By Matthijs de Vries, Founder and CTO of AllianceBlock
Over the past few decades, venture capital funding has become synonymous with growth and innovation. The roots of private equity can be traced back to as early as the 19th century, but it entered the mainstream as an “industry” shortly after World War II. As the entrepreneurial market evolved, older established fundraising models were replaced with what we now know as angel investors and venture capital firms.
Since the emergence of blockchain technology a new form of fundraising - blockchain-based crowdfunding - has become the most popular fundraising model to hit the entrepreneurial and startup landscape.
Blockchain-based funding brings the established concept of peer-to-peer (P2P) funding to the forefront. Although still nascent, this fundraising model has shown great promise, especially when removing all forms of centralized control and intermediaries from the funding process. By leveraging the features of blockchain, this P2P fundraising model positions itself as more inclusive, transparent, and sustainable than traditional fundraising models.
To understand how blockchain technology is streamlining fundraising, we must first look at the problems of the existing fundraising models.
The Traditional Fundraising Model
From an entrepreneur’s perspective, getting approved for a loan for a startup that is yet to generate any revenue is next to impossible in today’s centralized setup. Approaching a financial institution for a loan is an option but is accompanied by numerous onerous requirements. And meeting all of these requirements isn’t viable for most startups and entrepreneurs.
In the above scenario, the entrepreneurs are responsible for repaying the bank, financial organizations, or their friends and family members who had funded them. Even if the startup fails, it can’t just walk away without repaying its debts - something that the venture capital funding model solves.
Accordingly, the next logical option is to try to raise funds via venture capital. However, despite its popularity and many benefits for entrepreneurs, venture capital funding is equally difficult to attain. One of the primary reasons is the stiff competition for funding. In a world where there are so many startups and entrepreneurs, it becomes that much harder to get noticed by investors.
With such substantial competition, investors can be very selective and elect to focus on products or services that the market has already validated. This means they want to see that people are willing to pay for a product or service before investing even a cent.
That said, the main problem with traditional funding (or venture funding) is the lack of a level playing field. Due to its centralized nature, it remains difficult for founders and entrepreneurs from under-represented backgrounds to find their way into funding programs and access allocations from venture capital.
The Blockchain Fundraising Model
Decentralized fundraising models deliver several advantages over traditional methods. Although some jurisdictions still come with regulatory uncertainties and compliance frameworks that govern blockchain-based startups, several P2P crowdfunding models have proven their worth in the blockchain space and are increasingly used alongside traditional methods.
The two main blockchain fundraising models are:
Initial Coin Offering (ICO) - Via this method, a blockchain project issues its native tokens to interested buyers (investors). The funds raised through the sale of the tokens are then used to fund the project. This fundraising model is quite similar to the traditional IPO (Initial Public Offering) and is often implemented via centralized crypto exchanges. Hence, they are also called Initial Exchange Offerings (IEOs).
Initial DEX Offering (IDO) - This method is similar to ICO, except that the tokens are allocated via decentralized exchanges.
Other similar fundraising methods have emerged in recent years. They follow similar patterns but have fundamentally different funding ideologies. For instance, there’s the Initial Liquidity Offering (ILO), with new tokens offered to investors who agree to contribute to the project’s liquidity pool (LP). Another more recent approach is an Initial Game Offering (IGO), where blockchain gaming projects raise funds by offering in-game tokens and NFTs to investors.
Milestones to the Rescue
Now, there’s another innovative blockchain-based fundraising approach that aims to redefine the venture funding industry. By adding the concept of milestone-based crowdfunding to the existing blockchain-based P2P funding model, this new funding model essentially solves the shortcomings of traditional and existing blockchain-based fundraising models.
Startups don’t just fail due to lack of funding but also due to an abundance of it and a lack of acumen needed to allocate it properly. When emerging projects receive significant funding and deeper liquidity, some lose focus and efficiency. Others find themselves unequipped to oversee the full spectrum of related activities like tokenomics, marketing, and business strategy.
If a project finds itself awash in capital and diverges from its original roadmap, it can result in missed deadlines, lead to an unsustainable business model, and cause unnecessary losses for investors. Therefore, the addition of a milestone-based funding approach can serve as a viable springboard to leverage the skills, competencies, and knowledge of a community of experts, not to mention sidestepping hollow promises and shallow pledges that sink many projects.
Through milestone-based funding, a project can raise funds based on its performance and track record. The total funds can be allocated per milestone and will only be released when the project hits a predetermined milestone. On the one hand, investors can continuously monitor the project’s progress and how funds are being allocated. On the other hand, project owners will focus on reaching milestones to unlock additional capital to sustain and advance their efforts.
Blockchain-based funding is already decentralized, inclusive, and transparent. By incorporating milestone-based funding in this mix, the blockchain ecosystem has taken another substantial leap toward bridging the gap between decentralized and traditional fundraising. By laying the foundation for an integrated financial ecosystem with increased capital flow and innovation, entrepreneurs and investors alike are set to benefit.
About the author:
Matthijs de Vries is Founder and CTO of AllianceBlock, a platform that bridges traditional finance with compliant, data-driven access to new decentralized markets. Prior to AllianceBook Matthijs has managed the product development of one of the largest Dutch companies, PostNL, where he led an entire software development team before switching companies to lead several unique AI products amongst which a ground-breaking chatbot.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.