When big opportunities arise in any market, venture capitalists and hedge funds are tempted to jump in to profit. As the ICO market started to expand, the number of companies with backgrounds of making money through more traditional finance vehicles entering crypto and founding their own crypto-focused funds also began to grew:


Source: Reuters, @ritvikcarvalho


As VCs and hedge funds enter the space, ICO founders have more opportunities to finance their early-stage operations and private sale rounds during the token sale. Receiving funding from VC’s could also mean possibility to establish strategic partnerships relevant to the ICO.


Additional questions that weren’t relevant to ICOs may need solving in this new environment, as founders might need to consider factors such as:

  1. Can we reach potential customers better through the crowdfunding component of the ICO or the public token sale, or should we reach out to VC’s early and raise most of the money in private?
  2. How should we allocate the company equity across founders and different investors taking into account the different phases our business and our ICO?
  3. How can we attract these VCs to invest in our project when our ICO is still in early stage, and we have not started our ICO marketing efforts yet?


What VCs look at when investing in startups and ICOs

If you manage to grab the attention of the VCs, it’s critical to have prepared your ICO for their due diligence processes before any negotiations. In order to do that efficiently you can get familiar on how VCs look at ICO investing and investing startups in general. Typical investment criteria for VCs according to studies include:


  1. Personality of management: VC’s want to see a management team that can present the business idea and concept in a convincing manner. Management team members should be able to motivate employees, establish goals, assign duties and solve problems as they arise. They should also be able to detect risks and respond correctly. If your management team appears to have high ability to perform and persevere challenges in business, you are in strong position in terms of personality of management.
  2. Experience of management: Previous successful exits and experience of building startups are ways to show VCs your team is likely to succeed. In case of ICOs, besides being familiar with the target market and crypto space, your team should have a mix of competence in selling, marketing, financial, R&D, production, blockchain and software development. Besides experience, equity and token stake of the management team is an important factor for evaluating how committed the management team is in long-term success of the company.
  3. Characteristics of the product: Which stage your product development is at, does it have market acceptance, is it considered high tech and innovative and does it bring clear improvement over existing solutions are all questions VC’s are in when evaluating your product.
  4. Characteristics of the relevant market: Are the current or upcoming trends favourably affecting your target market? How competitive the target market is and are there existing distribution channels?
  5. Financial investment criteria: Simple metrics like appreciation potential of the acquired equity stake or tokens and dividend potential from acquired stake or tokens are carefully estimated by VCs. A significant difference between traditional startups and ICOs is in the ability to cash out, as tokens can be sold on any exchange where they are listed on compared to equity stake, which can be difficult to cash out before an IPO or a later funding round. ICO founders have more options here than traditional startups as they can offer VCs both equity and tokens, and also significant token bonuses compared to possible public token sale token price, which might make the investment a lot more appealing.


In short, you should take into account both key figures and facts [insert link of ‘Must have key figures for ICO whitepapers [checklist]’ once published] that individual ICO investors are interested about and specific aspects of your ICO listed above, which are typically emphasized by VCs. If you are looking to discuss potential investment in your ICO with Venture Capital firms and Crypto Investment Funds, you can find a relatively comprehensive list here.




Sources:


Dixon, R. 1991. “Venture capitalists and the appraisal of investments”. Omega 19(5)

Hall, J./Hofer, C. 1993. “Venture capitalists‟ decision criteria in new venture evaluation”. Journal of Business Venturing 8(1)

Kaplan, S./Stroemberg, P. 2001. “Characteristics, contracts, and actions: Evidence from venture capitalist analyses”, Working paper.

MacMillan, I. C./Siegel, R./Narasimha, S. P. N. 1985. “Criteria used by venture capitalists to evaluate new venture proposals”, Journal of Business Venturing 1

Muzyka, D. F./Birley, S./Leleux, B. 1996. “Trade-offs in the investment decisions of European venture capitalists”, Journal of Business Venturing 11(1)

Schefczyk, M. 2001. ‘’Determinants of Success of German Venture Capital Investments’’, International Business & Economics Research Journal 31(5)

Tyebjee, T. T. / Bruno, A. V. 1984. “A model of venture capitalist investment activity”, Management Science 30