Launching your Web3 startup is a key milestone, where you begin to deliver on your ambitions of transforming your idea into a real world product. Getting there requires passion, drive, vision and no lack of courage, but there’s something equally crucial you’ll also need… money.
For many kinds of startups, there are few options but to go down that well worn path of venture capital, where you get on your knees, cap in hand, begging investors to believe in your bright idea.
VC funding has some tremendous advantages. They can provide you with untold amounts of money to bring your ideas to life. In 2024, Web3 VC funding grew 3.6% to more than $8.5 billion, illustrating that investors are only too willing to throw money at bold crypto bets.
Besides money, VCs bring lots of other benefits, including access to an extensive network of mentors and other investors who’re also willing to part with their cash. But as with everything else in life, there comes a downside. VCs don’t give away their money for free. They want something back in return, and that almost always means giving up a part of your prized company.
The Big Cost of VC Money
The biggest disadvantage of VC funding is the loss of control. When you accept their money, they’re going to demand a say in how you run your business. In many cases, they’ll want a seat on its board of directors, and that means the decisions can no longer be taken by you and your co-founders (if you have them) alone.
Once the VCs get their feet under the table, they’ll want to have a say in everything the company does, from its overall strategy to even the most minor operational details. As a founder, you may have no choice but to compromise on your ethics and values, or pivot away from your original plans due to pressure from your financial backers.
Another major downside to VC funding is the pressure you’ll face to ignite rapid growth and increase investor’s returns. VCs want to back businesses with the highest growth potential, and they’ll push entrepreneurs to expand as rapidly as they can, sometimes forcing them to take risks that they’d never have done if they alone were making the decisions. Founders may even find themselves being forced into abandoning their ethical beliefs, or pushed into shadier business practices that potentially jeopardize the long-term health and prospects of their business.
Adding to the risk, if the company fails to meet its investor’s hoped-for growth targets, they might push for it or some of its assets to be sold as a way of recouping their investments.
The lesson is that while VCs bring some tremendous advantages and can accelerate bold ideas, there are some major drawbacks that should cause entrepreneurs to pause, and consider if alternative funding plans might be better.
The Advantage Of Full Control
For Web3 startups, there’s an argument to be made that the loss of control over your company is even more disadvantageous. In a decentralized industry where there’s no governing regulator to keep companies in line, your reputation is doubly important. The crypto world is littered with pumps and dumps, rugpulls and other kinds of scams, and so your target audience is often extremely distrustful and wary of new products and services.
By staying away from VCs, Web3 founders can maintain full control of their company and ensure its reputation and its business practices are beyond reproach, positioning themselves for strong organic growth through word of mouth alone.
Self-funded platforms have the freedom to stick to their founding ethics, whereas those that seek VC funding might be forced to abandon such honorable practices.
A good example of this is Kairon Labs, which has made a name for itself in the notoriously shady segment business of crypto market making. The company offers ethical market-making services, relying on sophisticated algorithmic trading software and an alliance of hundreds of crypto exchanges. It prides itself on the transparent nature of its services, stubbornly refusing to partake in dodgy activities like wash trading and other forms of market manipulation to create artificial demand for assets.
As an entirely self-funded firm with no outside capital injections and no external advisors, Kairon’s founders were able to build the company on their own terms, prioritizing an ethical approach to market making that better aligns with its clients’ needs. Had the company accepted VC capital, it’s very likely that this focus on ethics would have been tamped down by demands for a rapid return on investment, which could easily have resulted in corners being cut.
There is, unfortunately, a lot of precedent for shady dealings among crypto market makers. In October 2024 the U.S. Securities and Exchange Commission announced it was filing charges against three market making firms – named as ZM Quant, Gotbit and CLS Global – over the alleged manipulation of digital asset prices, accusing them of defrauding investors of millions of dollars.
Other examples include the recent arrest of the CEO of a market maker called Artube in South Korea, and Binance announced it was banning and also confiscating funds from an unnamed market maker after discovering it had violated its policies on asset manipulation.
Web3 Funding Alternatives
The reason so many startups look for VC funding is the relative accessibility of such large amounts of capital. VCs are risk-takers and they’re happy to fund dozens of companies at once, well aware that not all of them will ultimately succeed. They’re a lot more likely to support an entrepreneur than a traditional, extremely risk-averse bank, anyhow.
Fortunately, Web3 founders have lots of alternative options at their disposal. The fact that every crypto project revolves around some kind of digital asset means they have a potential money-raising mechanism right there at the start. In Web3, a project’s native token is usually essential for accessing its products and services, which gives that asset a certain amount of value, and many choose to cash in on that by selling them to early supporters.
Initial coin offerings or ICOs are much like crowdfunding, but the lack of regulation and the huge number of scams means they’re no longer very common, replaced instead by what’s known as an Initial DEX Offering, or IDO.
IDOs enforce stricter requirements on crypto projects, such as minimum trade volumes and extended platform interaction times, increasing the barrier to entry. They offer a bit more protection to investors, but the nature is not so different from ICOs. Basically, the project sells a portion of its token supply to early adopters at a price that’s lower than its perceived value. The idea being, the startup gets funded, while early backers can cash in and get a return on investment later, once the project takes off.
Besides IDOs, crypto projects can also use launchpads to sell their tokens. With these platforms, the project is required to allocate a certain amount of tokens to investors who meet certain requirements. They’ll also be strictly vetted, and their smart contract code audited, to try and reduce risk for investors. Following the launch, the token will be listed for trading on various CEX and/or DEX platforms.
Another solid option for Web3 founders is grants, which are usually provided in the form of digital tokens. Many Layer-1 blockchain platforms will dish out grants to promising projects in order to kick start growth in their ecosystem, and they’ll also provide technical assistance and mentorship. The advantage here is that projects aren’t usually required to give away tokens for this capital, but simply have a solid idea and be committed to helping to drive growth in the wider ecosystem they build in.
Control Your Destiny
Venture capital is not always a bad thing. Far from it. In fact, in many high-growth industries VC funding is must-have, because startups require millions of dollars to accelerate product development and enter new markets to keep pace with their competitors. If your company has a large market potential and it operates in a fast-growing industry, you’ll need massive resources to compete.
On the other hand, there are many industries where the lack of VC money isn’t necessarily a deal breaker. Web3, with various alternatives on hand, is one of the most obvious. By raising money through token sales or some other mechanism, Web3 founders can ensure they remain in full control of their company’s destiny, and ensure it sticks to its long-term vision and ethical standards.
In an industry where reputation matters more than anything else, alternative forms of funding allow founders to remain focused on their long-term goals, without any pressure from external forces to cut corners for the sake of a quick profit.
