Episode 8 – Funding Your Business

Hello everybody and welcome to the RunningWeb3 podcast, where we talk about running a web3 or crypto business. I’m your host, Paul Lambert, and today we’re going to talk about one of the first things that people think of when starting a business – funding.

Funding is often the elephant in the room. It can make or break your company, and it’s what a lot of people think of when they first think about starting and how you go about securing funding is vitally important for the long-term success of your company. There’s a couple different ways, and we’re going to go over those later on in the episode, but first I want to talk about equity versus loans for funding. So assuming that you aren’t funding this yourself and that you’re getting some source of outside investment, there’s two kinds of primary ways to get funding. The first is to give equity in your business or a stake in your business, and the other is to take out some sort of loan. And there’s a lot of different versions for both of these, but I want to talk about sort of the pros and cons of each of these a little bit. 

Most people are pretty familiar with equity, although they probably think of it in a different way than what you might think of for companies that we’re going to be talking about here. Equity, as most people know it, they think of stocks and that is a very accurate representation. It is other people that hold some portion that own some portion of the company. For big companies, there could be tens of thousands or even hundreds of thousands of holders varying from people owning 0.00001% up to people that own 80 plus percent of a company depending on the country that you’re in and the regulations. And so people think of things like Google stocks where they have equity in the company technically, but often it is in these very, very small amounts. The same principle applies in smaller companies. It just tends to be on the more extreme end. 

So often with equity, if you’re getting funding from some outside source is in much larger quantities than these 0.00001. Like penny options and things that you see on publicly traded companies, most of the time if you’re getting equity, it is in the 10 to 30 or 40% range, depending on the people that you’re securing funding from and the contracts that they have and what people are willing to invest. A good representation of this, or at least a a popular version that a lot of people will be familiar with is something like Shark Tank, where you have an individual in each of these cases that is giving some amount of money in exchange for ownership of some part of the company. And often this is done early on in order to get some amount of funding for the company and make sure that they have the, the funds needed to grow, whether that’s growing the number of customers or growing your, uh, staff and sales team in order to, uh, get more revenue. 

Or it could be used for other things like paying off business debts, but equity is just somebody owning a portion of the company. Um, anytime that you start your own company, you’re going to have a hundred percent of the equity unless you set up something unusual in that regard. The other common option is a loan, and rather than give up a portion of the company, um, giving up a little bit of the the ownership, you can instead take out a loan. You and these loans on paper are very, very similar to, um, a loan that you might take out for a personal loan or on a mortgage or something like that. It is, you receive a lump sum of money and you pay back that money over time with some agreed upon interest. And these loans and equity are kind of used in different situations depending on the founder of the business, depending on the business needs and depending on the business itself and kind of how it generates money. 

So for companies that have a much longer term plan or are looking to make money well into the future, but focus more on something like growth in the near future, those companies might go with equity. Um, a loan in this case might make it incredibly difficult to repay in the, the timeframe that the loaner would be comfortable with. And so the company might choose to go with equity instead. On the other hand, if a company’s going to be very profitable very early on, uh, this is often seen with like SaaS companies where it’s really only a year or two before you’re able to start driving revenue and, and driving profit. Um, depending on the industry that you’re in, it might make more sense to get a loan. And with taking a loan, that means that it’s going to be a little bit rough for those couple of early years, but it means that you have complete ownership or the company re retains ownership and doesn’t have to share in those profits or share in the decision making of the future of that company. 

So let’s jump into a few of the different strategies or methods that you can use in order to raise capital and, and raise funding for your business. The first one, the list here is an IPO or ICO, and that’s an initial public offering or initial coin offering. This is what you see when companies get listed on stock exchanges, for instance, the nasdaq, and you see this initial offering that they create in order to accept funding from anybody in the public. And in this case, people are buying portions of the company. They’re buying stocks, they’re buying shares more commonly. In web3, you see an ICO (initial coin offering), and this is used all the time in cryptocurrency. So in an ICO usually a company will create some sort of token and this could be a, a regular token or coin, or it could be something like an NFT and they offer it for the public to buy. 

Now depending on the country that you’re in and the year that you’re listening to this, um, there are different laws and regulations that may affect whether or not you’re allowed to do that or the method in which you do, uh, the offering. But oftentimes this is how, uh, web3 and especially cryptocurrency companies do things. In this case, they might do something like a pre-sale. So for instance, on DX sale or pink sale, you’ll see all sorts of pre-sales all the time of companies that are looking to raise funds and use those funds for different things. Some of it might be for liquidity, some of it might be to pay the team for the time that they’ve put in so far. Some of it might be to make additional hires in order to create the technology that they are promising, but this presale acts as a way of raising funding for cryptocurrencies. 

Also, in this group, I’m including NFT sales. So this isn’t necessarily an ICO. Oftentimes this is done after a company has already done their ICO or done their, their presale or their main sale, and it’s used as essentially an additional round of funding and they will sell off NFTs that have varying degrees of utility or other perks associated with them. So I know oftentimes, uh, companies that are in defi that are looking to raise extra money and do it through an NFT sale will include perks, like reduced transaction fees on the software that they’re providing for people. Um, if somebody’s doing staking, maybe there’s additional staking periods or locking times that they can do for those tokens. If they’re doing defi lending, they might decrease the transaction tax or the fees that are associated with doing that lending or they might increase the interest that you’re receiving on the tokens that you are lending out. 

But while this is commonly used for cryptocurrencies, it’s certainly not limited to just cryptocurrencies. I know a lot of people that are building communities and wanting to expand those communities and, uh, raise funding in order to continue the operations are doing NFT sales in order to get that funding. So they might have a free community, but if you use an NFT, then you’re able to access the paid community, um, acting as a token gate in this case. And for things like this, you might be able to raise funding in exchange for additional perks, extra videos, extra channels where only certain groups are able to access those channels or other things like that. So there are a lot of perks that you can attach with an ICO or with any sort of token sale, um, within web3. Next, let’s talk about every NBA’s favorite phrase, venture capital. 

Venture capital refers to a group of people that get together money and use the large sum of money that they have there to invest in oftentimes diversified portfolios. So this will be, for instance, a business that collects money from a bunch of different people and they invest that money into companies that need large amounts of money in order to generate a return. So whereas I might have $50 and you might have $50, there might be a company that requires at least $80 of investment. So you and I can both put our money together in a venture capital firm or individuals and have them invest that money into the company, and that way we’re able to access markets that we wouldn’t otherwise be able to. Now, venture capital does both equity and loans. From my personal experience. Most of the time they lean towards equity. Um, but there are certainly venture capital firms that do loans instead. 

Any group worth it, salt is going to specialize in some way and they’ll have diversity within that specialization, but they’ll often specialize in either just one industry or one stage of investment. So often venture capitalists break down the funding stages into pre-seed, seed series A, series B, and series C funding. And each of these are just different groups or different kind of milestones for a company on where they are. Um, pre-seed is when you’re first starting out and you don’t necessarily have a product that’s in the market yet. Um, you’re still in the process of developing it or you’re still doing product market fit testing or something like that. Um, and then it progresses through seed and series A, B, and C. And these are, like I said, just different milestones that you can use in order to kind of understand where a business is and how far along they’ve progressed. 

So a venture capital group might specialize in just pre-seed funding or in just series A funding or something like that. Alternatively, a venture capital firm might focus on just one industry. So they might say, we only do, uh, biotech, or we only do hydroponics, or we only do large scale databases, something along those lines. And some groups will mix and match this. So they might specialize in companies that are dealing with biotech that are in the seed stage of funding. These companies are everywhere and incredibly easy to find through Google searches. Or if you’re on LinkedIn and you show that you’re a business owner, um, you’ll be receiving messages at least weekly from different people that are looking to have conversations with you and learn more about your business and see if it’s worth investing for them. During the bull market, there were a lot of firms that had a lot of funding because everybody was looking to invest, and especially in web3, it was all the rage and so firms were investing left and right and it was very easy to get money not just through ICOs but also through venture capital. 

In the bear market, these companies tend to be at least a little bit more reserved, although it’s still very easy to at least have conversations with, uh, people that are in venture capital. If you know where to look, one really common way for new businesses to find funding through venture capital firms is through accelerator programs. And oftentimes the company that does the accelerator also doubles as a venture capital firm that invests specifically in the groups that come out of the accelerator. So an accelerator is a company that talks to new businesses, um, very pre-seed, sometimes seed, and kind of shows them the ropes. They find teams that they think have a good idea and a good team, and they teach them how to run a business. This is very common for people who it’s their first time starting a business or are still early in their entrepreneurial journey and maybe don’t know what mistakes to avoid or don’t know the right things to focus on early on in the company. 

And so the accelerators will get a bunch of these different groups together and put them in a group or a cohort and act as a sort of mentor for them and make sure that they are on the right path for success. Now, not every group that come that goes into an accelerator comes outta the accelerator as a essentially a graduate. Um, a lot of them are kind of lost along the way, and the percentages on that is going to vary from a accelerator to accelerator. But these accelerators often at the end now that they have a company that they are very familiar with through interacting with them in the accelerator, um, and are familiar with the team and believe in them, will often act as a source of funding for these groups so that they’re able to take this next step. And it works very well for the people in the accelerator because it means that they have people who intimately know their business and, uh, are willing to provide funding so they don’t have to go through the sort of dance that comes along with trying to secure funding from different people. 

Um, and the accelerator has somebody that they know that they can trust because they’ve already seen all the financials and seen the sort of behind the scenes of the company. One thing to watch out for this though is often these accelerators end up giving deals that maybe don’t favor the business, and obviously both the business and the uh, funding provider are going to want deals that work best for them. So they’re naturally at odds, but oftentimes in accelerators, these groups will end up getting funding that, um, ends up giving a lot more equity than they might have if they had gotten funding elsewhere. So definitely make sure that if you’re looking to go the accelerator route, um, that you look carefully into how they often provide funding and you talk with people who have graduated the program to see what that journey looks like and how they feel about it now that some time has passed since they graduated. 

Next, let’s talk about private investors. So in this case, private investors are individuals, although in theory you could have a private investor who is a company, oftentimes that happens with larger companies, but we’re going to focus on individuals here. And private investors are just individuals who want to invest in a company of some sort. Um, oftentimes this is a full-time job for them. So they will do research on a bunch of up and coming companies, and if any align with their particular investing strategy and the values that they are looking for and that sort of thing, then they will invest. Um, this also I would say includes angel investors or, um, even like family and friends. So before you get to the seed stage, which oftentimes may be like 50 to 150 or $200,000 of investment, you might need just a little bit to kind of start out in the first place. 

Um, maybe you need like $15,000. So this is where private investors might come in and this is a good time to talk about the different levels of interest or the, uh, different levels of investment that investors are going to look at. So typically the later the company is in this process, um, from the pre-seed or even angel investor all the way up to like series C funding, the later you are, the better the deal the company is going to get as in the lower the interest rate. And this is because these companies already have a proven track record. By the time you’re at series C, you’ve already proven that you have a working product and it is a product that people are interested in and you’ve been able to show growth over time and you’ve been able to show a consistent revenue stream or whatever KPI your company is shooting for, you’re able to show that you’ve consistently met that. 

So there’s a lot less risk there than an angel investor or a pre-seed investor would be taking on. Um, they’re investing in a company that has no proven track record, and oftentimes it’s more gut feeling plus understanding of the industry. And then really it’s the the people that make up the team at that company. So oftentimes they’re investing in the person in the CEO and the business owner rather than in the company. So with private investors, oftentimes if you’re getting a loan and it’s not from somebody that you know, that loan is going to come with a very heavy interest rate because they’re taking a lot of chance by giving you that money. It might be that they never see that money again, and that’s part of the business. They understand that. Um, but the more risk that they take on the larger return they’re going to be looking for. 

And if you’re going with a loan, then that’s oftentimes going to be in the form of interest. I do want to briefly mention two other forms of funding here. So the first one is like Dow style funding. Um, and this is where a company might have users paying directly for some sort of expense. So the, the most common form of this that I could think of is in a Dow where maybe the company is looking to acquire some new hardware or something like that, and rather than go over to a, uh, lending firm or to a bank, they will say, Hey, we’re looking to collect, or we’re looking to to buy this piece of hardware, and they will raise funds from the community. But rather than doing it through like an NFT or an ICO or something, people might send money directly to it or might purchase and transfer or in some way the community or the the token holders are going to purchase that for the company. 

Um, most of the time this is done when you have something that is a lot more decentralized than you see in a lot of other projects. So for example, a uh, defi lending company that has like a board of directors or has a very established, um, company hierarchy is a lot less likely to A, do this or B, get away with it, um, just because people tend to be a lot more suspicious of a company where the leadership is able to make decisions that kind of override the community in a community where the members hold all of the voting power and and are able to directly affect these decisions. However, and they’re able to allocate funds without an overrule from, uh, higher up in leadership. They might go with this particular route though, although I will say this is a lot less common than any of the other ones that we’ve looked at so far. 

And the final major source of funding on this list is grants. And this is something that I think people think of, um, when they’re looking at like university, but less so when they move into business ownership. Um, so a grant is very similar to a scholarship. It is a specific amount of money allocated to a person or to a business for a specific purpose. Um, you see this all the time with research grants in science, but these also exist in web3. So for instance, there might be an art grant and it’s some person or business that creates one or more grants. And, um, different businesses apply for these grants and say, Hey, I would like to use this money and it will allow me to do X, Y, Z. It will allow me to host this event to bring in more users, um, for web3 specifically related to art. 

Or it might be to help fund an artist so that they’re able to travel around or something like that. But these grants that are made for specific purposes are not necessarily uncommon in web3. There are still a lot of businesses and even, uh, government entities that offer grants to businesses for specific things. Um, I think at least in the the crypto world, some of the more common ones that people see or that they think of are from places like Binance who offer grants for different innovative projects. And oftentimes they don’t have as many applicants as people might initially think. Um, just because people don’t know that they exist or don’t go through the effort to apply to these grants. So grants are a really good way to acquire funding for a specific purpose, um, especially for these smaller companies. If you need a little bit less money, most of the time these grants aren’t half a million or $5 million in funding like you might see with like a series a, um, venture capitalist firm, but they might be $10,000 or $20,000 even for you to be able to move on to the next step of your business and further research or further the cultural development or some other specific mission that the grant holder is uh, offering to people. 

So those are the different forms of funding. Whether you’re doing an IPO using venture capital, joining an accelerator, finding private investors using a DAO or getting grants, you’re more prepared to take your business to the next level. If you’re enjoying the podcast, don’t forget to leave a review. There is as always, a quick summary in the description and a full episode transcript on www.runningweb3.com. Thank you all so much. I’m looking forward to seeing you next episode.