Venture capital firms offer value to startups beyond simply cash. They also bring business experience, broad networks and critical services to the table.
This year’s bear market trajectory should be looked upon as a favorable opportunity for Web3 founders to raise capital and build cutting-edge products. Some of the most robust businesses today were built during market downturns, and founders now have a real opportunity to ensure they’re building products and services that meet genuine, real-world needs and look beyond oversized checks to find the most suitable business partnership.
Determining the best methods to fund your product and company is of paramount importance and not a decision to be rushed into. It is an action that requires due diligence and an acute understanding of how the partnership will function and, more importantly, flourish in the face of adverse markets. Before a founder embarks on the journey of attracting investment, however, it is important they can communicate the efficacy of their product in current and future markets.
Only 0.05% of startups manage to secure venture capital (VC), and as such, one of the fundamental requirements when attracting investment is that your project is able to demonstrate a product-market fit built for success. While it doesn’t apply to every investment scenario, demonstrating that your product is useful to your target audience is crucial in the process of securing capital. So, what exactly does a strong product-market fit look like?
As decentralized finance (DeFi) solidified its place as one of blockchain’s strongest value propositions, many innovative DeFi solutions moved to the foreground.
Decentralized vs. private investment
Having worked relentlessly to build the best product possible for the market, you may now be ready to explore the different avenues of raising capital at your disposal. Owing to the decentralized nature of Web3, startups can raise capital via the non-traditional means that have emerged in recent years, such as investment decentralized autonomous organizations (DAOs). The availability of crowdsourced funding in Web3, in turn, has posed the question of traditional venture capital’s value proposition and whether it is still needed in the industry.
The reality is that the vast majority of Web3 startups still look for investment from VCs. We have witnessed more than 16,000 companies receiving capital backing from VC firms globally. This is likely due to the understanding that VCs can offer value far beyond just the provision of capital. It is their business experience, network and additional services that make them such compelling prospective partners.
Unlike non-traditional investment mechanisms, VC investors are also more likely to support startups over the course of their lifetime, helping with the preparation for future fundraising while also harboring the capabilities and discretion to step in should the startup’s operations face hurdles along its roadmap.
VCs also add value to startups through their business acumen, often providing decades of experience in founding and scaling businesses that can be used to develop strategies for success at every stage of the business lifecycle. The brand reputation that goes along with investment from certain players should also not be underestimated. Such associations for startups early in their lifecycle can be a valuable resource for many projects to cut through the noise and establish their place in the industry.
With extensive industry connections, VCs can also leverage this to play an important role in securing skilled personnel for portfolio projects. Innovative strategies such as hosting hackathons and developer events have been demonstrated as an effective means of attracting such talent.
Coding language proficiency has traditionally been a major barrier to entry for developers into the Web3 industry. Many layer 1s use less common coding languages, making it difficult to attract developers to build applications. VCs can invest in training and education programs to enable a new cohort of skilled developer talent to migrate to the industry and assist projects in finding the right talent to best fit their business.
Changing market conditions have led to a greater focus on business fundamentals and ensuring that products and services are developed at a higher caliber by a capable team that addresses a relevant market need. Startups should also use this period to focus on nurturing and growing their community, which will have a major say in the success and long-term prospects of the venture. Indeed, many of the current industry behemoths such as Solana, Coinbase, Chainalysis and Uniswap were built during previous bear markets.
Bull runs usually see startups and VCs flush with cash, encouraging them to proceed without a suitable product-market fit. In contrast, down markets force teams to construct a meaningful implementation of products and services and experiment carefully with solid proposals. It is also a time for founders to listen to their community and implement feedback, allowing for a more robust offering long-term.
In many ways, the dynamic between a startup and a VC can be viewed as similar to personal relationships — establishing trust and investing in the bond through careful thought and consideration can have far-reaching impacts on both parties and their stakeholders. In life, no relationship is one-size-fits-all, so ultimately, startups must remain patient until they find a partner who is ready and willing to bank on their future together.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.