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Entrepreneurs in the Web3 industry have to deal with many of the same challenges faced by their peers in getting their nascent startups off the ground. There’s the long, gruelling process of transforming their initial spark of an idea into a viable product, the need to create a business plan and come up with a pricing model that’s competitive yet profitable, and hiring competent staff is no easy task, either.
However, perhaps the most difficult challenge for entrepreneurs is the need to obtain funding. No startup can get by without operational capital to get it started, which is why so many turn to venture capital, but doing this can come at a significant cost.
Of course, VC investors do provide considerable assistance, as they have access to more than enough money to help your company do what it’s setting out to do, and the increasing annual growth in Web3 startup funding suggests they’re more than willing to invest in blockchain startups. VCs can also make introductions, helping entrepreneurs to find additional investors who’re willing to share the risk, and they can help with finding the essential talent startups need, which can be extremely difficult to do due to the limited number of developers around with blockchain-specific coding skills.
However, the big problem with accepting VC funding is that investors demand to have a significant say on the future direction of the business, and their priorities aren’t always in sync with those of its founders.
Entrepreneurs need to understand that when they accept money from VCs, they’ll be required to give up a considerable stake in the ownership of their company, and that means they’ll be forced to consult with them on all major decisions. As such, they no longer have full control over the company’s strategy and vision.
In fact, VCs are notorious for wanting to have a say in almost every aspect of what the company does, from its overall strategy and business plan, and even more minor decisions, such as who to hire, the number of hours they’re expected to work, their salaries, product design and a million and one other things.
In some cases, founders may be forced to compromise on their vision and goals, and sometimes even their ethics, and adopt strategies and policies they’d rather avoid. This is because the priorities of VCs are often very different from founders. While founders have a long-term vision, VCs are looking for an exit as soon as possible, and for that reason they tend to prioritize rapid growth over the founder’s longer-term plans. It’s not uncommon for VCs to push founders to take considerable risks in the relentless chase for growth – risks that they’d never entertain if they were making all of the decisions by themselves.
Should founders attempt to push back, or if the company fails to meet the VCs’ desired growth target, they may find that their backers are now going behind their backs, making deals to sell off its assets to recoup their initial investment. But what if those assets are key to the founder’s vision for long-term market domination? Well, that’s too bad, for they’ll more than likely have to sell anyway and be forced to watch, virtually powerless as a much larger competitor seizes on their vision.
In some industries, founders may have little choice but to accept the risks of VC funding because it’s the only way to get the capital they need to compete. For instance, AI startups have very few options due to the sky-high costs of the required computing infrastructure they need.
But that’s not so in Web3, where alternative funding avenues exist, thanks to the industry’s unique, decentralized nature.
Web3 is different because Web3 is decentralized, and that means there are plenty of opportunities to attract capital from a different source – the company’s customers, enthusiasts and believers.
Some of the most popular funding opportunities for Web3 startups are crypto launchpads and initial DEX offerings, where startups can sell a number of “tokens” to early investors at low prices in order to secure the backing they need.
In Web3, money is replaced by cryptocurrency and most projects are centered on some kind of digital asset that’s critical to the business they’re building. For example, a crypto project’s native token is often used to pay for access to its products and services. That means the token has obvious value in the hands of the right people. Tokens can also provide additional benefits, such as giving users the opportunity to participate in governance or obtain discounts on fees.
If a Web3 startup has a viable idea and gets its initial marketing right, it can quickly drum up a lot of enthusiasm and create demand for its tokens ahead of its launch. Then, it can sell off a portion of those assets to early investors to obtain much-needed capital.
One of the best ways to handle a token sale is through a crypto launchpad, such as Polkastarter, Impossible Finance or DAO Maker. Launchpads are especially popular with crypto investors because they take the time to carefully vet all new projects, perform due diligence and investigate their founders. The smart contract code will also be audited for vulnerabilities. If a project makes the cut, it’s a pretty strong sign that it’s legitimate and has a viable product on the way, reducing risk for investors.
The decentralized trading platform Mosaic Alpha was one such project that went down the launchpad route when it debuted its utility token KDX. Mosaic is a novel platform that’s aiming to make crypto trading more accessible through a unique spin on what's known as “copy trading”, where users can pay small fees to copy the traders of more experienced users.
With Mosaic, profitable traders can pay KDX tokens to create what’s known as a “token basket” made up of multiple digital assets, then continuously manage them by buying and selling different assets to increase the profit it generates. Other users can pay KDX tokens to use these baskets in their own investment strategy, with part of the fee going to the token basket creator, and part back to Mosaic’s treasury. However, basket creators will only receive these fees if their basket generates an acceptable profit, meaning they have a powerful incentive to ensure that it does.
Mosaic’s business model is based entirely on its founder’s vision, its fees are exceptionally low, and it has since moved from Binance Smart Chain to its very own blockchain, called Mosaic Chain, which supports the rapid, low-cost transactions needed to scale financial applications. It was able to do this precisely because it funded itself through a token sale, avoiding the need to accept VC funding. Had VCs been on board, it’s likely Mosaic would have been compelled to increase its fees in the name of profitability, and perhaps even abandon the costly development of the Mosaic Chain in favor of using a more established, but less optimal network.
While VC capital is by no means always a bad thing, founders need to understand that they will almost certainly have to give up a degree of control over their business if they decide to accept it. In many cases, they will decide that it’s absolutely necessary to do so, for in some industries there really are very few alternatives.
Fortunately, Web3 startups have many other options, thanks to the tokenized business model that’s unique to this industry. The goals of Web3 communities are much more likely to be aligned with those of the project’s founders, so there's no pressure on them to forsake their long-term vision for short-term profits.
