Fundraising for a blockchain startup can be daunting, but in this high-level overview I'll provide a practical framework to help you navigate the fundraising process confidently.

This is not financial or legal advice. Please seek professional help.

The process of fundraising has not changed much in the past 5 years, however, it has evolved significantly from the days of ICOs. Once the dominant funding mechanism in 2017, ICOs declined sharply amid the bear market of 2018 and increasing regulatory scrutiny.

While blockchain fundraising shares many similarities with traditional tech startups, one key difference is the ability to leverage token sales as a fundraising method. Despite this unique aspect, the process remains a well-trodden path with recognizable stages. I've even detailed this journey in a YouTube video series, breaking down each step.

This blog outlines a three-phase fundraising process:

1. Founder Money & Grants (each point a link?)
2. Private Rounds
3. Public Rounds

Not every startup needs to follow all three phases—each situation is unique. Some founders may have enough personal funds to develop a public product entirely. However, this is rare, even after notable gains in the crypto market.

1. Family, Friends, Founders, Grants

During the initial stages of development, you'll likely rely on your own finances. Quitting your job without a clear vision isn't advisable, so it's often better to tinker with ideas in your spare time. This can be challenging alongside a full-time job, but it's a practical way to develop your concept.

One solution to freeing up your time is to consider grant funding.

Image source: ChatGPT.

Grants

Fortunately, grants can provide a much-needed boost. Many governments offer grant schemes for tech startups. While it might not seem "cyberpunk," your taxes fund these grants, so it's worth considering if your idea fits within the scope. Additionally, numerous blockchain foundations offer grant programs that can support you in the early stages (Ethereum, Web3 Foundation, Polygon, Near etc).

Grants are non-dilutive capital, providing a way to iterate on your concept with minimal financial risk. Quitting a full-time job might pose a career risk, but sometimes bold moves are required to progress.

This is also an ideal time to network with other founders and discover who else is building in your chosen ecosystem(s). Fellow founders often provide invaluable insights you won't find elsewhere. Some may even offer angel investments, but their first-hand knowledge is most valuable: the pitfalls they encountered, the strategies to avoid scams, and the tricks they learned to gain an edge. Remember, it's a two-way street; give and take will build these relationships.

Grant programs often come with specific restrictions that may not align with your preferred development style. There are pros and cons to every approach. Pursuing grants is not essential, but may provide the lifeline you need. Often you can apply to the same program multiple times, and potentially to multiple programs.

Whitepaper & Pitchdeck

Start developing a public presence while preparing your whitepaper and pitch deck at this stage. Lawyers will want to review the whitepaper before incorporating any token-issuing entity. While investors appreciate a finished whitepaper, they may not demand it right away. However, the pitch deck is crucial and should follow a standard structure. Investors will closely scrutinize token distribution, including the unlock schedule, and the token economics (“tokenomics”).

Although it's common to incorporate a company before obtaining grant funding, you don't need to incorporate the token-issuing entity at this stage. Other founders or investors can often recommend legal assistance for this later step.

Image source: ChatGPT.

2. Private Rounds

Before seeking investment, it's crucial to have something tangible to show—a working prototype or MVP, even if imperfect, will demonstrate your ability to execute. Conversations with investors are much easier when you can showcase a product instead of merely presenting an idea. As an advisor, I've sometimes upset founders by suggesting they build something first, but without a working prototype there is little to discuss with potential investors.

In blockchain, open-source code is particularly advantageous. While not universally agreed upon, a transparent public record of your abilities can provide more credibility than other credentials.

Multiple Rounds

There's no strict sub-process for raising private rounds, but it's typical to have multiple rounds of funding: build a bit, secure some funding, and repeat until launch. Continuously refine your product based on investor and user feedback.

At this stage you are raising funds by selling allocations of tokens that don’t yet exist. A popular method for doing so is via a Simple Agreement for Future Tokens (SAFT). Be aware that the SEC isn’t a fan. You can find an example SAFT online at the SAFT project, but I wouldn’t say to just use this blindly. You should be in touch with a lawyer already.

Here are some numbers to help calibrate your own round valuation. These numbers are for the initial private round back in 2020 / 2021:

• $7m - $12m (Dec 2020 - Mar 2021)
• $15m - $20m (Apr - June 2021, mid-FOMO part of the bull market)
• Round size: 5 - 10%: $750k - $2m

From what I hear, the values are still typical.

Not all who identify as VCs or investors bring the same level of expertise or support. The most renowned investors are often very selective due to a high volume of funding requests. While securing funding from top-tier investors may not always be possible, it's crucial to steer clear of investors with poor reputations.

Be wary of joining accelerator programs. While they offer connections to lawyers, investors, and sometimes exchanges, they often come with mixed feedback. The best programs still leave questions about their added value. Offers may seem attractive, but quality matters more than speed and quantity.

Token unlocking schedules

In private rounds, it's crucial to set clear unlock cliffs and schedules (often labelled as "vesting") to ensure a stable and responsible distribution of tokens. This practice prevents immediate sell-offs that can destabilize the market and aligns long-term incentives between investors and the team. A well-structured vesting plan typically includes an initial lock-up period (a "cliff") followed by gradual token releases over a predetermined schedule. Transparency and communication around these timelines can build trust with investors and create a more sustainable token ecosystem.

The unlocks occur after the Token Generation Event (TGE): e.g. after network launch.

Jurisdiction

Before selling tokens, it's crucial to establish a legal entity in a jurisdiction with clear and favorable regulations. This entity will be responsible for issuing the tokens, ensuring compliance with relevant financial and regulatory laws. Choose a jurisdiction known for its supportive legal framework and clear guidelines around digital assets. Many blockchain teams opt for regions like Switzerland, Singapore, or the Cayman Islands (also BVI).

Consulting with legal advisors familiar with token issuance can help navigate the complexities and avoid regulatory pitfalls. You could start by finding a lawyer in your own jurisdiction and see if they can point you in the right direction. It is not possible to give specific advice here.

Banking

During this stage, finding a bank willing to work with a crypto business is challenging. Some teams have temporarily paid staff in stablecoins like USDT to delay the need for a business bank account. Still, securing a reliable and compliant banking partner should remain a priority. It is typical that teams open an account at private banks, although be warned that this is expensive.

Image source: ChatGPT.

3. Public Rounds

Most blockchain teams will likely create a token and perform some sort of public distribution, but not all will perform a public token sale. Selling tokens publicly can be fraught with regulatory pitfalls and legal sensitivities, particularly in the U.S. For U.S.-based or otherwise incorporated teams, it's generally understood that public sales should be avoided. Selling tokens to the general public in the U.S. leads to compliance challenges that most teams prefer to sidestep.

Token sales and launches are undeniably thrilling in the blockchain industry. The allure of acquiring tokens early in a project's lifecycle excites investors, while teams look forward to raising funds to accelerate development. However, the legal intricacies make this phase challenging, especially with increasing scrutiny from regulators like the SEC. The constant legal threats can make launching a token seem risky, but careful planning and compliance can help you navigate this complex landscape.

Alternative Approaches to Public Token Sales

Here are a few additional methods to distribute tokens. Each with their own legal considerations too.

Airdrops: Airdrops distribute tokens to a select group of early supporters or existing holders of other tokens. This approach incentivizes community engagement and awareness (somewhat) while avoiding the complexities of a public sale. Naturally, this also has complications related to aggressive airdrop farming (Sybil attacks), which are unlikely to benefit the community or project.

This is also broadly true for stakedrops / lockdrops.

Community Grants/ Bounties: Community grant/ bounty programs allocate tokens to developers and enthusiasts contributing to the project’s ecosystem.

Whitelisting: In whitelisting, teams carefully select a list of participants allowed to buy tokens during a public sale or distribution event. This curated group, often chosen from pre-existing community members or early investors.

LBPs (Liquidity Bootstrapping Pools): LBPs allow teams to launch their tokens with dynamic pricing mechanisms on decentralized exchanges. Unlike traditional sales, these pools have a flexible pricing curve that discourages initial speculation by starting at higher prices and gradually lowering them. LBPs minimize the risks of price manipulation, provide a fair market value, and help teams secure liquidity over time.

Conclusion

Raising funds for a blockchain startup requires careful planning, strategic decision-making, and adaptability. From bootstrapping with founder resources and grants to securing private investments and navigating public distributions, the path is unique but rewarding. By understanding the regulatory landscape, fostering a supportive network, and transparently communicating with the community, teams can build trust and credibility.

While the challenges of fundraising in the blockchain space can seem daunting, the opportunities for innovation and positive impact are vast. With a well-prepared pitch deck, an effective whitepaper, and a strong understanding of the funding phases, your startup can attract the right support to thrive. Embrace the journey, learn from the insights of others, and continue refining your vision to secure sustainable growth in the evolving blockchain ecosystem.

Here’s a recap of the three phases:

1. Family, Friends, Founders, and Grants
   1. Bootstrapping through personal finances
   2. Grants
   3. Networking with other founders
   4. Start developing a whitepaper and pitch deck
2. Private Rounds
   1. Build something that works before approaching investors
   2. Incorporate a token-issuing entity before receiving investment
   3. Raise over multiple private rounds leading up to TGE
3. Public Rounds
   1. Public distribution / public sale / TGE
   2. Airdrops, bounties, grants, etc