Source: CryptoStars

In 2022 which was considered a bearish season, web3 brands reportedly raised over $20 billion in just the first half of the year. The year after that - 2023, about $9 billion was invested in various crypto projects in many financing rounds, according to an article by CoinPedia.

Professional investors are always on the lookout for promising projects to put their funds in with the hope of profiting massively from their growth. There seems to be an all-round jubilation anytime a project announces a successful financing round. It begs the question “Why is financing crucial for web3 projects?”

Launching: funding gives founders the resources they need to take their ideas from the idea stage to the building stage. The financing provides them with what they need to advance their plans and expedite operations.

Expanding: when web3 projects want to expand their operations, fundraising is usually essential.

Raising funds from investors is not as simple as black and white. Investors are always skeptical about pumping funds into projects because there is no sure assurance of receiving ROI, especially considering the high volatility and uncertainty of the crypto market.

Another reason for investors’ skepticism is the unhidden fact that many web3 (and even non-web3) projects have gone into extinction for various reasons months after raising funds from investors, thereby leaving investors at a loss. This affects startup founders who are genuinely building products for the long run as it hampers their chances of getting investments.

Investors and VC firms now carry out intensive research and analysis into projects they wish to invest in to see if there is potential before investing. Most times, these investments come with commitments and binding policies.

That being said, below are some ways through which web3 projects raise funds from investors:

Seed Round

This is considered the earliest investment stage of any web3 project, hence the term “seed.” Seed round is the first official investment round that a company receives from external investors. The terms “official” and “external” are emphasized because, before a seed round, founder(s) are known to bootstrap their projects from their own pockets or raise funds from family and friends at the very early stage of the project.

Seed round involves professional investors who invest in projects with the main aim of making back profits when (if) the project performs well. These investors carry out a series of research and analysis to see the potential of any project they wish to invest in. Founders, on the other hand, engage in a series of discussions, and pitch deck presentations among other things to ensure a successful seed round stage.

This stage is usually after the project has just gone from a mere idea into the building stage with team members in place.

Private Token Sales

Source: Crypto Presales

This option is for projects that have their native tokens and tokenomics ready but have yet to launch. This involves professional investors investing funds in a project and being rewarded with the project’s yet-to-be-launched token at a very cheap price. It is expected that when the project finally launches its token to the public, the listing price will exceed the price at which these investors bought, hence, giving them good profits in return. Think of it as investors buying a project’s token directly from the team at a very early stage before launching.

Public Token Sales

This involves raising funds via the public by organizing a token sale. It is sometimes referred to as Initial Coin Offering (ICO) or Token Generation Event (TGE).

Initial Coin Offering (ICO) is a popular method of fundraising in the crypto space. Founders issue their projects’ new tokens (which may not be worth much) and sell them to investors who give them capital (in the form of other valuable cryptocurrencies like USDT, BTC, ETH, etc) to develop their projects. This is done to support projects and get them to the development phase.

Token Generation Event (TGE) is another method that, quite frankly, is similar to ICOs in that it involves sales of newly issued tokens to investors. Due to regulations and fear of the tokens being branded as securities by the SEC, crypto projects opt to call their fundraising method TGEs.

Initial DEX Offerings (IDOs)

IDOs are funds raised from DEXs. Founders list their new tokens on DEXs and investors purchase the tokens immediately after launch in the hope that when (if) the token gets more attention later on and the demand goes up, they’ll be in profit. This is not a direct source of investment as people are merely buying the token.

IDO is one of the easiest ways to raise money as a web3 founder because DEXs are permissionless (no VC to give conditions), automated by smart contracts, and it’s quite easy to list tokens on them. On the other hand, IDOs don’t always raise as much money as VC funding does.

Initial Exchange Offerings (IEOs)

This involves centralized crypto exchanges raising funds for startups. It involves selling the newly launched token of the project in the exchange and allowing the exchange’s users to participate in the event.

Simple Agreement for Future Token (SAFT)

This is a not-so-popular one and it involves investors funding a project based on a contract or an agreement of a future token being rewarded. What this means is that, unlike with private token sales, the project’s token is not yet ready but there are plans to issue one.

Grants

Grants are funds given to promising startups by bigger blockchains to help them scale. The startups that are given grants are not exactly required to refund the blockchains. However, they are expected to help contribute to the blockchain’s ecosystem and increase on-chain activities.

Incubator and Accelerator Programs

These are programs designed to provide founders with the necessary resources, guidance, mentorship, and training to move their projects to the next level. They are also very popular in the web2 space. While they may not always provide funding, they open wide doors of opportunities for founders. Some incubator and accelerator programs provide seed funding for projects too.

Funding from Investment DAOs

Web3 projects can raise money from investment DAOs to kickstart their projects. Investment DAOs are decentralized autonomous organizations that raise funds from the members for the sole aim of providing capital for web3 startup founders.

Members of investment DAOs vote on proposals on whether to pool funds for a project or not. Projects funded by DAOs like this consider the thoughts of DAO members before making certain decisions.

Which other fundraising method did I leave out?