What is Venture Capital Financing and How Does it Work in the Crypto Sector?

Venture capital (VC) is a type of financing that institutional investors offer for entrepreneurs and startups, typically when they are expanding the most. Still, VC funding can be offered at any stage of a startup’s evolution.

Usually, VC comes from VC companies, investment banks, high-net-worth individuals, and other financial institutions. At times, VC funding doesn’t consist of monetary investment but rather a transfer of technical and managerial expertise.

Venture capitalists consider early-stage startups in exchange for equity or an ownership stake, usually having an influence on businesses via their voting rights. Startups typically choose VC financing as they cannot go public and look for investments from retail investors. In the meantime, venture capitalists are prone to consider this somewhat risky investment type, hoping for a bountiful pay-off.

How Does VC Financing Work in the Crypto Space?

VC financing in the crypto sector is not that different from regular VC, with the exception being that businesses benefiting from financing operate in the cryptocurrency market. Cryptocurrency or blockchain-related startups are growing in a new space, considering that the industry has only been around for a relatively short period. Because of this, the risks for VCs are higher, more so when considering the rate of failure and scams.

​The blockchain uprising is often compared to the dot-com period, during which numerous Internet companies appeared suddenly to promise significant advances. While the Internet has been a subversive technology, only some of the dot-cot companies managed to survive until this day.

The instance is being utilized in the crypto sector. Venture capitalists know that some of the blockchain’s startups might end up being mega-caps in the future, and that is why investing in businesses related to cryptocurrency has become a trend. Some VC investors have started exclusively investing in crypto and blockchain businesses.

How Does Crypto Venture Capital Differ From ICO/IEO?

While venture capital originates from investors and HNWis, ICO funding comes from retail investors. ICO and IEO are crowdfunding methods that enable businesses to ignore any equity commitment because they purchase issued digital tokens.

ICOs and IEOs are ideal for anyone who’s willing to buy the tokens, including retail investors, which are the driving force behind these two methods. In the meantime, crypto-related venture capital financing originates from institutional or accredited investors who typically have high demands for the business they invest in.

What are the Advantages of VC Financing for Crypto Startups?

Overall, securing funds from reputable VC companies is suitable for a business’ reputation. There are a few benefits, though, that make VC a better option than ICOs.

For instance, raising funds from VC gives crypto startups a better image in terms of reliability and confidence. Venture capitalists are also not that harsh in case a project fails. Actually, startups have no obligation to pay back in the event of it failing. With ICOs, any kind of failure might be considered a scam.

Venture capital companies might also offer their skills and support crypto businesses throughout their growth. Usually, VCs have numerous relationships that might be life-changing for a small startup. Finally, venture capitalists are typically trustworthy. In the U.S. and most European countries, VC companies are regulated.

The Bottom Line

In the end, VC firms expect high returns and the chance to be a part of the blockchain revolution. It is not a secret that crypto-assets can show significant returns. The cryptocurrency space is still relatively new, and there is infinite room for expansion. Many VC companies know that the future belongs to crypto, and they do not want to miss such a fantastic opportunity.

Nonetheless, the market is still volatile, but VC companies that believe in crypto startup businesses are prepared to take additional risks.