Thoughts, stories and ideas
Things for Web3 projects to consider as they embark on fundraising
At Functionland we have been meeting with potential investors and advisors, and have been faced with questions that none of us founders have been asked before during our previous ventures. If you are considering building in the web3 ecosystem you are opening yourself up to a world of investors and collaborators, who are not investing with the usual instruments. Instead of convertible debentures and SAFE’s, investors expect more diverse deal structure options. For instance we are asked, “will you become a decentralized autonomous organization (DAO), or will you continue to grow as a corporation (with related legal entities)?, “ Is it an equity- or token-based investment opportunity, or both?” and, “explain the token economics built in to the project.” In addition to VC’s, Angels and syndicates, you could be pitching to a DAO or value-add investors that can bring their community building, or virality inducing skills to the table.
It is more than likely that an investor who is interested in your project is not going to be seeking a typical equity-only deal. Early token allocation is worth giving some thought to, has it has implications for the lifespan of the project. We are used to seeing companies do a seed round, perhaps a bridge, than Series A- D with a possible IPO along the way. When it comes to Web3 companies its more common to see “safe agreement for future tokens” (SAFT) rounds. An emerging legal framework uses NFTSPAs as a both a way to raise funds and launch products. We could see more of the activity shown here in this tweet.
So as you start to make your fundraising plans, ask yourself questions such as, “should we start with a straight equity-based seed round and then have a token sale event in the future,” and “how do investors who want to participate in the seed round stand to benefit from a future token distribution event?”
Explain the Tokenomics built into the project?
Investors (and regulators) will want to know, what kind of tokens are involved in your project, security tokens, utility tokens, utility and governance tokens? How is the token minted, what gives the token value, and what is the potential for growth? The decentralized nature of web3 projects means that their success is inextricably linked to the strength of their community. Investors are curious about how you will grow an engaged community. Who the community caters to is important too, is it primarily developers, or defi/crypto enthusiasts or investors? More crucially for many projects, including ours, how do you gain the membership of the average internet user today? A thriving, multi-faceted community is good to have, but as it turns out, so is good community governance as the Ripple Community is finding out.
A last important take home is that Web3 investors tend to have a good handle on the technical side of things, and what the limiting factors are to widespread web3 adoption. It is important to know about the projects and companies adjacent to you, who is upstream and downstream, and what is your true differentiator. Functionland is frequently asked, are you building your own blockchain, will you be leveraging existing infrastructure? There is talk of mainnet, parachains, and substrate on the technical side, but also practical questions about which launchpad will be used to distribute tokens in the first place. Keeping abreast of the advances in the evolving metaverse and knowing how to articulate the gaps your solution addresses within the larger ecosystem, will help your company standout as one to invest in.