determine the flaws and gaps in competitor products. Formulate a unique offer by segmenting your market properly (B2B, B2C, etc.) and show a clear development roadmap to investors. It’s vital to have a clear tokenomic design, a straightforward budget, and a go-to-market strategy to show how you’re planning to develop and grow the project further.
Build Trust and Credibility
Trust is an essential precondition for a project’s funding, and it depends on how well you manage to prove the project founders’ expertise in the relevant niche. All of them should be public personas with domain-specific experience; it’s great if they have successfully completed projects, preferably in international companies.
Extra credibility points come from experience in training, mentorship, or experience sharing in the Web 3.0 sphere and advanced industry credentials. It’s also vital for the project to have a reputable board of advisors and people engaged in the project’s development.
The project’s comprehensive safety and security are also at the heart of investor trust and credibility, so we recommend conducting an inside-out blockchain smart contract audit for your solution before pitching serious investors.
Take Regulations into Account
Web3 projects emerge at the crossroads of traditional and crypto finance, so their legal status is shaky and highly reliant on the ongoing legislative changes in the project’s jurisdiction. Therefore, a Web 3.0 startup should have a credible legal advisor at the fundraising stage to operate in compliance with existing regulations. Projects that have reliable infrastructure providers and don’t intersect with traditional finance and regulators in any way have higher chances of frictionless launch, which is also one of the vital Web3 bonuses for businesses.
Target the Right Investors
There are different investor types in the crypto market, so you need to differentiate them to ensure sustainable project growth. Here are some tips on this matter:
- Before engaging with investors, a project should try to initiate partnerships with related projects and try out some integrations to exemplify use cases and offer tangible proof of the project’s feasibility.
- The startup’s owners should understand the basics of pitching their product; if all steps are taken correctly, investors should be easy to find.
- Those considering angel investors should be clear about their own readiness to invest personal funds in the project. It’s important to show the outcomes of a pre-seed round, fund collection from family and friends, or partial financing from the founders’ own money. Such aspects add credibility to a project and show that founders are personally engaged and interested in their project.
- Venture capital firms usually enter the project at a seed or after-seed stage, and if you work with this funding partner, it’s essential to distribute duties and responsibilities on the project. These investors can not only finance a startup but also add expertise to the project’s team and give you access to top-tier funds.
- If you have several funds willing to fund your project, it’s better to choose one of the highest quality and standing. It will add expertise and vital support for your startup in the form of product team assistance and marketing. What’s more, such a fund may become your lead investor and disseminate the knowledge about your product to its network, which is a huge contribution to its outreach.
- Startups should be careful about investor engagement and also do their due diligence. Toxic investors with a notorious reputation can harm the project and cause further funding rounds to stagnate.
- A common industry practice is to engage angel investors in early fundraising rounds. Starting from seed rounds or moving beyond the $500,000 threshold, you will need to engage an institutional investor with greater industry expertise to ensure the project’s smooth progression.
Build a Strong Community
Last but not least, a strong, active community of enthusiasts can make or break your project. Web 3.0 products with a large follower base are living testimony to the practical use and value of your business idea for people. Such projects naturally attract investors more, as the latter sees a practical monetization and user acquisition potential in them.
If you’re confused about how to secure seed funding in blockchain, welcome to 4IRE – we provide strategizing services to Web 3.0 businesses and can maximize your chances to get crypto investments in many ways.
Real-Word Success Stories in Web 3.0
Let’s return to the successful fundraising cases we mentioned at the beginning of this article to show what projects still rock and get crypto investments in 2023. The first one is the $10 fundraising result of the Argus Labs startup. The project is San Francisco-based, and it deals with crypto gaming products. The startup was supported by Haun Ventures – a popular crypto-funding entity that previously helped Thirdwave and Zora Labs secure financing. Argus Labs allocated the collected funds to studio and tooling infrastructure updates and expansion of its development team. The startup is also expected to present its flagship web3 gaming SDK, the World Engine, in the coming months.
Another lucky project, CryptoGPT, is a layer-2 project mixing ZK-rollup tech with AI advancements. It secured $10 million in the Series A funding round, while its total valuation currently stands at $250 million. The project was assisted by DWF Labs, a Web3 investment company specializing in crypto fundraising. CryptoGPT’s funding came from a large-scale Web3 investor in the Asian market, underlining this technology’s financial and strategic viability for this area.
Risks and Challenges in Crypto Fundraising
Our crypto fundraising guide would be incomplete without a discussion of the risks and bottlenecks crypto projects are currently facing on the path of getting the essential finances for their growth. Overall, challenges in this industry are numerous because it’s a young industry tightly linked to the projects’ tokenomics design and a quick go-to-market, listing, and monetization model. When talking about monetization-related challenges, we mean investor share here. In the traditional fundraising sector, investors start getting ROI at least 3-5 years later, while Web 3.0 projects experience continuous pressure from investors awaiting immediate returns.
Another challenge comes from user acquisition, which is pretty complicated in the Web 3.0 sphere, especially for complex and technically advanced projects. A standard end-user in the Web 3.0 world is poorly educated in terms of technical nuances, so their onboarding is expensive, hard, and lengthy. Sometimes user acquisition efforts just don’t make sense because the innovative product doesn’t have mass adoption potential at the moment. Thus, projects that don’t solve a pressing problem or address users’ pain points will face troubles in fundraising.
The risks faced by crypto projects seeking financing are:
- Market conditions. We’ve already discussed this issue at length above – the present-day crypto market is in a downward trend, and the prolonged crypto winter has turned many innovation-focused investors into crypto skeptics.
- Security issues. Many blockchain protocols have significant flaws and suffer from scam partners, undermining the project’s success. The ultimate anonymity of crypto also has pros and cons that everyone should keep in mind; at times, crypto projects don’t know who they work with, and the risk of fraud is high.
- Solution provider-related risks. A blockchain solution provider can fail a project with no opportunity to reclaim your investment because of a weak regulatory environment and business law loopholes surrounding Web 3.0 partnership contracts. The Web3 business environment is famous for being dynamic and democratic, with many arrangements done simply in chats or emails, which comes with elevated business risks.
- Lack of sustainability. Web 3.0 has a reputation as a “get rick quick” scheme, which attracts investors of a specific sort to this industry. People and businesses are not interested in the project’s long-term growth and underlying technology, focusing mostly on cashing out quick gains.
- Regulation-related risks. The crypto world is facing increasing regulatory pressure today. For instance, the European Commission has already introduced a comprehensive framework for stablecoin regulation, and many other countries are expected to follow the lead soon, complicating crypto payment integration and slowing down their adoption. These pressures pose inherent legal risks for Web 3.0-only projects and urge people to return to fiat currencies or combined solutions with a mix of fiat and crypto payment options.
The Future of Crypto Funding in Web 3.0
Regardless of all the complexities, risks, and challenges we’ve just discussed, the favorable future of crypto funding is beyond doubt. Among a huge number of Web 3.0 projects launched every day, weak and vague ones fail, while strong and cool players survive and thrive in this highly competitive market.
Users and investors are getting savvier and choosing projects with trailblazing solutions and technologies, while crypto startups have more adequate fundraising expectations and a realistic outlook on their target market and audiences. The Web 3.0 market is becoming more mature, with exotic projects relevant to a small number of people giving way to sober, user-oriented solutions.
The boom of crypto projects in 2020-2021 resulted in many errors, with a huge portion of startups sinking into oblivion soon after launch. The present-day due diligence activities prove that crypto investors have done their homework and grown more competent in Web 3.0 project evaluation. Therefore, crypto projects should also keep pace with those changes and offer better product quality, which can help them attract liquidity, financing, and users.
Alongside the internal Web 3.0 industry evolution, smart startup owners have learned to integrate Web 3.0 elements into their business solutions and integrate Web 3.0 technologies to bridge the link between Web 2.0 and 3.0, thus taking the best from the two words. They also encourage Web 3.0 industry development by spreading its innovations and using unique Web 3.0 advantages for their digital businesses (e.g., throughput, anonymity, transparency, and decentralization).
As inflation is on the rise and global governments experience unprecedented loss of trust, institutional investors such as pension funds, hedge funds, and large banks are sure to seek new sources of risk diversification and hedging. With these trends in mind, one can expect the Web 3.0 investment to grow, and its share will increase along with Web 3.0 product quality improvements.
Thus, as the world is getting ever more decentralized, crypto fundraising is expected to develop and grow. Humanity is on the verge of accepting blockchain as the new standard of digital transactions, so the rise of Web 3.0 is not a matter of the distant future but rather a looming reality.
Here you go with all our investing secrets for your crypto startup. Hopefully, you’re more familiar with how to secure the essential finance for your project or engage crowdfunding in crypto for your project’s progression. Use these tips and hacks to create a sound basis for your Web 3.0 business idea and ensure greater outreach and visibility of your startup in the crypto space. If you need help in this process, welcome to 4IRE for blockchain development consulting and fundraising support. We know where to find grants and funding programs for your project type and can accelerate your project’s growth with tried and tested solutions.
Crypto projects can raise funds by offering token sales and ICOs, conducting STOs for tokens pegged to some physical securities and assets, getting public support on crowdfunding platforms, and issuing limited-edition NFTs.
ICOs and STOs have become primary instruments for investors to enter promising crypto projects at early stages, thus reaping generous gains from successful projects in the process of their expansion. even retail investors can partake in Web 3.0 investments by registering at DeFi lending platforms and contributing to the crowdfunding of projects they like.
If you have a promising Web 3.0 business idea but lack financing for its development, you can use a variety of tools for raising funds from individuals, angel investors, and venture capital firms. Web 3.0 is gradually rising, and investors keep projects with sound monetization and innovation potential in the spotlight of their attention. Thus, your project has all the chances to get the essential funds for development if it meets investor criteria and has reasonable development prospects.
The fundraising technique’s selection depends on your project’s scope and stage. You should understand what token type you’re offering – if it’s pegged to some physical asset, you can employ an STO. Yet, in this case, you should remember that your project’s operations will be regulated by securities laws. if your project is only at the early stages of development, you may consider ICOs and token sales, and maturer projects can qualify for direct venture capital funding.
Since Web 3.0 is a young industry, there are still many risks for startups and investors alike. As a crypto project owner, you may face regulatory risks because of the evolving blockchain and crypto legislation, such as securities laws, taxation issues, etc. The risks of scams, fraud, and intellectual theft are high in the decentralized and loosely regulated crypto space as well. Investors are also loosely protected in the Web 3.0 industry, as their arrangements with startups may be not fixed in written contracts. It’s also vital to keep the technical risks in mind, as technology vulnerabilities or flawed smart contract logic may undermine user trust in the project.