Back in the day, an entrepreneur would knock on as many doors as possible, looking for investors that would put their faith in his promising project and infuse capital into the business. Raising funds for new projects has always been notoriously tricky. Of thousands of hopeful project owners, only a few find venture capital firms or interested investors to back them up.
If you are a project owner that wants to raise funds for a play-to-earn crypto games platform, how can you go about it? The most known method to raise money for crypto projects is the initial coin offering (ICO). Still, there are other ways too to attract interested investors.
When it comes to crypto fundraising, developers have several methods to raise funds, all pertaining to the crypto space. Blockchain technology has allowed the development of novel forms of cryptocurrency fundraising, and we'll walk you through them all.
Let's learn how to get those crypto investments!
What is crypto fundraising?
First of all, let's not confuse crypto fundraising with crypto donations. Although there are people that talk about cryptocurrency donation and fundraising as if they are the same thing, they are not.
Crypto donors are the people that donate crypto coins to different non-profit organizations in the hopes of making the world a better place. Donating crypto is an alternative to traditional philanthropy that more and more people are embracing. Most NGOs nowadays accept crypto donations from a multitude of crypto tokens, and there are several benefits to donating cryptocurrencies instead of fiat money. We'll discuss more on the subject of crypto donations in the future, so stay tuned.
Cryptocurrency fundraising refers to the act of raising funds for a crypto start-up. It is done in the early stages of a project to attract funds from financial institutions or private crypto investors.
Several methods are used for crypto fundraising, like the initial coin offering, the security token offering, the initial public offering, the initial exchange offering, and many more that we'll discuss in this article.
Types of traditional fundraising
When we look at fundraising in the context of traditional finance, we discover that there are two primary sources of funding: debt and equity.
A business can raise debt funding by loaning money from the bank or issuing corporate bonds.
Equity fundraising, on the other hand, implies that companies ask for small investments from friends and family or raise funds from private investors.
Angel investors & venture capitalists
These are two traditional ways to raise startup capital. A venture capital fund refers to a group of investors or financial institutions that pool their funds and back up different projects. In exchange for the raised funds, they request equity. An angel investor can be a prominent figure that vouches and puts his money into a company in the early stages. They focus more on the project's vision than the business model.
Crypto fundraising methods
Raising funds for digital currency projects can be done in various forms. Let's check them out:
Initial Coin Offering (ICO)
Initial coin offerings are one of the first methods used to raise funds for crypto projects. They are the equivalent of an IPO- initial public offering- in the crypto world. A project owner seeking to raise money to create a new token, app, or service can launch an initial coin offering to raise funds.
The investors that decide to provide capital for the company doing the ICO get a share of the project's native crypto tokens in return. Usually, crypto investors buy into a specific project because they believe that, with time, the token's value will increase from the base price, bringing financial gain.
The tokens offered during initial coin offerings are often utility tokens, but some projects might also issue governance tokens to raise money.
Let's see how project owners can structure an ICO:
Static supply and static price: A start-up can set a specific funding goal or limit, meaning that each token sold in the ICO has a preset price, and the total token supply is fixed.
Static supply and dynamic price: An initial coin offering can have a fixed supply of tokens and a dynamic funding goal. As such, the amount of funds received in the ICO determines the overall price per token.
Dynamic supply and static price: Some initial coin offerings have a dynamic token supply and a fixed price. That means the amount of funding received determines the supply.
Initial Exchange Offering (IEO)
Another form of raising crypto contributions, the IEO, implies that the projects get listed on a cryptocurrency exchange without going through an ICO. The exchange acts as a mediator between the potential investors and the project owner. As such, the exchange verifies the credibility of the token issuers, offering in return more exposure and trustworthiness.
If the IEO is successful, the project developers pay a listing fee to the exchange and a pre-established amount of tokens for using the platform's services.
IEOs are considered more reliable than initial coin offerings, as there are fewer scamming risks, and the exchanges can protect investors and their funds.
Initial DEX Offering (IDO)
An Initial DEX Offering is a form of raising cryptocurrency donations for a project where the investment opportunities come when the project's coins are listed on a decentralized exchange (DEX). While IEOs rely on centralized exchanges, IDOs use a DEX's fully automated launchpad that runs on a blockchain via smart contracts.
Once a crypto project is submitted to an IDO launchpad, it gets verified by the cryptocurrency community, the launchpad project team, or a 3rd party auditor. The main objective is to establish that the project meets the standards required to list its tokens on the DEX. Usually, the project roadmap and whitepaper are checked, while the identity and personal identification of the owners are not disclosed.
Decentralized Autonomous Initial Coin Offering (DAICO)
The DAICO fundraising method incorporates aspects from a DAO in the process. This type of crypto fundraising adds accountability to the project owner and his team.
The contributors don't release all the raised funds all at once to the project developers. They make the investment funds available in a controlled manner that uses a consensus mechanism, voting how much of the raised funds they want to release periodically.
Equity Token Offering (ETO)
With the ETO crypto fundraising method, private investors or financial institutions receive pro rata ownership of a business, including voting and dividend rights. This equity-crowdfunding mechanism allows off-chain projects to issue part of their shares via a blockchain network.
ETO is considered a form of a Security Token Offering since equity is categorized as a security.
Utility Token Offering (UTO)
The Utility Token Offering is similar to the Initial Coin Offering, with the added fact that the coins have a clear utility.
Utility tokens are special assets that are primarily aimed at raising the funds necessary to develop crypto projects. Interested investors may purchase these utility tokens in different cryptocurrencies or even fiat currencies. Prices are generally fixed during the initial stages.
The value of these cryptocurrency tokens usually fluctuates depending on the demand for the project. They may end up generating profits for the token holder if the project reaches its intended purpose with reasonable success.
Initial Convertible Coin Offering (ICCO)
This fundraising method implies using a tokenized convertible warrant that will be regulated by a prospectus that a public authority must approve. Very strict rules regulate this kind of projects, and the investors can convert the tokens into company shares after a pre-determined period.
Palladium, a Malta-based company using blockchain tech, was the first to use the Initial Convertible Coin Offering successfully.
Asset Token Offering (ATO)
With the Asset Token Offering, the token issuers pledge to transform the income generated by the cryptocurrency assets into services or products.
The general public can purchase to participate in the property development phase ahead of time. The digital assets will be supervised by a third party to ensure that everything goes smoothly and the project develops and operates as scheduled.
Some examples of assets that can utilize Asset Token Offerings are real estate, intellectual property, or accounts payable and receivable assets.
Digital Security Offering (DSO)
The Digital Security Offering is a sale of securities that are issued and exist on a blockchain, which makes them digital securities.
This method gives investors ownership of an interest in real estate, either directly or indirectly, implemented on a blockchain platform in compliance with securities laws and regulations.
Security Token Offering (STO)
Security token offerings are less used than their other counterparts. An STO is like an IPO of tokenized digital securities. Security tokens entitle the owners to a share of the company's profits or a stake within the business.
STOs are always backed by a tangible asset, complying with security regulatory frameworks and anti-money laundering requirements.
These anti-money laundering requirements can put the mind of investors at ease, as there are fewer chances of any fraudulent business than in the case of an ICO, for example.
In order to classify as security tokens, crypto coins need to comply with specific requirements set forth by the Howley test.
Security tokens must involve a money investment with a particular expectation of profit. The said investment should be made in a common enterprise, and the profits should derive from a third party or promoter.
Initial Fork Offering (IFO)
An IFO is used when an existing blockchain is forked into two, the new chain trying to improve the protocol. The new coins are usually free; if enough users get them and make cryptocurrency transactions with them, their value increases. Once the crypto assets have a higher value, the fork developers can sell their own coins for capital gains.
Initial Airdrop Offering (IAO)
The IAO is quite similar to IFO. A project's coins are airdropped for free to selected crypto wallets. The participants must meet specific criteria to receive the free tokens: they should hold certain coins in their wallets or participate in different marketing campaigns the project is running. When the value of the native token rises, the developers can sell their coins to get the necessary funds.
Initial Staking Pool Offering (ISTPO)
This new method of crypto fundraising is based on the idea that investors don't have to put their capital into a project but rather into a staking pool. The developers collect the staking rewards and issue at the same time a proportional amount of tokens for the investors. The main difference from an ICO is that, in this case, users can withdraw their capital anytime, regardless of the project's success.
Before a public offering, project developers can conduct a private placement, known as token presale, to a selected number of private investors. Basically, the company sells tokens while the project is still in the early stages of development.
Since this method of getting crypto contributions is considered risky, investors might lose their investment if the company fails, so the tokens are sold with a considerable discount compared with the expected exchange listing price. Token presales are considered to be a high-risk/ high return tradeoff.
As you can see, there are many ways to raise capital for crypto industry projects, depending on the project's purpose and the benefits provided. There are many ways to raise money for a digital currency project and it all depends on what the project team finds suitable for their crypto venture.
As the crypto world evolves and finetunes itself, we're sure that more and more fundraising methods will emerge, providing a more comprehensive array of options for developers and investors alike.
Let’s stay in touch: