The success or failure of an entrepreneurial venture is closely tied to how much liquidity the startup has. That is no different in the bitcoin economy. You can be developing the most innovative world-changing technology but if you run out of funding you will have to close shop no matter what. Fortunately, nowadays, there are several ways to fund your blockchain project that does not involve begging your bank for a loan.
In this article, you will be introduced to five popular alternative ways to fund your blockchain venture that could make the difference between your project failing or succeeding.
The easiest and most hassle-free way to fund your startup venture is by bootstrapping it, if you and your team of developers are in the position to pool your own funds together to get the project off the ground. The benefits of funding your startup yourself is that you have no outside shareholders or private investors to answer to. Furthermore, by bootstrapping your project you are not diluting your share in the company, which may one day be worth a lot of money.
One of the more traditional ways for startups to receive funding is to pitch their idea to venture capital funds that are looking to invest in promising startups. Access to venture capital funding for tech firms, especially fintech firms, has been relatively easy in the last few years. Not only because there has been in a boom in both tech and fintech, but also because investors are looking for higher returns than they can currently get in the stock and bond markets.
Venture capital funding from leading blockchain VCs such as the Digital Currency Group, Blockchain Capital, Union Square Ventures, and Ribbit Capital, would not only give your project a financial boost but would also give your startup a certain degree of industry approval. This, in turn, can help to secure further funding down the road.
Having said that, having venture capitalists as investors also means that you will have to generate a profit sooner than later as investors want to see returns. Also, some VCs like to take a more hands-on approach with their investments, which could mean you as a founder may not be calling all the shots anymore.
If your own funds will not suffice to get the project off its feet, however, then you need to look at other options. One of these options is crowdfunding. Crowdfunding refers to the raising of capital from a number of private individuals who contribute small amounts to the project, usually through the use of an online crowdfunding platform.
When it comes to crowdfunding, there are three main types: reward-based crowdfunding, donation-based crowdfunding, and equity-based crowdfunding.
Rewards-based crowdfunding as the name suggests rewards those who fund the project or startup with rewards. Rewards can come in the form of a handwritten thank you letter to a mention on the startups websites to early access to the startups upcoming product. One of the most popular rewards-based crowdfunding platforms is U.S.-based Kickstarter.
Donation-based crowdfunding is usually found in the non-profit sector and is a way for individuals or NGOs to fund a charitable project that they are launching. In the for-profit space, donation-based crowdfunding is rather rare.
Equity-based crowdfunding rewards investors with a small share in the company that they are funding. Hence, instead of having to go public to raise money from private investors, startups can leverage online equity-based crowdfunding platforms such as Crowdfunder, CircleUp, and WeFunder.
Interestingly, the crowdfunding platform WeFunder has started to accept bitcoin as a payment method for making contributions to crowdfunding campaigns, which makes it an interesting funding source for those looking to tap into the bitcoin community to raise capital.
If you do not like the idea of giving away a share of your company to outside investors and are comfortable to take on debt to fund your project, you could apply for a peer-to-peer loan. Peer-to-peer loans are a form of debt financing that involves several individuals lending money to a startup or an SME via an online peer-to-peer lending platform.
To secure a peer-to-peer loan you have to apply to have your funding requirements listed on a peer-to-peer lending platform such as LendingClub and Prosper. Once your funding requirements and terms and condition are agreed upon by both the startup and the P2P lending platform, the loan is listed and individual investors can fund it. Once the loan is fully funded, the startup receives the funds and repays the money plus interest over the term of the loan in monthly installments. All payments are handled through the peer-to-peer lending platform.
Peer-to-peer loans are an excellent form of financing for those who are struggling to receive a bank loan, which is the case for many bitcoin startups, and for those who prefer not to give away equity in their new company.
Initial Coin Offerings
Finally, probably the most popular method of funding a new blockchain project today is through an initial coin offering. Initial coin offerings, also known as token sales, crowd sales, and initial public coin offerings, are a new way of funding startup ventures through the sale of a digital token. These digital token, also known as cryptocurrencies or cryptoassets, then act as an indirect stake in the project and, therefore, indirectly tracks the performance of the startup. In that sense, ICOs are similar to stock IPOs with the key difference being that the investors do not hold actual equity in the company. Instead, a digital token that is indirectly linked to the project’s performance.
From the company’s point of view, ICOs are an excellent way to raise funds without actually having to give away equity in the company while not having to resort to debt financing.
While launching your own digital token may seem daunting to some, there are platforms such as TokenMarket that will handle the entire process for you for a fee. Thereby, making fundraising via an ICO accessible to anyone looking to launch a new blockchain project.