Funding Bitcoin Projects

“The easiest way to find product market fit is to go build stuff and if you’re gonna screw up — screw up fast.” Ben Price (https://twitter.com/abitcoinperson)

Introduction

On June 6th, 2021, a group of Bitcoin builders, developers, and enthusiasts alike held a satellite conference called pleb.fi in Miami. The event took place after the Miami Bitcoin 2021 conference as a closing event dedicated to more technical workshops and discussions. Pleb.fi was organized by Jeremy Rubin, an MIT graduate, Bitcoin core developer, and the CEO of Judica, a bitcoin research and development organization. One of the panels of the event was dedicated to investments in bitcoin projects. This article is based on the transcript from this panel, which focused on the topics of funding startups, VCs, Silicon Valley investors and so on.

During the session, Jeremy Rubin and his panelists Benjamin Price (founder of Open Sats, a non-profit supporting contributors to Bitcoin core) and Oleg Mikhalsky (VC partner at Fulgur Ventures) answered a few questions regarding funding bitcoin startups and open source development. The speakers discussed how to choose the right VCs as well as the nuances around working with them, ways to find product market fit, and various combinations of investments and non-dilutive funding types.

The language in the article is adapted from our transcript of the session audio recording that was kindly provided by Jeremy Rubin. We kept most of the free-flow conversational style in here so that you might find it a bit easier to read. We hope you enjoy this conversational style, different from the typical analytical research articles by Fulgur.

Venture Capital as a Funding Source

VC — Founder Relationships

So, what is venture capital? One way to think about venture capital is capital provided to the project for a participation in it. Participation means that now you have a team with a VC as a new team member. And VC has skin in the game because they provided capital to the project. Venture capital is provided with expectation of future returns meaning that the VCs expect the project not to die, to continue over a significantly extended lifetime, to create a big impact, capture value and return value, larger than the initial investment. If you think of yourself as a teamplayer, aim for a big goal and want to build a team and grow relationships within the team, then venture capital can help you.

Relationships with VCs have two aspects. The first one is sustainability. One person can contribute over a long period of time as long as he has motivation, he is still alive and he can make his ends meet. In an extended team you thus have more sustainability. More teammates means that you have each other’s back. Potentially this project can continue as long as there is enough team support, available capital and venture partners to provide more capital. This way you can typically provide more value over the long term, but now there is the team and relationships — it all needs to be managed by you as the founder. Now there is not only a team of engineers, business developers but also a team of venture capitalists with ideas possibly different from yours sometimes.

Once there is sustainability, the other aspect of venture capital is to generate returns. It means there is a path to scalability of the project, creating bigger impact, “the new social network”, “new global payment system”, capturing value and delivering value back to the venture capital industry as well. If you are comfortable with operating a team and have an ambition to not only create a big impact by doing an open source project, but also to be able to capture value and distribute it not only to the users, but the team, shareholders and also to the venture capitalists, then VC makes much more sense for your project.

Challenges of Finding Your VC

VCs often get critique that they are fair-weather friends. They love you at the beginning when they believe in you and the next big thing you are building, but as soon as you are taking the project in a different or questionable direction they could try to replace the leadership to steer the company in a better direction from their point of view. But the original founders mean a lot for a project, they are part of the DNA.

Think about Steve Jobs, who got out of his company and then returned to it. So, how do we find VCs that are good and won’t make you leave the project or exercise too much pressure in turbulent times? How do you find VCs that not only have excitement and commitment in the early stage, when they have you on the hook for providing capital, but allow you to pursue your vision and change course according to your own pathway (providing it is economically reasonable)?

One of the answers is in VC time preference — low time preference means being supportive to your original vision and the big picture ahead of it despite volatility or turbulence on the way. High time preference means focusing on immediate opportunity for liquidity, exit, turning money around.

Bitcoin is a low time preference ecosystem. Unfortunately there are not so many VCs passionate about bitcoin yet. And yet there are not so many pure bitcoin companies that have skyrocketed and made a big impact. Bitcoin startups have to build for a long term and VCs often have short term preference and seek “ultrasound returns”. No surprise most of them are in the “altcoin space”. The wrong VC attitude can screw up the whole project idea.

“That’s the challenge in this industry more than asking for ‘easy’ money (fiat); you’re asking for the ‘hardest’ money (Bitcoin) in the space.” — Ben Price (https://twitter.com/abitcoinperson)

At the same time bringing a product to the market requires certain ambitions. Building a company over a long term and taking it through a volatile environment also needs agility and unfortunately sometimes founders just have to fake it until you make it, and it sometimes does work like this — as long as it remains within socially and ethically accepted boundaries. To build a new business means to identify and overcome risks of the unknown so you usually need to be a bit reckless… but not as reckless as in other spaces outside of Bitcoin, perhaps. That’s not what we are here for and not what Bitcoin savvy VCs are expecting. At the same time a healthy entrepreneurial attitude is not something every bitcoin person has. We often are thoughtful builders rather than risk takers.

“Sometimes you need to do it fast. Get out the door quickly. Get user feedback. It’s different from the purist, maximalist, perfectionist state most of us have.” — Oleg Mikhalsky (https://twitter.com/olegmikh1)

Where Did Silicon Valley VCs Go?

According to Oleg Mikhalsky, the VC model as it still exists in Silicon Valley is a bit stuck in the “dotcom” build cheap scale fast framework. This makes it more difficult to evaluate something like bitcoin. In most investments, there are two main aspects that VCs would want to consider: technical risk (will the tech work?) and marketing risk (will it have enough users to pay). Many of the Silicon Valley investors only work with the marketing risk — they want to quickly understand if the project will make the IPO next week and pump their money. Or, they would just bet on a few fastest horses so that at least one returns much more than 3 times the bet. The underlying technology risk is a bit harder to understand, especially with Bitcoin because it has the monetary aspect and co-depends on geopolitics, regulations, cryptography, etc.

For a long time, this was the preferred way for Silicon Valley to work with local talent. Meanwhile, there are now VCs there too that are understanding bitcoin, getting more comfortable to work with distributed teams, nomadic founders. And Silicon Valley is a powerful network to attract talent and capital for growth.

If you still want to build a big company, especially in North America where there is a big homogeneous target market suitable for scaling, you kind of have to play by Silicon Valley book while carefully choosing VCs that understand the difference between technical and marketing risk and adhere to Bitcoin principles.

On the other hand — and on the other side of the ocean, literally — there are quite a few European private companies that just build projects. It’s worth remembering that even a big company can still grow and remain private. There is no rule of thumb. You just need to find the right partners for what you want to do. If you want to scale quickly and go public, it’s one kind of partner like Silicon Valley VC type. If you want partners who have long term preference and connections to the Bitcoin ecosystem, those are other types of VCs (on both sides of the ocean), and it is good to see these qualities already started to overlap.

Funding Alternatives

“Building a startup accelerator/incubator that can provide knowledge to early stage founders about how to fundraise, how to get a project going can be important for Bitcoin ecosystem.” — Oleg Mikhalsky (https://twitter.com/olegmikh1)

When someone is building open source software for other developers and they use it, fork it and “star” it, eventually there is a community of developers that follow the project and contribute, submit and review pull requests. This is like a product market fit for an open source project with no commercial aspect. The project developers could also go to Patreon, create an account and also monetary contributions from supporters there. This would be like a simple business version of the software — a “product” based on an open source project.

Other opportunities to obtain funding are out there too. Here is one of them: Ben Price launched opensats.org — a platform for funding free open source software projects in bitcoin. People can find interesting projects there and donate or if you’re building a project that is interesting for potential donors you can sort of make some money on the side if the project is not your full time gig. Such platforms as Open Sats, Brink (https://brink.dev/) not only provide financial support but facilitate more people to contribute to the bitcoin ecosystem. Grants, donations and subscriptions can eventually provide a healthy and stable backing for a solo developer or a small free open source project team.

A project with VC backing will likely have more dimensions to be taken care of and these dimensions can bring some ups and downs with them. The whole venture fundraising process can be a bumpy road and difficult to the extent that infrequently teams even get dissolved during the process because they just realize it’s not for them, it’s not the right time or there was no luck and tailwind. What is important in the Bitcoin space is that because of everyone’s high conviction and mission driven mindset even after a few road bumps there is usually still a group of people that has more resources than before, it is creative and can continue to other bitcoin projects. So it is worth trying! Koala Studio and Graaf. One are such examples. All their founders were early in the space and are still there with more experience.

It’s typically less common to obtain funding for an open source project than to seek venture capital for a startup. But at the same time it’s much easier to feel rewarded in an open source project because there is no monetary return expected. In VC it’s much easier to fail and much harder to succeed but at the same time it’s probably easier to get funded. So, both paths to a sustainable project have their own pros and cons and it depends on the amount of stress and ambition one might desire to take on pursuing his own idea. In the long term, one approach does not contradict the other and there may be a transition. For example, NGINX — a web server that runs on about a half of the internet websites. It was launched as an open source project by a group of mostly Russian developers and remained a side project for them. It was hard for VCs to convince them to focus on it full time with VC money and the goal to commercialize. Finally, they decided to do so and kept the open source project alive too. They built a company on top of that years after NGINX became popular, and the company itself did great and had a successful exit event. A brief history of NGINX is here https://www.nginx.com/blog/do-svidaniya-igor-thank-you-for-nginx/ if you are interested.

So, there are many ways to fund a project. Traditional venture capital typically provides the most opportunities to grow into something big. If you want to make a huge impact, serve millions of users, and take over the world in a good way, it is likely that you will need substantial capital in the form of VC.

“There are developers that use many sources of funding at once. There is a symphony between them, it’s not necessarily an imperfect conflict. You have to balance between building what people actually want and something that you’ll make money from.” -Jeremy Rubin (https://twitter.com/JeremyRubin)

Staying Connected with Your Users and Your Supporters

Emotional support from followers means a lot for developers in the Bitcoin space. As Jeremy Rubin says, during the hard times, even 50 sponsors on Github lets him feel like he has a team behind his back. But sometimes even a large number of Github sponsors can’t provide enough money for developing a project.

“That’s a rocking bastion of support. But that’s not paying the bills.” — Jeremy Rubin (https://twitter.com/JeremyRubin)

Connection with users or customers also evolves throughout the project lifetime. It’s important to build a company or project around user experience. But the longer you build a company, the more detached from users you get as you remain the founder in charge of many things (managing a bigger team and VC relationships to name a few). But you literally can’t talk to thousands of users nevertheless. At some point, the company becomes a pure business with a structure.

Many Bitcoin companies are super lean and have a minimum amount of structure which is actually great. In comparison, companies outside of the bitcoin space may look overstaffed (and overfunded). They look like bubbles. If you find it rewarding being really connected with users, it can be difficult to build a bigger company unless you find your personal way to always feel the back of your most supportive users.

In Conclusion

There are multiple opportunities for project funding: grants, Patreon, Github Sponsors, VCs, also angel investors etc. We touched upon some of their common advantages and disadvantages, and we hope it helps you understand how they can align with your vision and ambitions. Dream big for your projects and build!