The crypto industry is evolving continuously and has matured enough to witness steady institutional investment. Both retail and institutional investors are flocking to crypto for high ROI. VC funding in crypto is increasing steadily, reaching its peak in 2021 before witnessing an understandable decline in 2022.
DeFi, Web3, and P2E are some of the top sectors within the industry when it comes to VC investments in crypto. While global funding for web3 and blockchain companies declined by 50% amidst the crypto winter, it is merely an indication of the temporary lull in the industry due to a prolonged bear market. Despite the decline, VC funding i crypto startups in Q3 2022 amounted to over $3.3 billion. While the decline looks huge due to the boom in the previous quarter, the numbers are still impressive.
What Is Venture Capital (VC) Funding In Crypto?
Venture Capital funds bring together a pool of investors, allowing them to invest in a startup or business for making a profit in a shorter time period. A proposal is sent by the fund manager to potential investors, inviting them to participate in the funding.
To ensure that the ROI is positive, fund managers spend days scrutinizing projects and startups to determine the ones with solid growth potential. Diversifying is a key mantra that VC funds stick to for minimizing risks. VC funding in crypto works the same way as in traditional investment. Fund managers carefully scan startups and different sectors such as DeFi, Web3, and Metaverse to spot high-growth potential projects. There has been a substantial shift in VC funding from traditional assets to digital assets.
How Does Venture Capital Funding Work?
Venture Capital (VC) funding is a multi-step process, and it works the same way in crypto as it does in the traditional sector. Fundamentally, it is a four-step process. Here are these steps:
- Pre-Seed: Also known as Stage 0, pre-seed is the stage where a group of investors and business experts analyze if an entrepreneur’s idea can be transformed into a successful venture. Unlike angel investors, VC funding requires extreme confidence in the idea of the entrepreneur to put their money into it.
- Seed Capital: The Seed Capital round is where startups pitch their business to VCs through tools like pitch decks and other documents. The drill is to convince the investors that the business will be profitable in the long run. It is a very brief round where founders meet potential investors with profit-loss statements and other important documents to make the process entirely transparent. This is the ideation stage, where investors put a small amount of money into the idea to test the startup in the market before investing more money.
- Series A: Series A is where equity comes into play. The round is mainly for crypto businesses already growing. Crypto businesses go for a Series A round after they have tested and validated their product in the market, following the seed capital. However, having seed capital is not mandatory for participating in the Series A funding round. VCs are more inclined to invest in the Series A round as the product has already been validated in the market, and the risk is comparatively low. The primary focus here is on customer acquisition and expansion of the startup.
- Series B: Series B or Early Stage funding is focused on adding more fuel to sales and marketing efforts. Series B VC funding in crypto startups is aimed at furthering the marketing activities to capture a wider market and increase the user base. Crypto companies use the fund to open offices in new locations, hire more professionals, absorb more resources, and solidify the product. VCs mostly provide Series B funding to startups that already have substantially high userbase.
- Series C: Series C, or Expansion Stage, is the final stage of VC funding in crypto. Crypto businesses that intend to start operations in additional markets and diversify their product lines participate in the Series C round. The round is mainly organized for established companies, and big investors participate in it. Scaling includes the acquisition of smaller businesses by a large business, and hence, comparatively higher amounts of funds are required. The risk involved in this stage is really low, and that is why private equity and investment banks also participate in the round.
VC Funding In Crypto And The Road Ahead
Business leaders and investors globally realize the potential of crypto. The increasing adoption of blockchain technology across major industries has paved the way for accelerated growth in the crypto market. VCs realize that the future belongs to crypto, and this has resulted in an exponential rise in VC funding in crypto over the past few years. Crypto startups now understand the importance of dedicating time and efforts to creating a funding pitch deck to approach investors as competition in the industry rises.
The sole difference between crypto businesses and traditional businesses participating in VC funding rounds is that the former operates digitally, with blockchain at its core. Furthermore, government regulations and institutional investments have led to more trust in the market. VCs are now more open to investing in emerging crypto startups as the risk involved is decreasing slowly.
Final Word
The crypto industry has matured enough to attract global attention. It offers an opportunity for steady gains, while allowing investors to diversify their investments across multiple projects. Be it VCs or retail investors, risk management is very easy if you understand the project well. Going forward, VCs are going to pour more money into crypto startups. However, an alarming rise in wallet breaches is one roadblock that the industry needs to pass to reach the tipping point for mass adoption.