Orphan Blocks

@orphanblocks

The complete guide to raising $4m or more for your blockchain project without doing an ICO

If you have ever tried to raise a Series A round, you’ll know that outside Silicon Valley where investors are sometimes more willing to take a punt on risky startups - it is a daunting task.

Most founders brace themselves for the gauntlet of inevitable rejection.

Historically there have been two golden opportunities for raising eye watering sums of money since Digital Equipment Corporation first raised $70k from the American Research and Development Corporation to kickstart VC funding for tech companies back in 1968:

  • 1995–2000: The “Dot Com Bubble”
  • 2017–2018: The “ICO Bubble”

This story bordering on the absurd of how James Altucher raised and then lost $100mm by first offering to acquire a random mobile wireless company for $10mm in stock and $10mm in cash (he didn’t have the $10mm in cash at hand at the time of the offer) and then using the letter of intent of that acquisition to secure funds from Henry Kravis, Frank Quattrone, Sam Waksal and others, before going public — best illustrates the heady days of 1999. Where just being involved with a tech/internet company made it possible to exploit the euphoria of investors to raise ridiculous sums of money.

It took another seventeen years before another generation of entrepreneurs were able to take advantage of a similar opportunity.

Early stage investing in startups has always been highly regulated — the average retail investor has to wait until a startup IPOs before they can get in on the action. Cryptocurrencies however provided a way around these regulations, giving “regular joes” a chance to get in at ground level.

As the price of Bitcoin started to surge last year, the savviest investors — who had taken positions in the Ethereum ICO a couple of years earlier cashed out their positions and then poured them straight into the ICOs for other projects.

If you were armed with a white paper and offered the vaguest promise of riches — you would find your coffers swelling with ETH as investors lined up to invest the 1000x they had already made. This fuelled a dot com era style bubble of financing that hadn’t been seen in decades.

If you were one of these investors however — putting your newly found riches into ICOs was a no brainer. For example, just investing $100 in Komodo in it’s ICO and holding until the peak of the bubble later that year would have returned ~$14,000! Likewise, investing $100 in Ark, would have netted ~$36,000 at the peak.

Courtesy of https://hackernoon.com/investors-are-making-50-000-returns-on-icos-32432bc741d1

Sadly, all good things come to an end and after a year of dizzying highs, the Bitcoin juggernaut started spluttering. By January the price had capitulated and everyone was brought back to earth:

Courtesy of https://www.icodata.io/stats/2018

As the new year settled in, for a few months at least the euphoria in the ICO markets remained and retail investors were convinced that after a minor correction, the profits they had become accustomed to in the past year would return.

Whilst the headlines state proudly that 2018 was an even better year for raising funds a new trend was emerging: ICOs were raising less money month on month, but this was mitigated by the fact they were raising private funding first before doing a token sale.

Instead an old friend had come to the rescue — now VCs were getting in on the act.

Last year, middle men such as Ian Balina, Phillip Nunn and others who took up positions as cryptocurrency advisors had figured out a fool proof way of making money on all their investments. Having amassed a large audience, they brokered deals with ICOs. In exchange for preferential access to unlocked tokens at a discount, they would bring on board their powerful marketing machines.

The trick was to unload on the retail investors at ICO, who would then have to find greater fools to sell their bags to. This worked beautifully in the rampant bull market of 2017 and VCs were also quick to follow - brokering similar deals.

As the great cryptocurrency bear market of 2018 has rolled on, retail investors are facing as much as 90% drops in the value of their cryptocurrency portfolios! They either don’t have any fiat left to throw at the market or have no further inclination to do so.

Advisors like Ian Balina also found themselves the centre of many scandals this year, including a particularly embarrassing episode where the extent of their dealings were unveiled to the greater public.

The bear market’s effect on portfolios married up with the fact that the murky inner workings of the system has now been exposed, means there is currently even less enthusiasm for ICOs.

Which means if you are contemplating creating and launching a blockchain related project this year and thought an ICO would be just the ticket — it’s time to rethink your overall strategy.

It all starts with an idea…

First of all, it should be clear by now that the euphoria of last year has worn off and hastily drafting a white paper and buying a landing page website template isn’t going to work.

You will first need a solid idea. If the extent of your idea involves finding an existing business and plonking blockchain onto it (time for the obligatory dig at Dentacoin), it might be worth bookmarking this article and returning to in a few months after you’ve given your idea muscle some well deserved exercise.

Assuming however that you have come up with a concept which genuinely requires the benefits offered by blockchain technology (and can handle the very obvious disadvantages) and you’ve come up with a set of compelling tokenomics if your project will require it’s own custom token, then it’s time to explore how to raise funds in a bear market.

As mentioned, you can’t raise millions based on a 50 page document with the history of blockchain lifted from Wikipedia this year, but you’ll stand half a chance if you prepare the following:

  • A pitch deck, no longer than 10 pages which explains your concept, the opportunity, your team etc. For inspiration, you can look at the pitch deck we created for Slips:
https://slips.ams3.digitaloceanspaces.com/deck.pdf
  • Your elevator pitch, a 30 second intro which every member of your team should be able to passionately and eloquently convey when asked what it is that you do.
  • A quick video or similar presentation — investors are busy people and hate reading mounds of text (unlike you!) so you need to catch their attention with a sharp visual presentation so they can “grok” whatever it is you are creating. Again look at our video for a good example of how to do this:
Most VCs love demos… We learned more from the demos, especially about our emotional interest in the products we played with, than any document could communicate. Each of these demos also gave us a chance to talk directly to the entrepreneurs about how they thought about their current and future products, and we got a clear read of the enthusiasm and passion of the entrepreneurs for what they are working on.

The passage above is lifted from Jason Mendelson and Brad Feld’s renowned book: Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. If you have not already heard of this book, it’s the definitive reference book for understanding the inner workings of how investors and venture capitalists work and deserves a place on your bookshelf.

Do build a proof of concept!

It goes without saying that you should be working on a proof of concept to show investors for the same reasons Mendelson and Feld eloquently stated above. In a bear market, having a working prototype will set you apart from your competitors and from the thousands of other applications bidding for attention.

Building a proof of concept does not need to be expensive. It can be a little rough around the edges and most certainly should be a scaled down version of your final vision. There are a myriad of tools to mock up interfaces these days and you can hire cheap designers and developers — why not check out /r/jobs4bitcoins on Reddit for example and support the cryptocurrency ecosystem?

Do not bother writing a whitepaper!

We wrote a simple litepaper at the start of the year and found it was an expensive endeavour that yielded little results. Very few people read the paper and your project will no doubt evolve during the course of the development process and soon the paper will become outdated. Two of the team members in our document bailed on us a few weeks after the paper was drafted for example!

All of the above should be blindingly obvious to any half decent entrepreneur so read on for the next section in which we discuss how you’ll survive whilst producing all of the above.

Your first port of call: The Incubators, Accelerators and Grants

So let’s face it — there are only two ways (unless you’re sitting on a nice nest egg or you made 50,000x returns on ICOs last year) you are going to fund the development of your proof of concept.

You could either work on it full time and exhaust your savings. Or you could work two jobs — a day job to pay the bills and then work through the night on your blockchain startup.

Another option is to source a grant or join an incubation or accelerator programme. Existing blockchain companies that raised substantial funds last year are just itching to get dApps and other projects to set up shop on their platforms.

No doubt the next bull run in the cryptocurrency markets will be the result of the trickle down economics of these platforms funding innovative projects like your own that will then go onto spur cryptocurrency adoption and bring new money into the space.

Likewise a number of companies exist to help bridge the gap between starting company and raising your first Series A round, these “accelerators” or “incubators” have also started focusing on cryptocurrency startups.

Expanse

Who are they? Expanse is one of the first stable forks of Ethereum and so offers a familiar environment for dApp developers.

As a fork, much of Ethereum’s current infrastructure (MyEtherWallet, GEXP and Mist Wallet for example) works for Expanse as well, and it’s a lot cheaper to deploy smart contracts on Expanse. The EXP token is available on Bittrex and a host of smaller exchanges.

If you were considering launching your final product on Ethereum, it shouldn’t take much effort to convert to Expanse.

Their offer: Expanse offers an extremely flexible grant between $5,000 and $50,000. Unlike a lot of other programmes, there’s not a whole lot of strings attached to their offer — they don’t try to muscle in on your IP or ask for any equity.

Apart from basic reporting of how funds are used and sticking to milestones agreed at the start of the project, there are few restrictions or obligations on how you spend your grant. Of course they do expect you to launch an ICO on their platform or use the network in some way in your final product.

How to get in touch: You can fill in the application form at https://expanse.tech/expgrants/

How to impress: Get in touch with Expanse’s COO, Marcia Danzeisen (twitter, linkedin) and knock her socks off so your grant application is sponsored by her personally. Or alternatively try to catch the attention of Christopher Franko, the CEO on Twitter.

Ethereum Classic Labs

Who are they? In 2016 the famous DAO project on Ethereum was hacked. The attacker used an error in the smart contract to drain the funds into a child DAO leaving the Ethereum project with less than a month to come up with a solution to recover the funds before the hacker made off with them for good.

A soft fork was proposed but the proposal was quickly shot down when it was found to enable a DoS vector. With the clock ticking, they decided to make the controversial choice of hard forking to recover the funds. This decision led to the creation of Ethereum Classic.

Ethereum Classic Labs is an incubator programme funded by the DCG and Jack Lee’s HCM Foxconn.

Their offer: ETCLabs have just completed a pilot programme and Labs will launch for good in January, offering ~12 startups per batch a chance to work from San Francisco or Singapore for a 3 month incubation programme. They offer office space, 100–500k in funding (for 8–10% equity) and access / networking opportunities with the likes of Charles Hoskinson (IOHK) and Igor Artamonov (ETCDev)

How to get in touch:
Fill in the application form at: https://www.etclabs.org/

How to impress: If you live near San Francisco you can join their weekly meet ups (https://www.meetup.com/etclabs/) and dazzle Programme Director Elizabeth Kukka or alternatively join their Telegram group: https://t.me/etclabs and make waves there.

WanLabs

Who are they? WanChain aims to offer cross chain compatibility with other blockchains. Ethereum was the first (an easy one considering WanChain was forked from Ethereum). Other ERC20 chains are in consideration and Bitcoin has even been suggested by some as one of the chains they will bridge with by the end of the year.

Their killer functionality is the ability to make private transactions, which they achieve with ring signatures and new addresses for each transactions. WanChain are one of the first blockchains to add privacy functions within smart contracts.

WanChain is a founding member of the Blockchain Interoperability Alliance alongside ICON (ICX) and Aion (AION).

They actually raised $37mm last year, the ICO price was $0.34 but anyone that dipped their toes into their ICO was richly rewarded by a meteoric 2,817% gain when the coin topped out at $9.92! Sadly it now trades at $1.02 however at least it’s evident that they’re not short of funds!

Their offer: WanChain offers business, legal and technical advice and financing for early stages of the startup. They do not go into great detail about the exact financial details of their offer however they do suggest that exceptional projects will be funded from their own fund and introductions to venture capital will be provided.

How to get in touch:
Fill in the application form at: https://wanchain.org/wanlabs

How to impress: The man to leave a mark on is Oliver Birch who handles the vetting process for WanChain Labs. You can find him on Twitter at: https://twitter.com/machinayz

WavesLabs

Who are they? Waves is a platform originating from Russia that exists to help people create tokens. The founders actually worked on the NXT platform before disagreements led them to breaking away. Rather than forking NXT, they built Waves from the ground up.

Waves unlike the platforms above is not based on Ethereum, instead it has a Leased Proof of Stake (LPoS) consensus mechanism. Waves has regular full nodes which are relied upon for blockchain interaction and transaction confirmations. It costs 10,000 Waves (total supply of Waves is 100,000,000) to run a full node. Light Nodes rely upon these full nodes. It’s possible to lease your tokens to full nodes or public mining pools.

Waves is available on both Binance and Bittrex and other smaller exchanges. They also have their own decentralised exchange (DEX) in which you can list any token you create on Waves and allow it to be trade-able against Waves.

For a blockchain designated to help others launch tokens, starting an accelerator / incubator service (WavesLabs) was a natural step for the project.

Their offer: As well as a hefty wedge of financing (WavesLab offers up to 300k of funding), they offer technical and legal support. Including sample documents and consultations by attorneys familiar with ICO legalities. They also provide strong PR/Marketing support (getting you onto ICO tracking web sites and introductions to influencers and advisors).

How to get in touch:
Fill in the application form at: https://docs.google.com/forms/d/e/1FAIpQLSe2Yt40yUPZkAaXajSGLKxPVzYzJP6_0caER7ZvVMpO-8U0ng/viewform

How to impress: WavesLabs has a Twitter account and a Telegram group. But if you want to go above and beyond, Inga Shkurina is the Waves Community Manager and can be found on Twitter (https://twitter.com/Ingulkin). Or perhaps you might be able to catch the attention of PR Manager Sergey Maslennikov.

NEM Community Fund

Who are they? NEM is another project which almost forked from NXT and is extremely popular in Japan.

It uses a “Proof of Importance” consensus mechanism — every node in the NEM network has an “importance” score which determines how often it can mine new “XEM” tokens. The importance score is built by “staking” coins — when you put coins into a wallet, they are “unvested” but over time will begin counting to your score. 10,000 XEM are required to be eligible for a score.

In addition, there are periodic scans of the network — nodes which are doing the most transactions are also given an additional weighting, giving them more importance.

The NEM community fund consists of 300 million XEM which were allocated during NEM’s nemesis block.

Their offer: You can get up to $40k grants requiring only approval from the NEM community fund committee. Additional funding brackets (40–150k and 150k-800k) are available but require further buy-in from various stakeholders.

How to get in touch:
Fill in the application form at: https://nem.io/community-fund/. Please note they are currently restructuring and the community fund is paused.

How to impress: NEM’s community fund has been paused, whilst they create a new organisation called NEM Ventures which will function more like a traditional incubator. According to a recent forum post David Shaw and Iain Wilson (https://twitter.com/iainwilson11) will be heading this new project and you might want to start cosying up to them if you want to participate in their pilot programme.

Other incubators, accelerators and services that might be able to help at this stage:

Boost.VC (https://www.boost.vc):

Iconiq Lab (https://iconiqlab.com):

Catena Capital ICO Co-investment (https://www.catena-capital.com/programs-and-fund)

Coinbase Ventures: https://ventures.coinbase.com/

Levelling Up: Approaching VCs and VC Etiquette

So let’s assume that you have been following the plan in this article in a linear fashion. You found a great idea, you created a solid pitch deck and elevator pitch. You got in touch with incubator/grant programmes and obtained some seed funding to put together a proof of concept.

Bear in mind that it takes at least 6–8 months of your time to secure funding from VCs so you may want to start approaching them in conjunction with the development of your proof of concept (which might take 2–3 months to complete).

General Preparation

After contacting a few investors, you’ll realise that most of them will ask you the same questions, so maintain a list of “frequently asked questions” and have your responses pre-planned so you are prepared when a VC throws a familiar question at you during a call/via email.

One thing to keep in mind is that you need to know how much of your company you are willing to trade and for how much. Most VC’s aren’t interested unless you know this but as this is your first time raising a round, you probably haven’t got an idea what to ask for! One strategy is to not mention a valuation at all, just mention what competitors in the space are being valued at / raising and let the VC initiate the negotiation.

The structure of a VC

It’s worth understanding how VCs are structured so you avoid wasting too much time on the wrong person. You want to progress your way to someone who can make decisions as soon as possible. Below is a list of different types of people you’ll meet:

Analysts are at the bottom rung of the ladder. They conduct research, studying companies like yours (and your competitors). They cannot make decisions but if you manage to charm them, you might be able to get them to make an introduction to someone who can. Their main role is to scout out deals. You’ll find them at conferences and they might be the first person you speak to if you try to make a cold introduction.

Do not waste an inordinate amount of time talking to analysts — you might be seen as a cheap source of information to help them with their research and they won’t hesitate to try and wrangle information out of you on the pretext of considering you for investment.

Associates are next on the ladder and unlike their analysts, associates will most certainly have a financial background and will be more involved with the funding process. Be aware that some firms will have junior or senior associates. Whilst associates can’t green-light funding your business, they are definitely a better bet for introducing you to someone who will and you can have a more productive conversation with them as well.

Principals are the next step up and unlike analysts and associates, they do have decision making abilities when it comes to investments! Once you have a principal in your corner, they will be your point of contact for the entire process. You should understand that principals are working towards the ambition of becoming “partners” and hold a lot of power — albeit the scope of their powers is limited — for example they won’t decide the strategy of the company.

Partners are the most senior people at a VC. As well as having a say in investment decisions (General Partners) and the day to day running of the company (Managing Partners), they also have the responsibility of raising capital for the firm. They typically have some of their own money invested in the VC as well.

Finding your leads — who to contact

Now that you know the enemy, it’s time to work out who you will be contacting and how. If you weren’t operating in the blockchain space, you would probably be seeking out a website like Crunchbase or Venture Deal to start the process.

However there is a neat trick trick available to you. As you may remember earlier in this article we mentioned how blockchain projects this year are raising funds privately before doing an ICO.

Most ICO websites follow the same conventional template layout so the majority will list their “partners” as logos on the site:

So all you need is a list of sites that list upcoming ICOs, you can find a selection on ICODrops.com, Coinschedule.com, CoinGecko.com etc. ICOBench.com even allows you to filter ICOs by category/industry/niche to make it even easier to zoom in on projects similar to your own.

You can find a comprehensive list of ICO listing sites here: https://hackernoon.com/top-100-free-paid-ico-listing-sites-35970f7d5ee1

The idea is to collect a list of VCs that are actively investing in the blockchain space. You will want to research the following information

  • Where they are based
  • When was the last time they made an investment — if it’s been longer than 6 months, they might have run out of money or are in the process of raising funds — do not bother with them!
  • What kind of companies they invest in (their portfolio) and whether it’s similar to yours
  • List of key people (see the roles earlier to see what kind of people you’re looking for).

You will find Crunchbase is useful for finding out information like their last investment and you’ll find LinkedIn a good tool for sourcing out key people at the VC.

Once you have your list together, you will need to see if you know anyone who can make a warm introduction. The worst type of introduction to a VC is sending them a cold email or call. They want to see that you can hustle and build relationships with others. If you can find someone who was not only funded by them but also managed to give them a good return, the introduction will be worth double in the eyes of the VC.

Again, because you’re operating in the blockchain space — it’s a little bit easier to do this. You hopefully made a list of blockchain companies in order to find their investors? Well you can now re-use your research and start contacting the founders and see if you can meet up with them. As with any contact, you’ll want to scratch their back in order to get the recommendation/introduction, although most are reasonably willing to help if you are polite and enthusiastic.

Keep on top of your research, a Trello board is a brilliant way to organise and manage your pipeline.

To help you along the way, here is a list of companies that we recommend starting your research with:

http://www.draper.vc/

Draper Associates is an early stage venture capital firm based in Silicon Valley.

https://www.usv.com/

Union Square Ventures is a New York-based venture capital firm that is doubling down on crypto. They are the authors of the “Fat Protocol” blog post: http://www.usv.com/blog/fat-protocols

https://jumpcap.com/

Jump Capital is a Chicago based venture capital firm that specialises in investments in technology and software. They invest in a lot of cryptocurrency infrastructure companies.

https://www.sequoiacap.com/

Sequoia Capital is a Californian VC and are considered one of the biggest investors in the blockchain space (having invested in Binance, Huobi, Robinhood, Orchid Labs to name a few).

https://a16zcrypto.com/

a16z crypto is a branch of Andreessen Horowitz — a $300M venture fund that was launched recently to invest in crypto companies and protocols.

Come prepared for the fight: who to follow and what to read as you embark on this journey

It goes without saying that establishing relationships with certain people will make your journey a little bit easier.

When you are trying to raise awareness about your project, you will find the curated databases that we have created below will be immensely helpful.

You’ll notice that our spreadsheets are designed in a way to let you register your progress and follow up on contacts. But we’d recommend porting them over to a five column Trello board like above as we found from personal experience that a spreadsheet was a poor choice for managing the process and we didn’t care to invest the time or money to pick up a custom CRM.

General Cryptocurrency Influencers: Influencer marketing was a powerful way to promote projects and there are many “advisors” who exist solely to promote paid opportunities to their feckless audience. There is a temptation to do this wrong — instead of contacting these influencers and offering some of your tokens, you might want to consider engaging with them on Twitter, building a long term relationship and seeing if they would be up for a collaboration. Remember these guys are inundated with offers so tread carefully:

https://docs.google.com/spreadsheets/d/1HDNH66tjm9yO7OcTkZvhec62FIrawyZVGMzRYAA2Mtk/edit?usp=sharing

Top Crypto Blogs and Journals: Part of the PR process involves getting in touch with blogs and journals and seeing if they are willing to cover you project. Whilst a lot of these publications charge, if you can produce great copy for the publicaiton (that isn’t overtly spamming your project), you might be able to get some excellent free press:

https://docs.google.com/spreadsheets/d/1czxbvKDczQKEcEsxBIkKjVGFXGPEaU4V4BDCIB50DTY/edit?usp=sharing

Top Crypto YouTubers: You might want to try making yourself a permanent fixture on the YouTube circuit to get the ball rolling on the publicity for your project. Trying to get on a show to promote your project is going to be met with resistance but if you can work out a good angle or find interesting content, you’ll have more luck:

https://docs.google.com/spreadsheets/d/1L1y3_j6RP_6_o3knDwMoC5kuB43qug7KCylqE9rU68g/edit?usp=sharing

And finally as Bill Gates famously says — reading a book allows you to devour a lifetime of knowledge from one person in a sitting so with that in mind, we’d recommend thumbing through the following:

https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist 
Brad Feld and Jason Mendelson

Gives you the inner workings of how venture capitalists think and is mandatory reading before you approach any VCs.

https://www.amazon.com/Funded-Entrepreneurs-Guide-Raising-First/dp/1491940263

Funded: The Entrepreneur’s Guide to Raising Your First Round 
Katherine Hague

This gives a more nuts and bolts approach for the first time founder with lots of practical advice on raising your first round.

https://www.amazon.com/Art-Startup-Fundraising-Negotiating-Entrepreneurs/dp/1119191831

The Art of Startup Fundraising
Alejandro Cremades

https://www.amazon.com/ENTREPRENEURIAL-BIBLE-VENTURE-CAPITAL-Secrets/dp/0071830359/

Aimed at first time founders, it might be a little patronising but there is a wealth of info and an inside track on the fundraising process.

THE ENTREPRENEURIAL BIBLE TO VENTURE CAPITAL: Inside Secrets from the Leaders in the Startup Game
Andrew Romans

Venture Deals is a more coherent version of this book. You’ll also need to get past the meandering first few chapters to get to the real gold. Worth a quick flick.

Final Thoughts

We hope you find this article useful and that it at least gives you a launch pad for finding funding for your own project. Despite the recent cool down in the ICO market, it is still a brilliant time for entrepreneurial minded folks to raise funds and bring exciting new projects to market.

Version History
We will update this footnote when this article changes to reflect new sources and information!
21 Oct 2018: First edition of this article was published.

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