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It can be difficult for novice investors to understand venture capital investments. You can invest your money in startups and blockchain projects, but here you need to figure out at what point it is worth doing. In the material we tell you what rounds of investment there are, what happens in them and to whom they are suitable.
Rounds in startups
Investments in startups are divided into several rounds: Pre-seed, Seed-round, A, B, C, D and IPO. This is necessary in order to minimize risks and assess intermediate results. Knowing where a startup is in funding helps you choose the right strategy and decide when to invest in it. Let’s analyze each round separately.
Pre-seed – at this stage, start-ups invest their own funds, ask from parents and friends. Such investments are also called FFF (family, friends, fools). By “fools” we mean investors without experience.
Less than 10% of startups successfully pass this stage, so professional investors very rarely invest here. To reach the next stage of development, you need to attract up to $ 50 thousand.
At this stage, the startup joins the venture ecosystem and begins to interact with incubators or accelerators. The incubator provides him with premises for rent on preferential terms, as well as provides consulting, accounting and legal services. And in the accelerator, the startup is intensively developing through mentoring, training, financial and expert support in exchange for a share of capital.
Seed-round (seed investments) – refinement of the main product, search for product-market fit (compliance of the product with the needs of the market) and first sales. In most cases, startups in the early stages are unprofitable. At this stage, the money goes to maintain the work of the startup during losses, as well as to its further development.
At the seed investment stage, the founders test the business model. If it is promising, the startup begins to grow and attract the interest of investors – business angels and venture funds.
The volume of investments in the seed round can be from $ 100 thousand to $ 2 million Only 15% of startups successfully move to the next stage.
This stage is suitable for novice investors who are not afraid of losing the invested money or want to have their share in the startup. Here it is already possible to evaluate the product and not such large amounts are needed as in subsequent rounds. But it’s also very risky.
How the investment process works:
- the investor gives the founders of the startup money,
- in return, he receives a share in the startup and a part of the profits,
- if the startup fails, then the parties do not owe anything to each other.
Round A — the startup already has a finished product, funds are attracted to scale sales. Thus, it arouses the interest of large investors and funds that specialize in the later stages of startup development.
The volume of investments grows to $ 3-12 million The transition to the next stage reaches 40% of startups, and compared to the Pre-seed stage, only 5% pass. Round A ends the early stages of project financing.
Current rounds of startup investment and the money raised can be found on the Crunchbase website
Round B — the startup attracts funds for further scaling and expansion of the geography of sales. At this stage, startups can already earn on their own, but this is not always the case. Then new investors are guided by the dynamics of the project and its compliance with trends.
Here, as in the previous round, the startup is financed by large investors and funds specializing in later stages of development. The volume of investments exceeds $ 12 million For example, at this stage, square, which was founded by Twitter creator Jack Dorsey, raised $ 27.5 million.
Rounds C, D and IPO – these are late rounds, during which the startup actually begins to prepare for the IPO, that is, the placement of the company’s shares on the stock exchange. Investors already understand the startup, and they are ready to give it a market assessment.
Rounds C and D are difficult to divide and estimate the average amount of the transaction, since startups achieve different indicators. The volume of investments at this stage is about $ 100 million Investors are both classic venture funds and private equity funds, less often – strategic investors.
Scheme of rounds, attracted investments, capitalization and maturity of the startup
At the IPO stage, the first public sale of the company’s shares to an unlimited number of persons takes place. issues shares and places them on the stock exchange, and any interested investor or investment fund can purchase them.
This stage is suitable for novice investors who do not want to take much risk and invest their money on the Seed round. To become an investor, you need to buy startup securities on the stock exchange during the IPO. In this round, it is possible to buy shares at a bargain price before the market price is set on them.
Rounds in blockchain projects
In addition to startups, you can invest in blockchain projects. Before placing your token on the exchange, almost every project collects money for its development. This process is broken down into several rounds: Seed sale, Private sale, Pre-sale, and Public sale. Let’s analyze each of them in more detail.
Seed sale – the earliest round of investment, when the project attracts the first official money from third-party investors. The amount of initial investment varies from $ 10 thousand to $ 40 thousand The main goal is to obtain funding for the further development of the project: the creation of a token, a marketing team, a website and financing the first advertising campaigns.
At this stage, the projects plan the number of tokens, which will be distributed to the remaining stages. That is, at each stage there is a certain number of tokens that the project sells.
The seeding round is optional. It is necessary in the event that the project team does not have enough money to launch it on its own. The volume of investments on the Seed sale can be from $ 25 thousand to $ 1 million.
Private sale are focused on a narrow group of investors. The round is intended for close supporters of the project, employees and institutional investors. At this stage, the project begins to sell its tokens, and the price for them is the lowest. A round of private sales is often limited in time and ends when the token limit is reached. The volume of investments grows to $ 500 thousand.
At this stage, the minimum amount of investment per person is high. It is difficult for novice investors to make a decision to enter the project and collect the necessary amount – $ 50 thousand.
And successful projects are selective in the choice of early investors and try to choose those who wish from the immediate environment. They are also looking for those who can contribute to the project other than money. For example, to help in marketing and PR.
Projects often use private sales to attract venture capital funds. Selling tokens in this round to one or a limited number of investors has many benefits for them: access to expertise and marketing activities.
Some projects make private sales open to the general public, but impose restrictions on it. To invest at this stage, you will need to pass KYC and have a minimum limit for investment. On average, this is tens of thousands of dollars. Projects most often inform about this in their social networks, or on the official website.
Pre-sale is the round before the public sale. It does not happen to all projects. Pre-sales participants are often family, friends and other interested parties. This stage is similar to the Pre-seed round of startups.
To invest in the project at this stage, the investor must be on the whitelist. It is used to organize marketing activities and raise awareness on social networks.
This stage is best suited for novice investors. Here it will be enough to fill out the Whitelist form, and then wait for your name in the white list and buy tokens at a bargain price.
This is what the Whitelist of the Metafluence project looks like
During the pre-sale phase, teams may also offer other bonuses. For example, the opportunity to be one of the first to participate in beta testing, get additional tokens or priority access to the product. The volume of investments exceeds $1 million.
Public sale – sale of tokens to all comers at the closest to the market price. This is the final round, which is limited in time. Tokens left over from previous rounds, if any, are sold at this stage. It is also suitable for novice investors, but will be less profitable than the previous one. The volume of investments exceeds $1 million.
Scheme of rounds of investments attracted by blockchain projects
The typical difference in the volume of investments between funding rounds is 10-15%. The structure of the rounds may vary. Some projects skip the round of private sales and conduct only a round of public sales.
IDO and INO – Alternative Ways to Invest in Projects
There are alternative ways to raise funds for the project. The most relevant for May 2022 are IDO and INO. They are suitable for novice investors, and the projects that plan to conduct them can be found in the public domain on the sites – Coinlist, Polkastarter, GameFi.
IDO (Initial DEX Offering) is the initial decentralized offering. This is a fundraiser on a decentralized exchange (DEX) for the release of project tokens. IDO also has a stage of first selling through whitelist, which is suitable for novice investors. There, tokens can be purchased at the best price.
The blockchain project provides the DEX with its tokens, then users deposit their funds through it on the exchange, and it completes the final distribution and transfer. These processes are automated and occur through smart contracts on the blockchain.
The first tokens are received by those who filled out the Whitelist form. They buy tokens at a lower price than the market price, and the whole process takes place in the same way as in the Pre-sale round, which we wrote about above. Then the tokens are sold to everyone at the closest to the market price.
INO (Initial NFTs Offering) is the initial offer of the NFT. Non-fungible tokens are sold at an early stage of the project for a pre-planned period. INO also has its own stage of pre-sale through the Whitelist, where you can buy tokens at the best price. Ino differs from IDO in that the actions take place not on a decentralized exchange, but in the NFT marketplace. All investment rounds are similar to IDO.
Conclusion
The material told what are the rounds of investment. They are needed in order to minimize risks and evaluate intermediate results. Knowing at what stage of financing the project is helps to choose the right strategy and the right investor.
In startups, rounds are divided into Pre-seed, Seed round, A, B, C, D and IPO. And in blockchain projects on Seed sale, Private sale, Pre-sale, Public sale. In the initial stages, investing in blockchain projects will require less money than in startups.
It is best for novice investors to invest in startups at the stages:
- Seed round is a higher risk,
- IPO – less risk than in the Seed round.
And in blockchain projects at the stages:
- Pre-sale — a more favorable price of tokens,
- Public sale – a higher price of tokens than on pre-sale.
Editor:
Dmitry Egorov
Cover and illustrations:
Julia Chistyakova
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