Study: How Much Money Does a Crypto Company Need?
Written by: Gregory S Mathew
In this article, we’ll try to decipher on average how much capital does a blockchain/crypto company raise and how long it lasts, before having to raise funds again.
We’ll be looking into two kinds of startups that
- raised seed funding, followed by other Venture funding rounds
- that raised funds purely through token sales such as an ICO, STO, or IEO.
All data used in this article is sourced from InWara’s Market Intelligence Platform, unless explicitly stated otherwise.
The Era of Blockchain and Cryptocurrency Startups
Blockchain and crypto startups are attracting immense investor attention on a global scale, within a handful of years, these startups have raised a whopping $46 billion to date. With such a resounding success, it’s easy to get caught up in exuberant stories of the best startups.
But despite the technical advantage these startups tout, most of them fail just like any startup. Forbes claims one of the major reasons for failure could be raising excessive capital too early and running out. Yes, sounds paradoxical, but it makes sense.
Hence, in light of this perplexing paradox, let’s try and decipher how much capital does a blockchain/cryptocurrency startup need to survive? By estimating how fast do these startups burn through cash.
The Venture Capital Route
For example, I’ll first consider blockchain and crypto startups that raised capital in Seed Funding. Then estimate, on average, how much was raised, and how long it lasted before having to raise more in new funding rounds like a Series A.
The average Funds raised in various funding stages is Seed Funding - $1.94 million, Series A - $8.8 million, and Series B - $24.8 million. On average, these startups waited 16 months between Seed and Series A funding rounds, 25 months between Series A and Series B funding rounds.
So what can we infer from this? For a blockchain and cryptocurrency startup, you’d probably need ~$2 million during your initial stages in Seed Funding to kickstart operations and this should last you ~16 months, before having to raise capital again.
And the same principle can be applied to later funding stages.
Now, what about blockchain-based fundraising? Token sale mechanisms like Initial Coin Offering (ICO) and the latest Initial Exchange Offering (IEO) are what propelled these startups into the limelight in the first place.
As much as 65% of the total funds raised by Blockchain and Crypto startups were through token sale mechanisms like ICOs, STOs, and IEOs.
A dive into the funds raised by these startups over the past few years clearly shows the dominance of blockchain-based fundraising over traditional Venture Capital. Hence, this study wouldn’t be complete without touching on these methods as well.
The Token Sale Route
It’s important to note that, in 2018, several thousand ICO projects were launched and several billion raised. While some of them like EOS were a resounding success having raised $billions, most of them raised little to no money.
An analysis of the funds raised by blockchain and crypto startups reveals that as much as 47% of the startups raised less than $5 million. And less than 5% raised more than $50 million. This suggests that predominantly blockchain-based fundraising is being leveraged to raise relatively smaller amounts of funds.
Shift From ICOs to IEOs
But in H1 2019, there was a shift from ICOs to Initial Exchange Offerings (IEOs). A method of fundraising that has become the go-to method of raising capital. IEOs are so successful right now that some token sales, like that of BitTorrent’s, concluded within a matter of minutes and raised several millions.
This success has prompted previously launched blockchain and cryptocurrency projects that conducted ICOs to launch their own IEO, as a way to raise fresh capital to fund their operations.
Note: This data is based on the several dozen Startups that have conducted both an ICO and an IEO
On average, blockchain and crypto startups raised $11.8 million during their ICO and $8 million during their IEO. But what’s important to note here is the short time frame between the token sales. Within just 3 months, on average, several dozen blockchain startups launched another token sale in the form of an Initial Exchange Offering.
Now, this might seem shocking at first but makes some sense when you realize that, unlike traditional venture capital, the sole purpose of launching a token offering is not just to raise funds but also to build a community, for marketing, to distribute tokens, etc.
That’s not to say there aren’t some projects that took advantage of the incredible buzz around IEOs to raise capital. Although they’ve raised plenty during their ICO.
There’s one final way to gauge how much capital ICO projects need. We can analyze their ETH wallet balances. This gives us a fairly accurate measure of how much funds - were raised during their ICO, have been utilized so far, and over what period of time.
Note: This data is based on a sample size of ~100 ICO projects From May 2018 to April of 2019, on average, as much as 3,700 ETH was withdrawn from public ICO treasuries. That’s an incredibly small amount. So what’s the deal here? Our deeper analysis of the data reveals that, some ICOs have seen an influx of ETH into their wallets, since their ICOs.
Another, more speculative, reasoning would be that these ICO projects are hodling their ETH for the next bull-run. When it’s more likely to be more profitable for them to cash out.
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