Web3 tyre service for flying saucers: how to launch a startup without scaring off investors

After the ICO bubble burst, finding a major investor for a blockchain startup became a difficult task. The requirements for early-stage projects have tightened — now they must not only offer innovations but often demonstrate at an early stage that the code is almost ready and will certainly work, and that the team will not disperse right after fundraising. How to understand that your startup is at a stage when it is not embarrassing to present to investors, according to experts surveyed by ForkLog.

Web3 and traditional startups: key differences

“I often hear complaints: the crypto industry is hype on hype, a lot of dirt, in which it’s hard to find something useful,” says Web3-entrepreneur Vladimir Menaskop. “This prejudice arises according to a very simple scheme. Analysts come and begin a superficial study: they read Bloomberg and Forbes and conclude, for example, that there are many hacks in DeFi. And that most of the funds obtained in attacks are returned — that’s another story, one that few write about. A junior analyst passes what they’ve learned in this way to the senior, who prepares a five-page report for the top manager, who passes the information even higher and says: this is the opinion we have formed on this issue.”

In his words, such prejudices are especially widespread among investors who became interested in Web3 startups after 2021. As Vladimir Menaskop notes, many fail to shed these stereotypes even after successful investments in projects that demonstrated effectiveness.

“We had unsuccessful investments when we did not fully assess the market conditions,” recalls co-founder Everscale and CEO HyperFlex Studio Nikita Inshakov. “In more traditional areas of the market, economic cycles are longer and volatility is lower. And here you must understand that the market can change very quickly and a hundred thousand of your customers can turn into zero overnight.”

Inshakov believes that “the blockchain industry is largely speculative,” and its representatives often abuse investors’ trust. “Blockchain attracts adventurers and dreamers. They go to investors and build castles in the air, and it’s hard to understand what has to do with reality and what doesn’t. ‘I’ll open a tyre shop for flying saucers.’ And how many flying saucers have you seen?” — the question, posed rhetorically, by Inshakov.

Vladimir Menaskop adds: this problem affects not only startup founders but also some funds willing to invest capital in Web3 projects.

“The situation is changing now: when your token fell at launch and cannot rise for five years — this is very hard for any startup. Everyone has understood this and started choosing investors more eco-friendly, the demand for non-toxic funds is growing,” the expert concludes.

MVP: base or luxury?

Many companies fail when they propose ambitious ideas but not a concrete product. According to Satis Group analysts’ calculations, during the 2018 ICO boom 78% of crypto startups were created purely to deceive potential investors. After such an experience, investors began to treat with caution projects that do not offer a minimally viable product at an early stage of negotiations. ICO 2018.

Having an MVP undoubtedly has a positive effect on the project’s image when it comes to attracting capital. However, according to Nikita Inshakov, this is not a mandatory requirement for a startup.

“Everything depends on the project’s specifics. In some projects you need a minimally viable product, in some a white paper is enough, in some cases MVP is not enough. The main thing is not to pass all risks to the investor and to demonstrate that you are capable of working independently. It’s not necessarily an MVP, but part of the work must be done: you haven’t built the machine in full, but you have the engine and wheels — that’s something,” — says Inshakov.

In turn, Vladimir Menaskop reminds that even at the “zero” stage of creating a project you should assemble a team that can effectively perform not only technical tasks.

“ startups I divide into two categories. The first — “humanitarian” ones, which have everything except code: concept, tokenomics, a good presentation. The second — more “technical.” They have code, but everything is poor on the humanitarian side, including tokenomics. Remember the four components: team, concept, coin, code. If you have at least three of them, you can start looking for investors,” — believes Vladimir Menaskop.

The product is thus ready for presentation when the team is confident that it can succinctly articulate the essence of the project and its main details, adds Inshakov. According to the Everscale co-founder, the ability to convey complex things simply is always a positive signal for an investor, indicating that the startup team clearly understands its own product.

“Investors always have little time; no one is prepared to listen to lengthy, tedious presentations without concrete answers to concrete questions,” sums up Inshakov.

Initial startup scoring: Nikita Inshakov’s checklist

Your project is ready for presentation to investors if you can answer the following questions:

• What are you doing? It sounds obvious, but in practice many projects cannot clearly answer this basic question.
• Who are your customers? Without understanding this you cannot even dream of effective marketing.
• Who are your competitors? And if there aren’t any, why not? Isn’t it because nobody needs them?
• What are your risks? For example, if it turns out that the regulator does not want to grant a license, you should have a backup option ready.
• Who is on your team? You should have a clear sense of which specialists you already have and which positions remain to be filled.
• Do you have a plan? Many people do not have a clear idea of what they will do in a month, six months, a year. “As grandmaster Tartakower once said, it’s better to have a bad plan than no plan at all.”
• What is your financial model? Web3 business is not only romance and making the world better. It is also the ability to count money.

Community: luxury or foundation?

Vladimir Menaskop believes that, unfortunately, investors do not always pay attention to this — they are more interested in the ideas themselves than the communities around them. But if the community exists and develops, that is a serious plus.

“On the other hand, everyone has understood that projects often inflate communities, from which people leave as soon as they receive an airdrop. Growing Discord or Telegram to 50,000 users is easy, but how many of them will become active participants in the community — that is the question,” the expert says.

Top three startup mistakes: Vladimir Menaskop’s picks

1. Poorly thought-out tokenomics. Here one might recall the experience of Uniswap. The project did everything possible to ensure that holding UNI made sense only when talking about millions of dollars. And if a user has only a million dollars, you simply wait and hope they rise in price. In fact, they ended up with a DAO that has no DAO.

2. Distancing from the community. I’ve formulated a rule “1–10 million.” It states: if a startup without a network suddenly raises from 1 to 10 million dollars, its founders begin to think they know where to take them. At this stage the psychological attachment to the idea is lost: firstly, after all, this is community money; secondly, this community should become a DAO; thirdly, this money should turn into a set of products.

Such a story happened with KickICO, when instead of an innovative platform they turned into a set of products that were supposed to appeal to funds. Why did this happen? Because investors want money, not a product. And startups begin to adjust their product to investors’ utilitarian values.

3. Departing from the original course. The most important thing I would warn young startups about: if there is a roadmap, you should first execute it, and then change it. Look at Vitalik Buterin. He has changed the roadmap more than once, but first he fulfilled all earlier conditions to the extent that everyone was satisfied.

Most startups do exactly the opposite: now we’ll lay out some roadmap for an IDO, then change it, then again, and eventually end up with a product that hits the market. There are examples where this worked: for instance, 1inch or Gnosis. But failures outnumber successes by far.

The simple conclusion: if the team is “technical” and has a solid grasp of blockchain nuances, it may work. In other cases, pursuing such a path is generally not advisable.