When a company reaches a specific growth stage, it might need to seek funds to help it reach its next stage. It may become a reliable means to seek out funds via fundraising to raise funds and finance its growth stage. This occurs when businesses want more funding to scale quicker than what is currently accessible to them. Because of their infancy in the public eye, Crypto businesses may not be open to options for funding like initial public offerings and obtaining a bank loan. So, if a cryptocurrency firm wants to raise money, it must consider fundraising. Let’s look into the role of marketing in a crypto fundraising plan. Read on!
What is Crypto fundraising?
Before we study crypto fundraising, let's first discuss the conventional fundraising methods: venture capital funding, and angel investors, before moving on to our main topic.
When a company needs money, its owners may turn to venture capital firms. In a venture capital fund, investors combine money and bet on entrepreneurs. These firms find investors by delivering a prospectus, an SEC-filed document that describes investment benefits and dangers. If investors are interested in a project, they invest.
While Angel investors are wealthy people who invest in early-stage businesses, their investing focus is on entrepreneurs and their vision, not commercial stability. Their objective for funding is to generate money, mainly for the stock they may or may not hold.
In 2017, a crypto funding craze led to a meltdown of crypto funding; many attributed the failure to its infancy. With so many crypto expert analyses, discoveries, and recommendations, crypto infancy is better than it was. There are several crypto financing options like ICO, STOs, IEO, and IDOs.
What is ICO?
Initial coin offerings are cryptocurrency's Initial Public Offerings (IPOs). An ICO helps a company fund a new app, coin, or service. Let's first discuss what an ICO does, then the differences.
The white paper, perhaps the most essential marketing document for blockchain and cryptocurrency firms, is the primary fundraising instrument. Marketing materials like brochures and flyers may be overtly promotional. In contrast, white papers are written to present evidence that a particular service is better than others at addressing a specific business issue. Tokenomics (the proportion of tokens that will be publicly accessible and the amount the creators aim to hold) and the specifics of the fundraising campaign are included in the white paper, which provides essential information.
What is IEO?
IEO means for Initial Exchange Offering. In this case, the project owner may rest easy knowing that their token will be accessible to every investor who has access to the exchange. It is possible that the backing of exchange will provide investors with peace of mind that their money is safe.
Having the exchange handle your coins directly comes at a considerable expense. This entails the payment of a token listing charge and the forfeiture of a portion of token sales. In essence, the exchange is lending its reputation to the enterprise for financial advantage.
When a cryptocurrency exchange decides to offer a project's token, the scenario is quite different. Once an exchange determines that a project is worth listing on its own, it may list a token based on those parameters.
What is STO?
STO stands for Security Token Offering. The less popular security token offering is a more cautious technique for acquiring funds using cryptocurrencies. As the name suggests, this technique already identifies the token as a security. As a result, they fully comply with all applicable safety standards and protocols.
Regulations may include KYC and AML standards to prevent money laundering and fraud. AML and KYC rules help financial institutions comply with the law by identifying and mitigating potential risks.
What is IDO?
IDO stands for Initial DEX Offering. A decentralized exchange (DEX) does not rely on any central authority. Automated market makers are DEXs' primary function. They use smart contracts to avoid needing a third-party intermediary regarding money transactions. There is no need for KYC and AML compliance. When the hammer falls, they may be subject to stricter rules. A digital wallet address is required to receive the currency in question, and no personal information is required to participate.
For startups: what kind of fund-raising strategy should they opt for?
As a result of token fundraising via a private placement, blockchain projects and startups can get immediate money and other benefits from investors without giving up ownership or voting rights. With no need for investment bankers or extensive documentation preparation, the token fundraising process is much more cost- and time-effective than traditional IPO methods, such as raising capital through a stock offering.
Several advantages can be gained by approaching several angel investors or institutional investors, including improving the project's legitimacy and giving operational support. A company or a project owner can raise financing via traditional debt or equity if they take these activities in the private placement stage.
For dApp businesses, an ICO is still not suggested because ICOs are less reputable and more expensive than IEO/IDO. Startups may be unable to raise the money they need due to a lack of investor knowledge and low credibility. There are many advantages to using an IEO/IDO, including using your existing customer base and credibility to develop trust and generate financing awareness over an ICO, which requires a huge amount of marketing spend. However, this is governed by the laws of each country.
Firms looking to raise money via equities and tokens should be aware of the potential for conflict of interest. Due to the fundamental differences between equity and token appreciation, there is a direct conflict of interest.
For equity value to appreciate, the company must create sufficient cash flow and anticipate future growth. On the other hand, token value increases are linked to an increase in the overall demand for the token.
For example, a token holder can try to persuade the company to invest substantial sums of money only to increase traffic and demand for the token. dApp startups can avoid this problem by either raising capital through the sale of tokens or by selling shares of their company. Otherwise, most of the investors would have to hold equal amounts of tokens and equity for the company to succeed.
For investors: what kind of fund-raising strategy should they opt for?
dApp businesses typically seek capital from institutional investors, as these investors may provide immediate credibility, operational support, and a network of long-term commercial partners for the startup. In this way, institutional investors have a great deal of leverage in the marketplace.
For this reason, institutional investors who believe in the project's long-term goals and the team behind the project should invest in private placements to optimize their financial returns. IEOs and IDOs can offer retail investors the opportunity to participate in private rounds if they have a solid relationship with the project owner.
Angels and institutional investors who invested in the private round profit greatly from token investments because they can turn over cash flow. In contrast to traditional equity IPOs, token investments allow early-stage investors to realize a return on their investment in a fraction of the time.
This is because putting a project through IEO and IDO, where investors sell their tokens to realize a profit, is much simpler and faster than the traditional IPO process. In addition, the token can be staked throughout the holding term to receive additional returns and, of course, the risk of losing the tokens. As a result of these advantages, investors can make a profit more quickly while also being able to control their cash flow better.
Many new crypto developments have emerged only a few months after initial coin offerings (ICOs) debuted. Innovative ways to raise money for startups like IEOs, IDOs, and other crowdfunding innovations are becoming more popular than ICOs. Regarding the future of fundraising, what new methods will be developed? This is yet to be determined. Regulators, on the other hand, will determine the industry's future. There's no dispute about it. So, perhaps, they'll be mindful of both project investors' and issuers' demands.
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