🌵Web3 Fundraising - Like Finding Water in a Desert
How Founders Are Obtaining Capital in the Bear
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Topics Covered
Web3 venture capital funding decline
Scrappy ways to fund your startup as a crypto founder
Recent VC firm raises in the crypto space
Quick Notes
The crypto industry is currently in a bear market and the rise of AI plus the unclear regulatory guidelines in the US has diverted attention away from the industry.
Combining these two challenges along with the overall dynamics of the market has led to a significant decline in VC web3 funding.
The above risks are also combined with the high valuations that founders received in the bull market.
Thus, it’s an even tougher market for founders to obtain VC funding.
One alternative method to obtaining capital for crypto founders is to launch a token sale.
This is a proven way to receive capital from a global group of participants.
Some of the biggest projects like Ethereum and AAVE have used this method to launch.
But US regulations and fraud risk have given a stigma surrounding token sales.
Thus, founders have to make a choice on how to raise funds for their company and consider tradeoffs
For Roman Giler, founder of Savvy DeFi, a token sale made the most sense for his community.
But instead of using an initial coin offering (ICO)...
Savvy DeFi generated capital through a mechanism called a Liquidity Bootstrapping Pool (LPB).
After using Debank and Blaze the Savvy team was able to outbound ideal LPB participants.
This scrappy move by the team plus launching the product prior to the token led to Savvy generating over 300 ETH in 3 days.
Additionally, Savvy was also able to keep over 90 percent of the protocol.
While an LPB was best for Savvy, we are also seeing some VC funds like CoinFund and Blockchain Capital raise funds.
These firms having capital will be able to infuse capital in relatively new projects or double down on the top companies in the space at better valuations.
Full Analysis
The crypto industry is in a bear market. Last year, major projects like Luna, BlockFi, Celsius, and most notably FTX collapsed.
From that point on, the crypto received a rude wake up call and as AI has increased in popularity…
The crypto industry has begun to feel like an afterthought to both the mainstream and to investors.
AI seems like the hottest thing out currently and that Web3 won’t be important.
While there are recent developments mentioned in previous CryptoJeter articles like the prospect of a BlackRock and others launching Spot Bitcoin ETF…
Or PayPal and Visa entering the stablecoin space…
The industry doesn’t appear to garnering the buzz that was around a couple years ago.
One major deterrent to engaging in crypto is the unclear regulatory environment in the US.
However, after recent federal rulings that have resulted in wins in the industry.
Crypto should be viewed as a legitimate technology that has positive use cases that benefit society.
While there is optimism for the future, venture capital dollars flowing into the space has plummeted.
Crypto VC Funding This Year Is In The Sewer
According to The Block, crypto startups have received the least amount of funding are as low as they’ve been in 2 years.
In August alone, only half a billion dollars has been deployed to crypto startups.
But while that is a rough month for the industry, it unfortunately is the fourth consecutive month where investment into crypto startups have declined.
Thus, despite the theory that the best companies are built during downturns…
It is a struggle for founders and communities to raise funds that may help projects survive, grow, and even launch.
The hesitancy from venture capitalists to invest in the crypto space stems from the risks of not only company survival in a volatile environment.
But also, the lack of companies with reasonable valuations has made it challenging for crypto companies to raise up rounds.
With this in mind, Tom Schmidt, managing partner at crypto VC firm Dragonfly Capital, addresses this issue by saying…
“Many companies that raised massive amounts at crazy valuations that they haven't grown into aren't fundable in 2023 without totally reworking the cap table or adding so much structure to the round that it simply isn't worth it.”
Based on Tom’s comments, it seems like VCs are being ultra-conservative
And they have acknowledged the aggressive expectations set on their portfolio companies.
But while many VCs are observing and largely letting the bear market pass…
Founders need to find creative methods to extend their company’s runway.
Obtaining Capital Requires Grit and Creativity
In the late 2010s, initial coin offerings (ICO) were a primary mechanism for projects to receive capital from their communities.
Ethereum, the second largest cryptocurrency behind Bitcoin began its journey with a token presale.
The presale generated a remarkable 2.2 million dollars in only 12 hours.
But unfortunately, many ICOs were not for legitimate projects.
Thus, the mechanism became more recognized for its ability to drive fraud rather than standing up new crypto projects .
Despite the narrative, token sales continued to be prevalent as other top projects AAVE, Filecoin, and Cosmos leveraged them to launch.
They are still around today but they are less visible in the United States due to the regulatory pressures.
For example, there is a lot of discussion about what makes a token a security in the US
And if a token wants US investors, only those who are accredited (predominantly rich individuals) can partake in the token sale.
But to avoid the threat of a legal incident ending a project…
Many token sales eliminate US citizen participation.
However, in this down funding environment, a token sale may be necessary to pursue.
One way to perform a token sale is through a Liquidity Bootstrapping Pool (LPB).
These pools allow projects to generate liquidity with small initial capital and create better distribution.
Additionally, the pool's mechanisms can be adjusted to reduce price volatility.
This ultimately protects investors as the tokens are backed by collateral.
Early stage projects that are looking to distribute tokens without a sharp price curve.
One platform that has gained traction to create LPBs is Balancer.
Balancer describes itself as a “decentralized automated market maker (AMM) protocol built on Ethereum that represents a flexible building block for programmable liquidity.”
Fjord Foundry has propelled Balancer’s influence in the LPB space through their partnership.
Over 130 bootstrapped communities have been created with Fjord Foundry.
But the community platform value comes from its ability to connect supporters to new projects.
Thus, Fjords work has resulted in 750 million dollars of tokens accrued
And over 1 Billion Dollars of processed value.
One project that worked with Forjd Foundry to bootstrap their protocol is Savvy DeFi.
And after chatting with Savvy’s founder, Roman Giler, it makes sense why this option was appealing.
Roman shared that he was looking for a way for Savvy to become a community owned project
And with VC funding at this stage, he didn’t see that as being obtainable.
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