Venture Capital Financing In Cryptocurrency: A General Overview
Many people are quick to compare the fast growth of the crypto industry to the gold rush. And now that the industry is getting more established, people are starting to see a lot of traditional and small-time investors flocking to the crypto space.
Institutional investors like venture capital funds and banks are looking at cryptocurrency businesses more and more to see if they can make money by funding them. Crypto startups have a lot of equity, and more and more people are starting to see them as good ways to invest.
Some of the most popular places for venture funds to invest in the crypto industry are the DeFi space and the nonfungible token (NFT) market. In this article, we will talk about venture capital financing in the crypto industry.
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What Is Venture Capital Financing?
Venture capital funds are a composition of investors that raise a significant amount of money. Often than not, fund managers do send a prospectus to potential investors on fundraising participation. Fund managers send out a prospectus to potential investors inviting them to participate.
In most cases, startups go by the VC funding lane before going public. In another instance, it might be difficult to get funds from smaller investors. But with the dynamics being played out in the crypto world, the narrative for VC financing is fast changing.
Furthermore, there are crypto-based enterprises that offer significant derivative services to the usual user base. These enterprises include crypto charting software, crypto tax reporting businesses, etc.
Stages Of Venture Capital Funding
Most funding for venture capital is done in five stages. But later on, more stages could be added if funding goals aren’t met in earlier rounds or if the founders want to raise more money.
Stage 0: Pre-Seed
Ideation occurs in the pre-seed phase. Often, this stage is not included as an official stage because, at this point, the team members participating try to assess whether a founder’s idea can be transformed into a product. Financing comes from a small group of close friends and family members, usually without asking for any equity in return.
An angel investor may become involved if the entrepreneur knows the proper people. Unlike venture capitalists, angel investors tend to operate on their own. Like venture capitalists, angel investors are free to disregard the project’s soundness if they have entire faith in the ability of the entrepreneur.
Stage 1: Seed Capital
The initial round of funding is brief, and it should be the shortest of all the rounds. In this phase, the product is put to the test to see if it will be successful on the market. Using a tool like market potential analysis, the startup analyzes its market feasibility. Using the market potential analysis tool, you can do market research and determine whether or not the product is worth marketing.
Pitch decks and financial documentation such as profit and loss figures, cash flow estimates, and the project roadmap may be required to help the firm persuade the venture capital fund that their idea is worthwhile. That said, angel investors could still be involved at this point.
Series A: Startup Capital
Series A marks the beginning of the seriousness of things. This is the point at which the company’s equity is brought in. Because this financing is only open to established Bitcoin businesses, startups are not eligible to participate. They have a proven product, a loyal fan base, and a constant stream of revenue.
These companies are looking to raise money so that they may continue to improve their product and expand their business. Investors have a lower degree of risk at this stage because the company’s product or service has previously been proven to be effective. Customers and marketing and advertising are also top priorities for the company.
Series B: Early Stage
The Series B fundraising round is devoted to sales and marketing efforts, as well as more versions of the product. It’s all about scalability in Series B rounds. This round is reserved for companies in the early stages of development. They’re looking for ways to develop their business and increase their market share. It’s safe to claim that they already have a large user base at this time.
The company intends to use the funds to establish a strong team and strengthen its product to speed up its growth. This includes marketing and sales, human resources, business development, and customer service investments.
Series C: Expansion Stage
The expansion stage is where the last VC money is received. This is the time when a company focuses on diversifying its product offerings and expanding into new markets. Series C-funded companies are already well-established in their respective industries. When a company raises money, it can develop new products or services and expand into new areas.
At this point, scaling is also accomplished through the acquisition of additional companies. If a crypto-brokerage company in the United States has been successful, it may want to enter the Canadian market. The corporation may try to offer other financial services that are outside of its usual scope.
The investment risk is reduced at this stage, but the possible rewards are also lower. For a startup to be profitable at this stage, it needs to have a commercially available product. The majority of receivers of expansion funds have been in business for two to three years.
As a result, more and more external parties are becoming involved in investment management. Hedge fund managers, private equity firms, and investment banks join the fray in addition to VCs. They all have an eye on the stock of the company. Before an initial public offering (IPO), many companies arrange a Series C round of financing to boost their valuation.
How VC Firms Work In The Crypto Industry
Cryptocurrency is still a very new business, and there is plenty of space for expansion. A growing number of venture capital (VC) organizations recognize that the future belongs to crypto, and they don’t want to miss out on what could be the greatest investment opportunity of our time.
Even if the cryptocurrency market remains volatile, VC firms who believe in blockchain and cryptocurrency companies are willing to take on greater risk.
Crypto venture capital funding is no different from traditional VC funding, except for one thing. In the cryptocurrency industry, the startups that received funding operate.
Due to popular usage, venture capitalists (VCs) are increasingly turning to crypto as a source of finance. As a result of the lifting of the ban on crypto marketing by large advertising platforms like Facebook and Google, this has occurred. VCs, on the other hand, see the crypto industry as a less hazardous investment because of its broad adoption by institutional investors.
Nevertheless, this has the potential to be a two-edged sword. Moreover, the influx of capital has sparked a flood of new initiatives. In other words, even though just a few of these transactions may be deliberate scams, the vast majority are high-risk investments.
This hasn’t put many VC funders off, as they know that with high risk comes big returns. The returns from cryptocurrency start-ups are among the highest available. A VC fund manager’s job requires them to have the ability to manage risk and take calculated risks.
Advantages And Disadvantages Of VC Funding In Cryptocurrency
The advantages and downsides of VC funding in the cryptocurrency field are comparable to those of VC funding in general. The goal of venture capitalists is to make a profit, which translates into equity and a rapid exit. This suggests that there may be a sense of urgency, as well as a chance that some control may be given up.
One of the most significant advantages of receiving venture investment is that it lends legitimacy to the crypto firm. Retail investors may be enticed to contribute more money as a result of the credibility the company now enjoys.
This is because ICOs and other crypto financing methods have lowered the barriers to market access. Many ICOs can be launched with just a website and an adequate white paper.
However, venture capitalists have done a lot more research on the project’s viability and its team’s ability to deliver on its promises, as well as conducting market and community research so that they can predict the project’s long-term success. In addition, VC funds employ fund managers with extensive experience in valuing private companies.
Despite its downsides, VC investment can help form strong relationships and link people from different industries. If problems occur in an unknown domain, the contacts of a VC firm may be useful.
It is common knowledge among venture capitalists that not all ventures will be a success. Although their primary objective is to generate revenue, if a company fails, the corporation has no obligation to return any of its investors’ money.