Problems

Some of the problems VCs and startups have to face with the traditional fundraising model:

1. Finding the right investor:

Web3 startups don’t understand what they’re looking for in an investor. After the bull run in 2020, many web2 investors got intrigued and entered web3 but they cannot provide much guidance to the startup as they themselves are new in the space. However some projects are funded entirely by the community, but a strategic lead investor can support a startup in multiple ways like:

-> Advise on equity and token distribution

-> Wider network access

-> Expertise and experience in their specialized domain

-> Building open-source community

Ultimately, the right investor(s) will guide you into surviving all kinds of ups and downs in the market and establishing a long-term relationship.

2. Collaboration:

There are many ways for Web3 startups to raise funds, be it through grants, incubator programs, crowdfunding, etc. The Web3 space also introduces many new fundraising innovations, such as decentralized crowdfunding. Since observers expect these innovations to transform how VCs operate in Web3, founders still need to keep in mind that any kind of seed investors still expect to see the same fundamentals that traditional VCs seek: robust technology, a clear business plan, and vision, feasible product roadmap & the right leadership.

Many founders fail to acquire the skills, connections & operational expertise required to collaborate effectively with experienced investors.

3. Inefficient Use Of Capital/Funds:

The average seed raise has risen from $1.5M in 2020 to $3.3M in 2021 for web3 startups. Even in the pre-seed phase, some Web3 companies are raising rounds to the tune of $3M. As we’re in midst of the biggest technological innovation since the Internet, VCs have one of the most asymmetric upside opportunities in recent times. The overall hype leads to overfunded early rounds, causing startups to overspend money on unnecessary activities, while on the other hand, large investments are exposing investors to increased risk.