Web3 Fundraising 101 💸

Happy Tuesday y’all! 👋🏽

After we wrote last week’s edition about builder season, we realized that even though VCs were pumping money into Web3, there’s a lot of different ways you can fundraise in this space. So in this week’s newsletter, we’re going to take a step back and do a quick overview of the ways you can secure the bag in Web3 💰. Welcome to Fundraising 101 in Web3!

What’s fundraising? And how is it different in Web3?

Whether it’s a startup looking for capital to keep the business running or your local soccer team selling candy bars to buy new jerseys, fundraising is pretty standard no matter how you look at it: it’s the process of seeking and collecting voluntary financial contributions from different parties like individuals, businesses, even government agencies. 

Startups in Web3 can still raise money the same way that other startups do too. Here are a few different ways below:

• Grants: money to build a startup with no commitment required in return (e.g., no equity, no refunding the money). Blockchain networks will use these grants as a way to build on their network or tilt their web3 project addresses to specific use cases. Believe it or not, there are billions in blockchain grant funding available. 

• Accelerators/Incubators: programs that provide training, resources, and expertise in the space to prepare startups for future funding. Given the nascency of blockchain, sometimes founders have issues navigating certain obstacles while building. These programs equip them with resources they need specifically for Web3. 

• Bootstrapping: spending and using resources at the expense of the startup founder (think of it as paying for your startup out of pocket)

• Crowdfunding: asking the public to contribute/donate, if you will, towards a certain target amount for your startup. If you’ve ever done a GoFundMe or Kickstarter, this is it. 

• Venture Capital: receive investment from a venture capital firm in exchange for equity in the business.

• Loans: take out a traditional loan from the bank, an investor, or even friends and family with the promise to pay them back later.

In the meantime, Web3 projects have also opened up new ways to fundraise that traditional startups may not have even known were possible. And because of this, we’re seeing web3 startups finding innovative ways to get to the bag. 

Is ICO the new IPO? 

You’ve probably heard of the term “IPO” before, but if not, let us give you the quick down low on what this means. An IPO stands for Initial Public Offering. Essentially, this is the first time a privately held company sells shares of stock to the public. It’s also a major opportunity for people with equity in the company pre-IPO to cash out!

However, web3 companies have created a new, more hip & community-oriented version of this called Initial Coin Offering, or ICO. This is a way to publicly fund crypto startups by taking a crowdfunding approach. How does it work? We’ve broken it down into three main steps:

1. The Mint: At the earliest stage of the project, they can mint (think of this as uploading) new tokens on the blockchain. These tokens either have utility related to the product or service that the company is offering or represent a stake in the company or project.

2. The Sell: Then, they sell them to investors in exchange for other popular cryptocurrencies such as ETH or Bitcoin.

3. The Distribution: web3 smart contracts calculate total sales and distribute tokens to investors through an automated and transparent on-chain process. 

The reason why ICOs are preferred by the crypto community is that they don’t require any special regulation to be executed. This means that companies can quickly raise funds without running into the issues that sometimes come along with IPOs.  With a solid marketing & PR approach, a detailed whitepaper, and a great team, a company can raise enough through their ICO to sustain themselves for the long term. Noun’s DAO is a great example of unique funding in web3 and the method is being replicated by a lot of businesses too.

Okay, but what’s the catch here?

One thing about us, we’re gonna give you both sides of the coin–pun intended haha. Perhaps the reason why web3 founders love the idea of ICO is also the reason why you should proceed with caution if you ever choose to engage with one. Because of the unregulated nature of ICOs, regulatory bodies have been outwardly critical of them. From fraudulent projects to countries banning ICOs, we still have a ways to go before this hits the mainstream. 

Of course there are risks and rewards with everything, but it’s important to do your diligence if you ever decide to participate in an ICO. What will be interesting to watch is how ICOs provide an alternate funding opportunity for people who have historically been overlooked by traditional VC investors. The world of fundraising for web3 companies could be completely flipped upside, and we’ll be out with our popcorn ready to watch it all unfold. 

Until next time!

Kendall & Chad ✌🏽