On average, over 300,000 businesses commence operation every year in the United Kingdom, which means that over 5,700 businesses are registered every week. Many of these businesses are owned by startup founders who seek funding to bring their ideas to life.
While venture capital remains one of the most dominant funding options for startups, alternative routes like cryptocurrency and blockchain-based ideas are becoming increasingly helpful by the day.
This article will discuss both funding routes to help you make informed decisions that best fit the nature of your startup. We will consider the pros and cons of both options and their regulatory implications as well.
Crypto vs Venture Capital for Startup Funding – Which Is Better?
Crypto-Based Funding
As blockchain technology grows more popular, its uses continue to gain relevance across several cases. In startup funding, businesses receive these funds as digital tokens. Raising these digital tokens happens in different ways.
An Initial Coin Offering (ICO) is one way some startups raise funds for their projects. Just like an initial public offering, where companies sell their shares to the public to raise funds, an ICO sells digital tokens or coins.
These digital coins are usually created by the startup, and the funds would be used to develop the project, while investors hope that the project will be a success and the coin will appreciate in value.
Other forms of crypto-based startup funding include Security Token Offerings (STOs), which were used in 2018 by tZERO to raise about $134 million; Initial DEX Offerings (IDOs); and Initial Exchange Offerings (IEOs).
The Pros of Crypto Funding
- This form of funding has a global reach, as you can reach a wider pool of investors, literally anyone with a crypto wallet.
- Depending on the market interest, adequate funds can be raised within days or weeks, which is usually faster than conventional funding.
- The startup owner doesn’t always risk equity dilution, as tokens can be offered without trading company ownership.
- As early adopters, investors are likely to be promoters of your product, which gives you the benefit of crypto’s community-driven marketplace.
- Tokens are usually liquid because they can be traded on platforms like Coinpass or other centralised and decentralised exchanges
The Cons of Crypto Funding
- Regulatory uncertainty and market volatility are two of the biggest cons here because the value of tokens can change drastically within a short time, which can affect project progress, and government authorities consider some tokens as invalid securities.
- Several cases of ICO scams have, to an extent, damaged the reputation of crypto-based funding and given it a high-risk perception.
- Technical demands can create extra workload for your startup because you would need security audits and smart contracts to manage the funds.
- In the crypto world, most investors are seeking faster profits rather than long-term development, and this can place the startup under pressure.
Venture Capital Funding
VC funding is a traditional funding option where startups obtain financial leverage from institutional investors or angel investors in exchange for a part of the business or equity.
Funding patterns usually come in stages, and every stage portrays the maturity level of the business and how much risk investors are willing to bear. Before a VC firm or investor considers a startup, they usually analyse the startup’s growth potential, the market appeal of the startup’s product, and the strength of their management team.
In most cases, VC funding occurs in seven phases:
- Pre-seed phase
- Seed phase
- Series A phase
- Series B phase
- Series C phase
- Mezzanine phase
- IPO phase
The Pros of VC Funding
- VC funding can provide expertise and mentorship for your business because most investors come with several years of operational and scaling experience.
- It adds credibility to your business, which can attract other investors and customers, not to mention exposure to powerful networks, which can include media coverage and potential hires.
- VC funding is milestone-based, which encourages startups to pursue structured growth using disciplined development.
The Cons of VC Funding
- There is the issue of equity dilution, where investors take up significant ownership stakes in your business.
- VC funding takes time due to periods of pitching and convincing investors, due diligence, and legal negotiations.
- VCs may put the startup under pressure for high ROI because they want big returns and to stay afloat; you may be put under pressure to grow aggressively.
- Access to VC funding is often region-centric, which can limit opportunities for founders outside advantaged regions.
Regulatory Considerations in Crypto and VC Funding
When considering crypto funding, you have to pay attention to legal risks, as many governments have stringent rules around the sale of unregistered tokens.
Compliance is another factor worth consideration, as your funding project must effectively manage AML/KYC laws, security regulations, and even cross-border taxation. However, there are jurisdictions like the United Arab Emirates and Singapore that are friendlier to crypto funding operations.
Regulatory considerations in venture capital funding include corporate law compliance, which requires companies to register, report, and operate under local business laws. Additionally, VCs reserve the right to certain legal obligations to be met by startup founders. Also, your business receives funding via established frameworks and standard instruments like convertible notes and SAFEs.
Investors’ Expectations in Crypto and VC Funding
We will discuss these expectations under the salient key points.
Control
Crypto investors usually have no control over the business, but venture capitalists often take up board seats and demand a part of the business.
ROI Timeframe
For crypto investors, returns are expected to come in early, especially during token listing. VCs are more patient with ROI expectations spanning from three to 10 years.
Investor Involvement
Investor involvement is minimal in crypto funding, except when it is DAO-based, but involvement is active or high in the case of venture capital funding.
Transparency
Transparency is high in the case of crypto funding due to the nature of fund sourcing, which involves a wide section of investors. Founders have to give updates to these investors. For VC-funded startups, transparency is medium, with private reporting presented to investors.
Exit Strategy
When crypto-funded startups want to pull out, they sell off their tokens; meanwhile, for VC-funded startups, they either have to acquire full ownership or go IPO.
The Long-Term Implications for Growth
Both crypto and VC-funded startups have potential for long-term growth, although they have different perks. For crypto-funded startups, there’s higher potential for fast global scaling, and it’s easier for people to invest thanks to token incentives.
Also, community governance might come into play due to decentralisation, and market crashes can affect your project in the long run. Venture capital-funded startups have a stronger foundation for sustainable growth and have an easier time walking through the regulatory requirements needed for traditional markets.
There’s also a higher likelihood of acquisition/IPO with the right VC partners. Possible limitations can occur when founders want to innovate, but investors are conservative.
Choosing the Right Funding Path
Both funding models have unique features, strengths, and limitations. If your product functions on the Web3, metaverse, or blockchain and you seek funding without losing a part of your equity, crypto-based funding might work for you.
However, if you are operating in a traditional market and seek operational and scaling guidance, VC funding might be your best route.
