Limitations of Funding Mechanism in web3.0 community. (Investors Perspective)
The rise of the crypto economy brings promises and perils to the venture capital industry. Distributed ledger technologies offer new investment opportunities to venture capitalists (VCs). Traditional VCs are gradually diversifying their portfolios to invest in crypto-assets and blockchain technology projects, as well as launching crypto-centric funds. Simultaneously, venture capital funds are developing various hybrid financing models to adopt and imitate the fundraising mechanism of initial coin offerings. However, the polymorphous and evolving features of crypto-assets also introduce new risks to the venture capital market.
As the cryptocurrency market grew globally with rampant speculation about its value, without a clear applicable regulation, and for that reason, without entry barriers, the tokenized blockchain projects and their ICO/IDO/IEO's became the incredibly quickest and simplest instrument to obtain exorbitant funds and profits.
With projects being funded with just white papers and pitch decks, some of the entrepreneurs/founders have found ways to raise exorbitant funds on their towering ideas. Though web3.0 investments have given returns in the multifold to its investors, it also bought heavy losses to many investors retail and institutional as well. On this note, we would like to highlight the limitations of the current funding mechanism of web3.0 startups versus a much more stable and established web2.0 startups.
- 1.SAFT (Simple Agreement for Future Tokens) becoming Non EnforceableA SAFT (Simple Agreement for Future Tokens) is the common instrument executed between investors and founders in agreement of purchase of tokens at discounted price before the public sale/IEO/IDO, most commonly with a vesting period. With most projects being funded by multiple VC's or Minor Crypto Hedge funds with diversified stakes, may not be in the position to practically enforce the SAFT in case of any defaults by the founders due to high costs involved in approaching courts or for an International Arbitration. Further, SAFT is for mere purchase of the tokens, legally the founders can always claim the option of limited liability in case the SAFT is executed by limited liability corporation.
- 2.Early Stage Influx of CapitalTypically in equity model of funding the number of shares are limited at the beginning and the shares are issued at premium at every round of funding subject to the growth of the project or product with no limitations to the maximum shares to be issued. Where as in tokenized model of funding the no of tokens are restricted a finite supply and the tokens are sold to Investors at a discount at the very beginning of the project with focus being only on idea of capital appreciation of the token and staking rewards if any. With this a tokenized blockchain project raises the whole funds necessary for development and marketing including liquidity at the initial stages of the project, sometimes even without detailed budgeting.
- 3.Founders InexperienceAn Estimated 80% of the founders of the blockchain projects are first time founders with no experience in running an organisation with 50% of them coming straight out of colleges or even dropouts. In Web2.0 funding model the founders inexperience is compensated by the regular oversight by Investors and Auditors who seek constant reporting on the performance of the project or product. Such an oversight is completely amiss the web3.0 community, which coupled with founder's inexperience can lead to project failures and loss of investors money.
- 4.Concentration on Token PriceAs most of the Investor's money is focused on capital appreciation of the token's which are immediately tradable in open market. The focus of founders or project tend to solely deviate to the elevation of the token price rather its development or adoption and actual use cases. Even Investors sometimes tend to ignore the development of the actual project in view of the elevation in price of token, which in most cases is due to market making impact of the Founders.