In recent years, VCs have begun flocking to the web3 ecosystem due to its exponential growth. NFTs, DeFi, and several other layer one and two projects made waves across the internet in 2021 and 2022. As a result, VCs are pouring money into web3, making sizable bets in hopes of exiting with huge bags.
In 2021, VCs invested over $29.2 billion in web3 projects. And despite the bearish market trend and crash of top projects like LUNA/UST and FTX, VCs poured over $21.5 billion in the sector in 2022.
But funding slowed down significantly in Q4 of 2022 as the crashes also made VCs extra careful in their investment strategy. However, one thing is sure; VCs know that web3 holds huge promise and will continue to invest but with more scrutiny this time.
As a founder, you need to understand the basic requirements that will attract VCs in these times before sourcing for funds.
This piece covers key requirements that will help you land that VC funding you're aiming for in your web3 project:
1. Simple and Clear vision
The rate of innovation in web3 is high. Considering the open and decentralised nature of blockchain systems, countless web3 projects are entering the space daily, aiming to become the next big disruptor. As a result, it's easy for half-baked products and fragile business models to flood the market.
To differentiate yourself from the noise, you must have a clear vision and SMART (Specific, Measurable, Attainable, Relevant, and Timely) goals. VCs will know if your goals are outrageous and unlikely to succeed.
While the web3 market is hot with innovations right now, VCs will always remain meticulous in their approach and won't invest only because your idea is disruptive. They want to see the clarity of your vision and understand how you plan to achieve your goals before investing.
2. Understand how venture funding works in web3
VCs in web3 provide funding to projects in exchange for a portion of their native tokens. In this case, tokens represent equity as the VC can sell them whenever they want to cash out their investments.
However, like traditional VC funding, VCs invest if they believe your project can give them a high return rate. And they secure these investments by large ownership positions in your project.
The relationship also resembles that of a long-term partnership as VCs would provide advice and experience to help your project grow so that they can cash out their investments.
But it's important to carefully navigate the process as investors and your community members may see VCs holding a large percentage of your tokens as foul play and antagonistic to web3's ethos of decentralisation.
You would also have to prepare the different legal documents that contain the terms of agreement between your startup and the VCs. These documents vary from region to region, considering the regulatory uncertainties around web3 products.
VCs will unlikely invest if you lack the appropriate legal documents. Preparing these documents beforehand shows your diligence in business and would help to quickly complete the negotiation process.
3. High-Profit Potential
The reason for every investment is profits. No one invests in a business if it doesn't have the potential to bring in profits on a short or long-term basis.
VC investment contains high risk because startups are under no obligation to return funds if they fail. As a result, VCs mainly invest in startups with very high-profit potential.
The goal is for the profits realised in a few investments to offset potential losses in other investments. And the possibility of high profits in web3 is largely dependent on your tokenomic design.
An amazing project with poor tokenomics hardly appeals to investors. Some of the key ingredients of a good tokenomics design include:
- Appealing incentive mechanisms
- Proper vesting schedules
- Tying tokens to product features
- Distribution strategy
- Total supply
- Supply structure - inflationary or deflationary
- Minting momentum
In addition, your knowledge of the market is essential in determining the profitability of your startup.
Many founders often fail to research their target market and industry trends before reaching out to investors. Some founders get too excited with their product that they believe it'll scale and become the next big thing, regardless of market conditions.
However, good utility alone doesn't make up for good investment. VCs will ignore you if you aren't well-versed in the market that surrounds your product. Important metrics to keep in mind when doing your due diligence:
- Get specific information about your market and know your numbers.
- The actual and potential risks with your product.
- Understand the trend of the market - what not to say, the kind of investment that gets people excited, and the like.
- Study why most web3 VC deals fail.
4. Strong Team
In a sense, VCs aren't investing in your idea/product. Rather, they are investing in your experience and the ability of your team to scale the product. If you don't have a team yet, VCs would want to see that you have the capacity to choose and attract the right talent that can build with you.
Think of this like Tesla and Edison. Tesla had the creative ideas and expertise to build mind-blowing solutions. But Edison had the managerial expertise to turn these solutions into profitable ventures. VCs invest in the latter.
Community is at the core of web3. Without a vibrant community or plan to attract one, it's unlikely that your startup will scale. In web3, an enthusiastic community is proof that your idea is sound and will rake in profits in the long term. Some VCs may even treat a sound community as a minimum viable product (MVP) and invest regardless, in the absence of a working product.
However, VCs don't only watch out for the size of your community. They pay close attention to the experience and expertise of your community members.
Because of decentralised governance structures in web3 projects, community plays a huge role in the decisions that will scale the product. Hence, VCs watch if you have 'true believers' and a few experienced talents as members of your community.
6. Employ a web3 consulting firm
A consulting firm provides professional guidance to help you easily navigate the challenges most founders encounter when trying to raise with VCs.
Consider this like an all-in-one solution that enables you to get the details right, anticipate roadblocks and reduce stress, especially since the consulting firm will provide the necessary insights and details.
As a result, you can kill two birds with one stone - successfully raise funds and gain practical knowledge of the 'how tos' of web3 VC funding.
At SIGNVM, we have connected several web3 projects with VCs and helped them raise funds. You too can become part of our success stories. Send us a message here.
7. Find the right VC for your project
While VCs are highly interested in web3, they have different preferences for investing in the space. Like in traditional VC investing, some funds focus on Fintech, AI, Greentech, E-commerce, etc.
Similarly, some VCs in web3 are interested in specific sectors; DeFi, GameFi, Metaverse, DAOs, arts, luxury assets, etc. They also focus on different stages of the investment process - pre-seed, early-stage, ICOs, Series A, etc.
Find ways to meet these VCs and establish connections before pitching your business. Explore personal connections or overlapping interests that are business-unrelated.
Industry events and conferences are key places to meet VCs and make lasting impressions. In addition, you may meet other successful founders that can share advice with you or help introduce you to industry players.
Other notable steps that can help attract VCs include:
Learn from your failures - Don't take rejections personally. You have to learn from the rejection feedback you receive and find ways to adjust your pitch or product. Treat the feedback as a checklist for how not to do it next time.
Don't neglect smaller funds - Network and stay close to newer funds and their partners. Funds need good deal flows as much as founders need capital. Hence, there's an element of reciprocity that you can leverage.
Offer something for free to them - Free premium usage of your platform, event tickets, subject-matter knowledge, gifts, etc.
Master the VC term sheet
And of course, design a strong pitch deck presentation.
Interested in receiving weekly insights on how you can scale your web3 startup? See our blog where we share insights on web3 fundraising, growth strategies and marketing. Join us here!