Touchpoint Topic: Fundraising

This is an edited version of an article I wrote for Touchpoint earlier this year. I intended to provide a base-level knowledge of fundraising in web3 to the projects working with us. Since this is often unexplored territory, I’m publishing it here for anyone who wants to grasp the basic vocabulary of raising capital. Much thanks to Christian Saur and Corey for their input :)

Many of the questions we get involve raising capital. Before quitting your job to work on your crypto project full-time, let’s dive into the available fundraising options so you can pay for your team of developers and marketing professionals (and maybe for your groceries).

Member of the aplysina genus being satisfied upon receiving nautical-themed fiat currency

1. Bootstrapping

Formerly known as paying-for-it-yourself, this is the most straightforward method for those that can afford it. Additionally, bootstrapping can be a positive signal to investors, as it shows that you have “skin in the game,” and are not funding your idea solely with other peoples’ money. Foregoing outside investments can also give the core team a level of autonomy in a project. Here are some resources to help determine if its a good option for your team:

• The advantage of bootstrapping, including how to finance while bootstrapping, and common objections / solutions
• Bootstrapping techniques for a start-up, financial and marketing techniques, and preparing for bootstrapping

2. Angel Investors & Venture Capital (VC)

A second option is to get investors to buy into your idea early. These can take the form of specific individuals (Angel Investors) or investment firms (Venture Capital). Notably, investment firms can be further split between generalists and specialists, the latter of which focuses on industry “verticals” (or, a specific sector/niche).

What you do for funding will largely be determined by how mature your project is. Thus, a common timeline for financing a project with investors is:

Seed round → Series A → Series B → Series C

In the early stages, it is more likely that you (or family/friends) will have to foot a larger part of the bill, although some projects can entice outside investors at this stage as well. A Series A round occurs around the same time that a project has a minimum viable product (MVP), and the later series serve to scale a project after the first revenue streams are set up. However, the contents of each round are not rigid and some may have investment opportunities before showcasing a working product. (see also: Venture Capital Financing in Crypto, Explained)

It is not just about getting their money. Angel investors & VCs can also provide legitimacy to a project, strategic partnerships, networking opportunities, and guidance (after all, they want you to succeed once they are invested).

Yet, before you receive support from investors, you have to actually convince them to that your idea is good. Next, we talk through how to best present your crypto project.

2.1 Making the perfect pitch deck

Much of this section was stolen from our comms department. Thanks Suz!

As a founder, your success depends on how good of an impression you can make with your project. This often comes down to your pitch deck and the story you tell. Unsurprisingly, there are better and worse ways to go about making one. Above all, the goal of a pitch deck is to create a presentation that is clear, concise, compelling, and easy to act on. These can take a variety of forms, so find one that fits your style and run with it. If you are totally lost, here are some ground rules:

• 10–12 slides max
• Keep it clean and simple
• Create an intuitive narrative
• Create each slide so that the key message is understood in 3 seconds
• One message per slide
• Explain it bottom up

So what should the slides actually talk about? You cannot go wrong if you use the following format:

Vision and Value Proposition What do you do, what do you want to achieve, and what’s in it for your customers

The Problem What are you trying to solve?

Target Market and Opportunity Who is your customer, what’s the market size, and how do you position yourself

The Solution Describe your solution to the problem. You want the reader to have an epiphany.

Revenue Model How do you intend on creating revenue?

Roadmap Talk about the milestones you will achieve

Marketing and Sales Strategy Outline the key marketing strategy

Team What are you a great fit for the product

Financials (no more than 7 lines) Forecast for at least 3 years

Competition What’s your advantage over the competition?

Investment and Use of Funds How much and why?

2.2 How to make connections to investors?

So you have an idea, a team, and something to show off. Now you just need an audience.

Optimally, you are able to get a warm introduction with investors that you are interested in. This means having someone connect you or joining a pitch event. Cold calls, on the other hand, have much lower success rates. Here is where you have to get creative. Ask around in discord servers, slack channels, twitter, etc. Additionally, feel free to reach out to the Touchpoint team, we will try to point you in the right direction!

Note also that there are different levels of investors. You can have your “dream list,” but you should also contact some smaller firms that are a bit more approachable. This is more than just for safety reasons. It also allows you to refine your pitch, testing what works and what doesn’t, and getting into a rhythm of fundraising.

Speaking of finding investors, consider asking similar project teams who they talked to or check out this Crypto Fund Landscape, compiled by one crypto fund manager.

And don't get discouraged! Fundraising is very much a numbers game. Even with an excellent pitch, it may take a couple of tries to get someone on board.

2.3 What are VCs looking for?

You are likely competing for the investor’s attention with many other projects. So what do these investors want, and how can you prove that your project has what it takes? Here are some guides on this point:

• Data Driven Investor: 5 Things Blockchain Investors Look When Funding a Startup
• TheNextWeb: What Big-Time Blockchain Investors Look For when Funding a Startup
• Consensys & Pantera Capital: How Blockchain VCs are Preparing for Crypto Spring
• (non-crypto) Forbes: What to Expect When You Meet With A VC Seed
• (non-crypto) Open View Partners: 5 Ways to Prep for a Meeting with a VC
• Read also how Pantera Capital sheds light on their vetting process.
• Practical tips for crypto VC meetings can be found on this twitter thread

Takeaway: at a high level, VCs seek real innovation, viable solutions, valuable data, and founders who know their industry and who stay close to the problem they are trying to solve.

2.4 Offering to investors: tokens vs equity?

There are a few options at your disposal to entice investors. For instance, you might be looking to sell tokens to investors at a discount or you may offer equity in your company (perhaps to be redeemable for tokens at a later date).

Our feedback from investors is that they largely prefer token sales due to their liquidity, often coordinated through a Simple Agreement for Future Tokens (SAFT) contracts. You can read about these here and here.

Remember: a larger VC check isn’t necessarily a proper metric of success. For instance, the more tokens a project allocates to outside investors, the less they initially have to set aside for ecosystem development or for their treasury. Additionally, your current valuation will be compared to future valuations as a sign of progress.

2.5 How to make a company valuation?

Your company’s valuation will help determine how big of a check you receive from investors and how much attention your project gets in general. How, then, does a project arrive at these numbers?

One approach is to look at the valuations of comparable projects so that you can get a reference level. Valuations are also determined by:

• Macro market conditions
• Where (and if) your asset is listed
• The functional value of your token
• The speculative value of your token

While there are some older guides for valuing a token (which in turn helps value the company) valuations are ultimately subjective and, thus, up to debate. Investors may push back against inflated valuations but, with some luck, they may provide constructive feedback and a valuable perspective on your project.

It’s also important to consider the future valuation of your project. Generally, communities and investors expect a project’s valuation to increase as it matures. If this number is set too high initially, it may be difficult to make progress in the form of increasingly large valuations.

3. Crowdfunding

Perhaps the VC route doesn’t fit the narrative of your project. After all, why appeal to specific investors when you can get contributions from everyone instead? Such is the thinking behind crowdfunding. While some associate this term specifically with platforms like kickstarter, crowdfunding actually encompasses any method of raising money that is open to a large community. In crypto, these originally consisted of initial coin offerings (ICOs), but this method has steadily been replaced by IEOs/IDOs, kickstarter-like crowdfunding “launchpads” and NFT sales.

3.1 Initial Exchange Offering (IEO)

Some projects aspire to have their tokens sold on a centralized exchange (CEX) like Binance, Coinbase, Huobi, and for good reason. Exchanges can provide legitimacy to a project since they vet the listed tokens to varying degrees. They also reduce the technical requirements of the user, as users are not required to interact with web3 wallets. However, most exchanges require that users actually have verified accounts in a Know-Your-Customer (KYC) process. Further, centralized exchanges may have their own requirements, such as up-front payments in fiat or tokens, or may even restrict a project from listing on a competitor.

One way to improve the odds of listing on a CEX is by partnering with a market maker, or investor. These partnerships guarantee liquidity on the exchange, lowering the bid-ask spread, which itself signals to other investors that the project is worth consideration. See here for further reading.

There is one major consideration with IEOs: If the exchange does not list your ecosystem’s native cryptocurrency (such as IOTA) it may be unlikely that they will list your token. A pragmatic approach would be to filter all the exchanges to those which list the native currency and try to engage those teams. For IOTA, this list can be found here.

3.2 Initial DEX Offering (IDO): Static Listing

IDOs rely on a decentralized exchange (DEX) to list a token, raising capital from retail investors. DEXs are generally open-source, decentralized applications (DApps) like Uniswap and SushiSwap. Static listings on these DEXs operate peer-2-peer, have lower listing costs than an IEO, and avoid the need for verified exchange accounts (i.e. no KYC). These exchanges also do not hold custody of the tokens.

As opposed to the traditional order books of centralized exchanges, many DEX’s function as automated market makers (AMMs). These use a novel pricing mechanism called a bonding curve to mathematically derive price from the available supply and demand while minting and burning the token.

🐰 Want to go deeper into the rabbit hole and level up your crypto knowledge? Read more about bonding curves here, here, and here (in order of technical complexity).

Conducting a static listing to raise funds can expand the reach of a token, yet some users are hesitant to use DEXs since the ability for anyone to list a token can invite scammers. Additionally, a web3 wallet is required to interact with a DEX. Our ecosystem already has a number of DEXs being set up, which can be found here. As more cross-chain bridges are set up, there will be an increased availability to trade IOTA, SMR, and YOURTOKEN!

Getting your token onto a DEX requires your team to set up a liquidity pool between your token and another asset, for instance, IOTA or a stablecoin. These constitute a trading pair, which are generally kept at a 50:50 ratio. As in IEOs, it can be very useful to partner with a market maker. Such partners can “rent” their liquidity to you by providing the stablecoin or other asset, allowing smooth buying/selling of your asset.

More recently, new techniques of providing liquidity to DEX’s have come onto the scene, including liquidity bootstrapping pools (LBP), a method that allows different trading pair ratios which elongate the price discovery and mitigate the effects of bots and whales. In addition, LBPs require less up-front capital.

3.3 IDO: Launchpads

Instead of initially launching a token on a DEX like Uniswap, some teams utilize launchpads, which vet and promote new projects. Accordingly, launchpads give validation to new projects by hosting their IDO. They aim to enable small investors with mechanisms that deter whales and frontrunning, while also requiring less up-front capital from the project team.

Launchpads are typically ecosystem specific and sometimes require KYC. They can also be embedded into a larger CEX, like Binance. We even have some examples building with us (looking at you, Soonlabs). Other examples of these platforms include:

Seedify, Binance Launchpad, Alliance.xyz, Republic (a more traditional crowdfunding platform that includes crypto assets), Red Kite, TrustSwap (on Ethereum, Polygon, BSC and Avalanche), Duckstarter (on Ethereum, Polygon, BSC and Polkadot), Launchpool Labs (chain-agnostic incubator)

3.4 NFT Sales

Originally a staple of non-profits in crypto, many projects are now turning to NFT sales for their for-profit ventures (looking at you again, SoonLabs). When done right, NFT sales can promote community building while giving investors (i.e. NFT purchasers) special access to a dApp’s functionality. See here for a run-down on what makes a good NFT launch.

Securities consideration: All things crypto come with some measure of regulatory uncertainty, particularly when it comes to new forms of fundraising. We strongly recommend that project teams consult with a legal representative before issuing an asset that could be classified as a security.

4. Grants

With a little bit of luck, you may even be able to get some money for free! In the future, Iota, Shimmer, and Assembly grants could be dispensed to eligible projects. Until then, there are a few other avenues to receive grants for your project. For example, check here (general Web3), here (EU projects), and here (Projects aligned with UNICEF).

5. Further resources

Still looking for answers? Check out Nat Eliason’s article on launching a token.

For a different overview of project financing, check out this Y-combinator guide (non-crypto), which addresses why and when to raise money, how much to raise, different financing options, and tips for meeting with investors.

Additionally, this MVPworkshop blog post goes over how to bootstrap, where to find grants, incubators vs accelerators, crowdfunding, how to get seed funding, and more.

Lastly, check out this resource for a different perspective on token listing strategies.

Now go make some money!
✨ Adam ✨