Enigma Ventures
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Enigma Ventures

An Early Stage Primer for Founders in Web3

So… you have an idea for a Web3 project that keeps you up awake at night. Feverish thoughts of inception, development and then fruition roll through the landscapes of your mind, each progression more elegant than the last.

Welcome to the world of building the Web3 stack. Many of us are in the space because we believe in permissionless, open and egalitarian tech. We believe it challenges old paradigms, provides global scale and outreach by onboarding a large swathe of users across different demographics and geographical locations, and allowing these users the ability to own a stake in decentralized protocols or networks.

However… unless you, as a builder can bootstrap your project with your own resources from the get go, you have to consider how to go about funding the project with early stage capital. There is a classic line from David Mamet’s 2001 movie Heist which goes — “Everybody needs money. That’s why they call it money.” I don’t quite get it…. but it’s probably one of those non cents things…

As a founder, your capital raising strategy is very important at this stage. Any decision you make at this stage will be irreversible from here on out, which is why it is worth it to consider the various forms of capital raises carefully even while constantly refining your pitch.

And for the early stage investors, they too have to contend with the scope and promise of your project, the scale of it (or addressable market) and how you and your team can go about balancing the needs of a diverse group of stakeholders in a decentralized space before committing capital to your project.

If You Build It, They Will Come…?

This is written in a time of expected quantitative tightening down the road. In the past couple years, in an era of massive liquidity, everyone was flush owing to easy monetary policies and adopted the spray-n-pray approach to investing in the early stage rounds of projects. This scenario is perhaps less relevant now, as investors are now more circumspect as a whole when it comes to opening their check books. The halcyon days of fund raising from early stage investors are now moderated somewhat, just like in the post 2017 ICO fever era.

This doesn’t mean a prolonged winter is here — as the space matures with the passing of every cycle, capital looking for outsized returns will be deployed to some of the most innovative projects with the hottest narratives.

Fret not, builder. Here are the types of investors that you may come across when looking to fund your project.

Venture Capital

Depending on the mandates from their limited partners (LPs), these guys have varying time frames and expectations for returns on their capital. On the surface, while it may feel great to announce to the market that your project raised an eye popping amount from a big name VC, founders have to be clear that raised capital is the means to achieving your building goals, and even if raise is “big number” doesn’t mean you are gonna make it. The higher the amount raised, the higher the expectations are for you and your team to deliver — because high valuations naturally come with higher expectations.

If you are a first time builder and/or this is your first market cycle, also understand that these guys have more experience than you, have dipped their toes into a multitude of other projects, and may negotiate terms from a position of strength owing to their brand name or raise amount. All in all, it is always better to work with a crypto-native VC who understands the nuances of the industry and has long term conviction about where we are heading compared to a bunch of mercenary dudes cutting you a check under the guise of a new spin up.

Angels

These are the guys who’ve been around for a while, seen a couple of market cycles, have a bit of capital and now want to “put name on project”. If you know of these angels, great for you. Angels in general want to give back to the industry, by supporting new projects with their capital, time and experience.

Their investment amounts may not be institution size large, but anyone who has endured the volatility of crypto over the last few market cycles, managed to survive and maybe even thrive is really unlikely to be overly exacting on their demands to see a quick return on their capital. Building fuss-free with support is a superpower that many founders wish they could have, and angels may be able to offer solutions with the experience they bring to the table.

The caveat: If you are going into the meatspace to pitch your Web3 project to people who have not even heard of Web3 and hoping they become your angels, consider carefully. While you may think having access to funding from foreign tourists in the space gives you an edge over other projects, it is likely that your time will be spent focusing on them and their expectations rather than your roadmap.

Grassroots and Community

This is the bottom-up approach. Works great for social and meme related projects and/or art related NFTs. You can start by sowing the seeds of an idea, akin to creating a new sub-culture of sorts. If your idea is attractive enough, you get your first followers in, which then organically transforms into a community. People love to have fun while being involved, and certain founders out there intuitively understand this. Perhaps it’s time to execute a fundraise from this community to follow through on your vision!

A diverse community and a wide distribution of your project tokens is typically achieved with this type of raise, with capital coming from all corners. While raises from community can be fun, they can also get intense, with a cacophony of voices from community members often trying to steer the project direction at the early stage.

Remember that community is one of the biggest moats that any project can have in Web3, especially given the open-source nature of it, and a sufficiently engaged and supportive community is the holy grail for legit projects in the space.

Decentralized Autonomous Organizations (DAOs)

Much has been posited about how DAOs will restructure human collectivism, and how informal structures in a DAO could possibly work out over the long term. I see them as a great social experiment going through iteration upon iteration, but for the purpose of this article, let us understand the DAO in this context as a syndicate, or a community with shared capital that has its treasury managed and audited transparently on the blockchain.

Other than just raising capital from a DAO what you as a founder may need to consider is — is the DAO able to value add to my project? For example, do certain members in the DAO have skillsets that my project needs that could involve some form of secondment? How would I utilize the DAOs brand or network to bring about awareness of the project? Tapping on the combined financial and social capital of a DAO could be a thing for many projects going forward. This could be how communities become institutions in their own regard, with their own set of internal rules and governance, acting for their own collective benefit.

Whichever way you decide to raise capital, or even employing hybrid capital raise strategies across these types of early stage investors — remember that this space moves at the speed of light. Whatever ideas were being discussed a few months ago may be laughed off as quixotic just because “market prices down bad”. Market and global economic conditions can change on a whim, and the attention of participants in the space is constantly stretched to breaking point.

Hope that all this gave a short insight into some of the types of fund raising strategies available to you, now or in the future. If you are currently wanting to build or you are already building, we would like to talk to you. At Enigma Ventures, we are long term believers in this space and believe that Web3 tech is entering into yet another phase of growth and maturity.

We look to assist founders and projects on a multi year time frame by providing actionable guidance and strategies to unlock value for their stakeholders.

Go, little rockstar.

Originally published at https://enigmafi.io on March 9, 2022.

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Investing in Web3 projects + Helping institutions navigate the digital asset landscape

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