Marcie Terman, COO at Panxora, discusses the challenges facing token founders in a sceptical world.
The heady days of a booming token sales market driven by FOMO are long gone. Firms looking to raise money on the blockchain in 2020 are faced with a far more cautious investor base, and with good reason. A high percentage of early tokens failed— some of these were scams like the infamous OneCoin, others were founded by opportunists that added blockchain to conventional businesses to gain easy access to cash.
There was also a wave of projects inspired by crypto enthusiasts that were starting to explore how blockchain could be used to solve specific problems in revolutionary ways. These founders were arguably brilliant, but many were young and inexperienced in business. They made poor business choices that caused their projects to fail even if the premise for the project was still valid.
With more experience and responsible financial management, it could have been an entirely different story.
In this new, sceptical world, founders looking for money need to approach the market differently to achieve their financial goals and get their projects moving. There are several factors to consider in this approach, from understanding the current sources to tap to attract investment to managing assets responsibly and classifying tokens correctly which legitimises the project. While intimidating, those who understand how to navigate this new market will reap the rewards.
New kids on the block-chain
In a market with zero percent interest rates, there is a lot of professional investment capital looking for opportunities. Blockchain projects like Dragonchain and Libra being backed by large corporations have certainly piqued the interest of high-net-worth individuals, business angels, VCs and family offices. These mainstream investors take a more serious approach to selecting the projects they back and are not vulnerable to tokens that project large aspirations without underlying substance.
Understanding the financials
A defensible whitepaper no longer cuts the mustard with investors. Founders need to demonstrate an understanding of what it will cost to run the business and bring the minimum viable product (MVP) to market. While it is interesting to include income projections, no one can really tell what those are likely to be until the business gets going.
Instead, founders need to demonstrate that the business can continue to run for 24 – 30 months without income. This gives the time and flexibility needed to refine the model and adapt following practical experience of what the marketplace is really like. Hopefully this will prevent the nightmare scenario of founders scrambling to bring in more investment when their focus is needed on productivity.
Professionally volatility management for long-term success
In the early days, numerous project founders made the mistake of leaving their token’s assets in cryptocurrency, which leaves money they really need for success at the mercy of sharp declines in value if crypto dips like it did on March 7, when bitcoin fell by 50% in the space of 2 days. The same thing happened in 2018 when bitcoin slid to 20% of its December 2017 value, causing many projects to fail because they were left with insufficient capital to execute their plans.
This doesn’t mean to say that founders should move all subscription capital into fiat, as during a bull market the project could find itself in a weaker financial position than its competitors.
Seasoned professionals should implement a solid hedging strategy. This is what conventional companies do for their business to protect against big losses when they need to hold volatile raw materials like metals or fuel.
This also means that when the market presents opportunities, they can trade that asset to generate positive returns. For some of these companies a significant part of their annual revenue comes from actively trading the asset they are obliged to hold. There is no reason token projects cannot do the same hedge their investment capital from a fall in crypto while also benefiting from bull runs.
A more mature market requires more mature businesses
As the token market matures, founders can expect harder questions about how investor capital will generate a return. Founders claiming to have a finite number of tokens available and an exponentially growing user base will likely be met with raised eyebrows from investors who have heard the story before.
It’s impossible to say there will not be competing tokens entering the market with a similar business, a better user interface, deeper pockets or a better customer acquisition model. As a result, the main priority for founders is having a clear and realistic idea of why a token investor can reasonably expect to make a return. This could be a ‘buy back and burn’ strategy, or some other method to logically increase a token’s value.
The market has become highly competitive, and in order for token founders to cut through the noise they need to pull together a battle plan to show investors how they will generate returns, or risk missing out on the investment capital needed to bring their projects successfully to market.
Panxora is looking to invest in outstanding token founders and to work with blockchain angel investors that will benefit from our multiple revenue stream hybrid token investment model.