Today we are going to explore funding your startup with cryptocurrency. Cryptocurrency has been making waves in recent years. By definition, cryptocurrency is a type of digital asset that facilitates exchanges through secure financial encryptions and verifications. Over the years, cryptocurrency (“crypto” for short) has evolved as a means to fund startup companies and small businesses. Among the most widely used cryptocurrencies include:
- BitCoin Cash
While gaining popularity, funding your startup with cryptocurrency is not without its drawbacks. First, cryptocurrencies are still in a relatively early stage and it’s still somewhat of the “wild, wild, west,” when it comes to cryptocurrency startup investing.
Since they have no central authority, the prices of cryptocurrencies can also be highly volatile. Over the last several years, the value of BitCoin has ranged from a low of just a few thousand dollars to a high of over $15,000. But these factors do not mean that funding your startup with cryptocurrency is not a valid option that should be explored.
The use of private funds has the immediate advantage of strengthening public trust when it comes to a startup. It can come in the form of venture capitalists, angel investors or private equity companies. And for certain types of startups, the security of cryptocurrencies makes them highly appealing. Crunchbase lists 470 different startups that have been funded with crypto, many of them in fintech or other high tech sectors that require a high degree of security.
Initial Coin Offerings (ICO)
An ICO is the equivalent of an initial private offering or IPO in traditional businesses. In cryptocurrency, it is a form of crowdfunding. This is a method where investors buy a specific number of tokens that will then provide platform access.
It has seen its share of controversies because it is unregulated as far as raising funds is concerned. The US Securities and Exchange Commission (SEC) released an official conclusion that virtual tokens are securities and must be subject to the regulations of federal securities laws.
But still in all, ICOs can be used as a means to fund operations or new programs for an organization. It can raise capital for startups.
The Founder Institute, one of the worlds’ premier startup accelerators for tech forward companies, offers some great insight into ICOs, including some examples of how some of their graduates have used ICOs to fund their startups.
Security Token Offerings (STO)
There is optimism in STOs as a crypto fundraising method that can adhere to regulations. In a nutshell, a security token is a cryptocurrency that has the backing of real assets. It also complies with SEC regulations. They have lower risks compared to ICOs.
Case in point: Blockchain Capital had the first STO on April 10, 2017. Amazingly, it raised $10 million in just one day.
Initial Exchange Offering (IEO)
The IEO is a method that is facilitated by an exchange, usually with platforms such as KuCoin, Huobi or Binance. Token sales are implemented through these platforms and token issuers have to pay a listing fee together with a percentage of tokens sold during the IEO.
In exchange, the tokens of the startup are sold on the platforms and their coins are listed once the deal is done. The exchange takes a percentage of the tokens and provides incentives to help the marketing operations of the token issuer.
The participants of the IEO do not provide contributions to the smart contract. They just have to create an account on the exchange platform. The contributors will then fund their wallets with coins and use those funds to buy the tokens of the company.
Choosing the Best Method for Crypto Fundraising
Each method has advantages. But the latest innovation can be observed using Initial Exchange Offering platforms. They offer a reputable venue to conduct crowdsale using cryptocurrencies. Scams and dubious personalities can be crossed out of the equation with this system.
Startups that issue tokens can also benefit with the seamless and problem-free process of launching IEOs on exchange platforms, compared to ICOs where they are mostly on their own. There may be listing fees, but this is overcome by the excellent service of the IEO platforms.
Consult a Qualified Legal Team
Before looking at funding your startup with cryptocurrency, be certain to seek advice from a qualified legal expert with experience in the field. Remember, this is still an emerging field with lots of regulatory changes potentially on the horizon.
Want to learn more about funding your startup with cryptocurrency? Contact me today and let’s talk!