Dealing with VCs in the Web3 Space: a No-Nonsense 101 for Projects and Founders

Written by Alexandra Overgaag & Kendall Brown

In the Web3 environment, the role of venture capital (VC) firms is crucial for the growth and development of start-ups. VCs provide the necessary funding to develop projects and scale operations. Non-monetary speaking, VCs may also offer valuable mentorship, guidance, and access to a network of industry connections, all of which can further help enhance a project’s chances of success.

A lot of existing research on the operations of VCs can vis-a-vis be applied to VCs operating in the Web3 space. As noted in the article “Finding venture capital: Why fit matters more than money, when scouting for potential VCs”,

“[...]the right investors will get you more than money out of the deal,” for example, “they’ll loop you into the right networks, offer advice on how to grow and scale the company and share expertise in your field”.

However, not all Web3-oriented VC firms are created equal. They differ significantly in terms of quality, the value they add to the projects they invest in, and their ability to live up to their promises. These differences are often magnified by the prevailing market conditions, such as bull and bear cycles.

As such, projects must at all times complete their own screening and due-diligence process to find the best fit with the VC most closely aligned with the startup's goals and vision. Conducting this initial research can save time later on for both parties and also helps the startup clearly define their company goals, growth trajectory, and use for VC investment. Afterall, the Silicon Valley Bank writes

“[...] if someone else is going to have a big say in how you run the business, you’ll want it to be someone you work well with and who can help you grow”. Very true.

With all this in mind, there are some preliminary steps projects, and founders may take whilst searching for that right VC. ‍

Preliminary Things to Think About Before (!) You Engage

In Common Mistakes Startups Make When Seeking VC Funding: Part One, Amy Danise notes how

"it is essential to understand the VC firm's investment thesis, portfolio companies and preferred industry sectors. By conducting in-depth research, startups can tailor their pitch to align with the VC's interests, increasing their chances of success”.

When conducting research about a VC, thus ask some profound questions to initially identify the main purpose and priorities of said investor For example, what is the mission and target investment size or you can ask founders or read on experiences with that VC. What are they like as a partner? What are their values? How did they treat others during tough times? Do they respect token agreements?

Justin Biel provides a guide on How to Find the Right VC To Fund Your Business, noting again that there is a diversity of VC firms that specialize in different industries and stages of development, have different goals and prioritizes. In addition to researching some of the above questions, look for who/what fits that VCs Web3 investment profile. What kinds of companies or verticals do they fund (DeFi, consumer products, DePIN, infrastructure AI, etc)? And what about stages of investment (seed, early-stage, series A/B/C)?

Regarding VC involvement with Web3 projects and companies, it is important to note that some VCs invest solely in token deals, while others focus exclusively on equity-based investments. Moreover, certain VCs have specific geographical preferences or restrictions on where they invest. Some investors might be open to both. Why all these preferences and restrictions? Because certain VCs might be tied to agreements with the investors in the funds they manage.

It is thus much recommended to determine whether your project aligns with a VC’s investment thesis before reaching out, for instance by checking whether this information is publicly available on the investor’s website.

Now, with the initial research done, projects can move forward with their proposal. At this time, the VC will follow its own process of research and screening out startups, whilst projects should remain agile and on top of things. ‍‍‍

The Investment Process

An exemplary investment process with a reliable VC in the Web3 space typically follows well-defined and clear steps to ensure both parties understand each other and stay transparent. Here are some key elements of this process that deserve ti be highlighted:

Pitch and Intro

Start-ups submit a pitch deck or business plan to the VC analyst, providing an overview of their business and growth plans. The VC firm reviews the pitch and decides whether to proceed with further evaluation. Note that the first review oftentimes is less than two minutes - most VCs get dozens of decks per week in their email inboxes, over LinkedIn, or directly sent by founders. Therefore it is recommended to reach out to a VC you already know, or ask a friend for a warm intro - this increases the likelihood that the VC accepts your suggestion to talk.

Investor Due Dilligence

The VC investigates the start-up’s team, and assesses its technology, and market potential alongside other factors, such as competition, traction, tokenomics (if applicable), and roadmap. After the initial few calls, financial statements, legal documents, and other relevant information are usually thoroughly examined. Generally, the exact due diligence process depends on the VC at stake and on the fundraising stage and history of the start-up.

Term Sheet and Negotiation

If the VC firm is interested in investing, they present a term sheet outlining the proposed terms of the investment. This includes details such as funding amount, company valuation, and investor rights and responsibilities. Negotiations between the start-up and the VC then take place to reach mutually agreeable terms.

Please note here that different approaches are common amongst different VCs (as American VCs may operate differently and more fast than European ones). Also, there can be substantial differences between token-based investments and equity based ones. We recommend start-ups to discuss terms with a legal consultant before signing anything. One single mistake, omission, or negligent clause can impact the entire trajectory of your project.

Closing

Once the terms are finalized, the investment reaches the closing stage. This involves the transfer of funds to the start-up and the issuance of new shares or tokens (or indeed the signing of the SAFT agreement) as agreed upon, respecting a cooperative timeline.Legal and administrative procedures are followed to ensure a smooth transition.

Don’t celebrate until the funds have arrived - there are ample examples of VCs backing out at last minute.

Continued Support (also after the token hits the market)

After the investment is completed, the VC provides ongoing support to the start-up such as mentorship, guidance, and access to networks and resources that can facilitate the start-up's growth and success. They act as a valuable partner, leveraging their expertise and connections to maximize the start-up's potential. Unless you’re out for quick money only, or even dumb money, don’t treat your VC as a ‘one night stand’ - ideally you are in it for the long haul.

Important: if you did a tokenraise, make sure that the VC will not immediately dump your tokens when they hit the market. This can kill your project. Both ‘reputable’ and less reputable VCs may engage in this kind of behaviour, and there are blacklists circulating in the Web3 VC space that list their friends and competitors known for said practices. Thus, make sure to check the VCs reputation in this regard with someone you trust in the VC space.

To VC or not to VC?

It is, of course, important to state that variations in the investment process may exist depending on the VC firm's specific practices, the start-up's stage of development, and whatnot. Thus, always DYOR. Also, do also note that pursuing VC investments is not always the best avenue for a project, depending on the nature of the company, its stage, and market conditions. Sometimes angel investments can be a better alternative, or one can decide to bootstrap or seek to generate revenue without injecting external capital.

Finally, at Thrilld Labs, we believe that a trustworthy VC firm operating in the Web3 space should prioritize transparency, clearly communicating their investment process and being responsive to your inquiries and concerns. If they are too vague, too pushy, or completely ghost you despite your best efforts, you better move on to one of their friends or competitors and perhaps consider raising a red flag with your acquaintances in the space whilst you're at it, too. ‍

More Resources

Web3&Business video about Crypto Investment Trends, Web3 & VCs, Networking Interview with Sarah Gottwald - Blockchain Founders Group

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Disclaimer & Risks The information provided in this article is intended solely for educational purposes and should not be construed as a recommendation to buy or sell any security, cryptocurrency, or digital asset.

Thrilld Labs shall not be held liable for any investment decisions made or the acceptance of any investments based on the information provided in this article. Readers are fully responsible for their own investment decisions and should exercise caution and due diligence. By using the information in this article, readers agree that Thrilld Labs is not responsible for any financial losses or damages incurred.

Readers are strongly encouraged to conduct thorough research and consult with a financial or legal advisor before making any investment or acceptance decisions.