The crypto industry is maturing quickly, with many quickly comparing it to the gold rush. And as the industry matures, users are seeing a deluge of traditional and private investors pouring into the cryptocurrency space.
Venture capital funds and other institutional investors are increasingly looking to cryptocurrency companies to see if funding them can be profitable. Crypto start-up firms have a lot of equity, and the general public sees them as viable investment vehicles.
The DeFi space and the nonfungible token (NFT) market are among the most popular areas in the crypto industry, attracting venture capital. In this article, let's take a look at venture capital funding in the crypto industry. In this post, we’ll discuss about Blockchain Venture Capital and more.
What is venture capital financing?
Venture capital funds are made up of a pool of investors who want to quickly earn large sums. Fund managers send prospectus to potential investors and invite them to participate. Essentially, a prospectus is a document selling them on the investment fund.
Venture capital fund managers spend a lot of time reviewing thousands of projects to determine their potential for growth. Although they are cautious investors, venture capitalists like to spread their investments out. So they don't risk putting all their eggs in one basket.
Start-ups typically use venture capital funding if they are not yet ready to go public. Alternatively, they may not be able to raise funds from private investors.
Venture capital funds no longer limit their interest to crypto unicorns - rare companies worth at least $ 1 billion, as determined to venture capital firms. Many VCs use “pick and shovel” business models because they see new opportunities. Pick-and-shovel organizations are crypto-related companies that provide derivative services to the same user base. These companies include crypto tax filing startups, cryptocurrency mapping software, and many more.
Stages of venture capital financing
Venture capital financing is generally divided into five stages. However, other phases can be added later if fundraising goals have not been met in previous cycles or if the founders wish to seek even more funding.
Phase 0: pre-seed capital
The pre-seed phase is the idea phase. It is often not included as an official step because the team members involved want to decide if a founder's idea can be turned into a product in this phase. Close family and friends usually provide funding, and equity is not involved.
If the founder knows the right people, angel investors can get involved now. Compared to venture capital funds, angel investors are very wealthy individuals who tend to work on their own. And unlike VCs, angel investors can ignore the health of a project if they have full confidence in the capabilities of a founder.
Phase 1: seed capital
The seed funding cycle is short and should be the shortest funding cycle of all. In this phase, the profitability of the product is tested in the market. Using a tool such as the market potential analysis, the start-up determines the market value. As the name suggests, the Market Potential Analysis Tool helps provide a framework for conducting market research and determining if the product is marketable.
The startup may also need to convince the venture capital fund that their product is worth investing in using tools such as pitch decks and financial documents such as income statements, cash flow projections, the project roadmap, etc. It should be noted that angel investors can still be involved at this point.
Series A: startup capital
It gets serious in Serie A. Then, equity kicks in. Startups don't have to apply because this round is reserved for cryptocurrency companies that are already in the growth phase. They have a validated product and a strong community with regular cash flow.
What these companies are looking for is capital to help them iterate and grow their product. At this stage, investors have much less risk because the company's product or service has already been validated. In addition, the company focuses on customer acquisition, marketing and advertising.
Series B: early stage
The Series B funding cycle is dedicated to additional reiterations, sales and marketing. The B-Series rounds are all about scalability. Companies that pass this cycle are in the development phase. They are looking for opportunities to grow their business and expand their reach in the market. At this point, it goes without saying that they already have a huge user base.
To accelerate its expansion, the company plans to use the funds to build a competent team and strengthen its product. More specifically, the company will invest in marketing and sales, human resources, business development and customer service.
Series C: expansion phase
The last official round of venture capital funding is the expansion phase. In this phase, a company wants to expand into other markets and diversify its product lines. Companies that obtain Series C financing are well established in their industry. By raising funds, they can develop new products or services and launch their business in international markets.
Additional series (optional): pre-IPO stage
In the pre-IPO phase, with a proven product or service, some companies aim to go public for various reasons. Reasons include better access to all types of investors and additional capital, increased public trust and significant brand awareness.
How Venture Capitalists Work in the Crypto Industry
The cryptocurrency industry is still in its infancy and the possibilities for growth are endless. Many venture capitalists realize that crypto is the future and don't want to miss out on what is arguably the greatest investment opportunity of our time.
Even so, the crypto market is still volatile, but venture capitalists who believe in blockchain and cryptocurrency firms are willing to take additional risks.
With one exception, venture capital funding in the crypto industry is no different from typical vc funding. Startups that receive funding are active in the cryptocurrency market.
Although considered to be a traditional method of funding, venture capital funds are increasingly seeking crypto due to their mainsream adoption. Indeed, the main advertising platforms like Facebook and Google have decided to lift their ban on crypto advertising.
A Pros and Cons of VC funding in crypto
As with venture capital funding in general, the pros and cons of blockchain and cryptocurrency space are similar. Venture capital firms seek high returns that are reflected in their own power with the potential for quick returns.
A significant advantage of getting blockchain venture capital is that the crypto startup provides legitimacy. This legitimacy has the potential to make even more money from retail investors too.
This is because ICOs and other crypto fund methods introduce much lower limits to market entry.
Despite the downsides, investing in blockchain venture capital helps build some fantastic relationships and excels at establishing connections between different industries. So, you can turn to a blockchain venture capitalist that is useful to you to challenge yourself in an unfamiliar area.
Blockchain VCs know that not all projects succeed. Of course, their main goal is to make money, but should a business fail, the business doesn't have to pay back the funds.
If you are looking to invest at the intersection of digital transformation and sustainability, visit blufolio for more information about Blockchain Venture Capital and more.