Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
The Use of Cryptocurrency in the Fundraising and Venture Capital Industry
Guest Post | Feb 1, 2023
Image: Unsplash/Christina @ wocintechchat.com
Cryptocurrency has taken the world by storm since its entrance into mainstream awareness. This new form of money is quickly becoming a sought-after resource for individuals looking to acquire venture capital or to fund startups. The possibilities that cryptocurrency provides in the fundraising and venture capital industry are unique, adding another layer of complexity to the already intricate process, which requires careful consideration from entrepreneurs and investors alike.
This is because cryptocurrencies offer several advantages over traditional fiat currencies, such as lower transaction costs, higher security, and quicker settlements. Cryptocurrencies are also becoming more widely accepted as a form of payment. Because of this, cryptocurrencies are becoming more popular in the fundraising and venture capital sectors. In fact, some startups and venture capital firms now accept and trade cryptocurrency for investment deals.
What is cryptocurrency fundraising?
Cryptocurrency fundraising refers to the process of raising funds for a project or venture by accepting cryptocurrency as a form of payment. This type of funding has become increasingly popular in recent years as it enables companies to tap into a global pool of investors. Using cryptocurrencies to raise money is an option that works well for initiatives tied to blockchain technology. A popular form of Cryptocurrency fundraising is the initial coin offering (ICO).
An initial coin offering is a fundraising event within the blockchain technology framework. It’s similar to an initial public offering (IPO), except that it employs cryptocurrency instead of traditional currency. There are two different kinds of initial coin offerings: private and public.
When a company makes a private initial coin offering, only a select group of investors who have met certain criteria are permitted to participate, whereas a public initial coin offering is a form of crowdfunding that is directed at the broader public. In addition, the initial public offering is considered more democratic than other forms of investing since virtually anybody can become an investor. Other forms of cryptocurrency fundraising include initial exchange offerings (IEO) and initial decentralized exchange offerings (IDO).
What is venture capital financing?
Venture capital is the funds that individuals invest in businesses in return for a stake in the company. Most of the funds generated are invested in the company's growth and expansion. Venture capitalists prefer to back startup companies that can develop into substantial enterprises, have a clear strategy for the future, and provide a favorable return on investment.
Venture capital funding is usually divided into five stages. These stages are pre-seed, which is also known as stage 0; seed capital (stage 1), startup capital (series A), early stage (series B), and expansion stage (series C).
Venture capital can serve various purposes for a startup, each tailored to the company's specific requirements at a given moment. For example, crypto venture capital, in the context of cryptocurrencies, can be used to speed up development, launch the project, recruit key personnel, and ready the business for an initial coin offering.
People investing in venture capital funds have the same goal: to amass a large fortune in a short period of time. Accordingly, administrators of such funds often extend invitations to potential investors using a prospectus.
Cryptocurrency fundraising and traditional fundraising
Cryptocurrency fundraising is often compared to traditional equity fundraising, as both involve the exchange of funds for a stake in the project. However, there are a few differences between cryptocurrency fundraising and traditional fundraising. Firstly, cryptocurrency fundraising is often done through initial coin offerings, a crowdfunding type. Secondly, cryptocurrency fundraising is usually open to a wider range of investors, as it does not require accreditation.
Why venture capital firms are interested in the crypto industry
There’s a rise in demand for investments in the blockchain/cryptocurrency industry. As a direct consequence, crypto venture capital companies are putting money into the crypto space to achieve high returns on their investments.
The following are some of the factors that contribute to the sector's attractiveness to potential investors:
- The cryptocurrency/blockchain industry has tremendous room for expansion. This demonstrates the industry's rapid development and enormous growth potential.
- Cryptocurrency investments appeal to venture capital companies due to their decentralized and distributed nature. Another main attraction of crypto finance is the exchange of tokens rather than shares at fundraising time.
- Tokens, as opposed to shares, are often traded throughout the fundraising phase of a cryptocurrency venture. Due to these facts, venture capitalists see cryptocurrency and blockchain technology as a sector with the potential to become profitable and worthy of investment.
- The arrival of blockchain technology and cryptocurrency has fundamentally changed the web world as we know it, making Web3 the web of the future. At this time, several firms are developing decentralized applications by using blockchain technology. Furthermore, this foreseen future is getting ever closer, due to the development and expansion of the crypto industry.
Advantages of using cryptocurrency in fundraising and venture capital financing
Image: Unsplash/Art Rachen
Increased transparency and accountability
All transactions on the blockchain are verified by a distributed network of nodes, making the data available to anybody. Since the blockchain record is accessible to the public, tracking the movement of money is easy, because cryptocurrencies are traded directly between digital wallets.
Ability to attract emerging investors
Raising funds through cryptocurrency could be the perfect way to get young investors interested. Not only is this a great way to access an increasingly valuable fund base, but these emerging investors come with a ready-made enthusiasm to make serious investments. Plus, it's the modern, tech-savvy solution that's sure to make any project stand out!
Lower transaction costs
Since many participants who would normally function as middlemen in financial transactions are removed from a blockchain system, the transactions are usually processed more quickly and at a lower cost. This is especially helpful when making international donations, because banking costs and procedures might reduce the overall impact of the funds.
By accepting cryptocurrency donations, venture capital firms may expand their global reach without experiencing any of the many drawbacks that often outweigh the benefits of a more geographically dispersed donor pool.
See: Blockchain-based replacement for traditional crowdfunding: DAOs
Although there are a lot of benefits linked with them, the use of cryptocurrencies comes with various challenges, such as uncertainty over regulatory requirements and market volatility.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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