Career Nav #73: Fundraising for the Web3 Founder

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Shiv Mehta, Limited Partner at MHC Digital Finance Web3 Fund and an advisor at Graviton Web3 Accelerator, shares his talk, “Fundraising for the Web3 Founder.” He shares his journey into venture capital, the importance of knowing your competition, and the resources for funding your Web3 startups. 

My background before entering venture capital and academia was in traditional financial services. I’m an Indian-Australian. I worked for nine years, including two and a half years, in National Australia Bank, Australia’s second-largest bank. After completing my MBA at NYU Stern, I returned to Sydney and continued working. Since I became a published author, I used to get invitations for public speaking events, and people used to pick my brain and get free tips on what crypto to buy. Then venture capital started becoming popular in the Australasian region regarding Web3. Eventually, I became a limited partner at a Web3 venture capital fund based out of Sydney.

The association started around December 2021. We started doing due diligence on Web3 startups and started investing in them. Some of the investments that we’ve done there are multifold. We’ve invested in DAOs such as the QUEST DAO. We’ve invested in Metaverse Marketplaces and MetaZone. We’ve invested in a Metaverse project based out of Melbourne called MetaKey.

Many gaming projects like Ignite tournaments, Ethereum, and a non-token-based enterprise blockchain software called DigiBuild, where Y Combinator and Harvard University are our co-investors. I’ve also invested in non-blockchain companies as well as an AI company. For the last few months, I’ve been in India. I wanted to explore opportunities in India and invested in an EdTech company called LearnApp. I have a diverse startup investing background, mostly focused on crypto, but I’ve also diversified into AI and EdTech companies.

The good thing about Web3 is that you have a lot of opportunities, but those avenues are useless if you don’t get your basics right. Some of the basics are transferable if you have experience with a Web3 startup. Some of them are unique when it comes to a Web3 startup. To get the basics right, start with your fundraising goals.

Only you can decide what your fundraising goal needs to be. For example, if you’re building a new blockchain that competes with the Solana blockchain, your fundraising goal would be to raise as much capital as required. You would be raising between 10 million dollars for that particular project and 50 to 150 million. I’ve seen projects raising $150 million in the Pre-Seed round because they are creating a new blockchain or a layer two blockchain where the settlement happens on the Bitcoin blockchain. Fundraising goals are something that you can only decide if you’re raising to create a Web3 gain depending on the Web3 gain sophistication. A good starting point is between $3 million and $5 million. 

The fundraising goal is something that you need to decide by thinking from a VC perspective on how we value projects. Valuing projects is easier when you’ve got revenue coming in. If you’re raising something for a Pre-Seed round, you must demonstrate to investors how you would achieve product market fit. Those three are the golden words for any startup investor. They want to see you already have achieved product market fit, in which case you’re a mature startup, or you need to demonstrate how you’re going to achieve product-market fit if you’re currently in an ideation stage or you’ve just built an MVP.

To persuade investors that there is a market of customers who are willing to spend money or who are willing to use your decentralized application or your blockchain, you need to demonstrate the qualitative aspect. In this case, it would be the pedigree of your team, the leadership, mission, and value statement. No matter how strong your team is, your ability to execute the idea gets questioned if you cannot put a pen to paper. The way to demonstrate that in addition to your team skillset is also by quantifying the level of market appetite. These are the total addressable market for your idea and the available market. Startup investors don’t want to invest in a market with no growth potential. If that had been the case, we would have invested in oil companies. We don’t invest in oil companies because it’s a mature industry.

If we invest in oil production companies, we won’t get a moonshot opportunity. You need to demonstrate that the market that you’re entering has exceptional growth opportunities. You can pivot later, but when you’re raising money, you’ve got to have a very strong conviction that you’re going to execute on this idea, and it’s going to make investors money. Clear value power proposition during the ideation stage is very important, even though you can pivot later after understanding the market dynamics and user interest. You need to show how much market share capture you can take, and don’t say you’re going be a monopoly or don’t say that you don’t have any competition.

As an Angel Investor and a limited partner, we see a lot of pitch decks from investors or startup founders, especially in the Pre-Seed round phase. The common mistake they all make is thinking they don’t have any competition. When somebody tells me that they don’t have any competition, it just showcases they haven’t done that much research. To give you an example, Howard Reeds, the CEO of Netflix, used to mention before any of the streaming vs. happened, and Disney+ and Peacock and other media companies brought their streaming platform, Netflix was the only company in streaming.

He used to say that sleep is a competition because people who are sleeping are not able to watch Netflix when Netflix was the only streaming platform. Broaden your horizon. You need to do more research as to where your user’s attention is going in comparison to the product that you’re building. If you have actual competition, you need to put it out there and benchmark your idea towards them. You need to showcase what your competitor’s valuation is as well.

The general rule of thumb with Web3 startups, especially if you’re building something B2C rather than B2B, is that you can build a Web3 startup focusing on institutional investors and businesses that want to get onto blockchain. Or you can build a Web3 startup that focuses on normal people. Somebody wants to play Web 2 games and get rewarded in tokens. You are building a platform where I can play a web2 game like Fortnite, and the amount of hours I’m playing on Fortnite, I get rewarded with your startup tokens. In that case, you are building a retail audience-centric Web3 startup.

You can and should do many things before starting your Pre-Seed, seed, or fundraising round. One is building a community. Web3 projects are all about community. If your idea is good, your community’s growth will be great. That would demonstrate to the investor that there is an interested user base. Website traffic is another metric that makes the investors interested. A lot of Web3 startups have a Discord community. The amount of engagement, not members, but engagement among the discord community is important. It could be any of the social media platforms. If you demonstrate that your idea has created user interest, that’s a plus for your project.

If you are creating a pitch deck, do not overcomplicate it. A pitch deck should be 10 to 12 slides telling the story of why your startup idea is good and why you should invest. No need to complicate it with fancy technologies and so forth. When you have an idea or have built an MVP, that’s generally the Pre-Seed round. You don’t have many users. Your pre-revenue or your monthly revenue is a max of $25,000. You can expect to raise between $0-$750,000. This is an average. Dedicated Pre-Seed funds, angels like myself, friends, family, founders, and accelerators are generally the avenues to raise money for your Pre-Seed idea. The seed round includes early evidence of product market fit, your six-digit monthly revenues, and your round size would be bigger. If you need Seed Plus, it’s another fancy name. You can effectively make it a seed round. 

Series A is when you’ve got the validation that your startup is going places. You need to grow your team. That’s when you do the series A round. That’s usually a bigger round. Your monthly revenue is exceptional, above $200,000, in which case you’re doing well. In the Web3 startup, not in all cases, but generally, you don’t have a round after series A. In a traditional startup, you continue to raise series A, B, C, D.

You can do multiple series until you see an exit, which could be in the form of an IPO or it could be in the form of an acquisition by a larger company. That’s generally what you see in a traditional startup. In a WEB3 startup, you start with an idea, which could be in the Pre-Seed round. When you’ve got your MVP built, you raise a seed round. Your MVP is doing well. Now, you need money to go against your competition. You raise a series A round. Then, you have a token generation event in which the community would own a majority of your tokens. Generally, you don’t see Web3 entrepreneurs doing subsequent races after series A.

Most Web3 startups now have a company, which could be a DAO. That company is creating a network, and the ownership of that network is mostly with the community, which we call tokenomics. That is unique for a Web3 startup. 

Do your research first. LinkedIn is a great resource. If anybody invests in startups professionally, they would be on LinkedIn, or their team members would be on LinkedIn. Once you find out and create a list of potential venture capitalists and investors, it could also be Angel Investors. Have a look at what kind of investments they have made. You should leverage your network. You are part of Women Who Code. Contact your volunteers at Women Who Code to contact your fellows at Women Who Code. Establish a personal connection and build your brand. I could get into venture capital without any VC investing background, purely because I had a personal brand and networked. Personal brand is very important.

Lastly, if you’re desperate to get capital, try to shortlist investors that will provide you strategic value during the initial stages where you’re looking for capital. The great thing about Web3 is that it’s a new technology, and if you can’t find a venture capital house or Angel Investors, there are a lot of accelerators. Y Combinator and Techstars are actively investing in Web3 startups now. If you soon become a startup founder, Y Combinator is the OG, and Techstars is not far behind. You’ve got blockchain grounds as well. Every company and platform would have grants because they want you to build on their blockchain.

There’s a website called blockchaingrants.org with a comprehensive list of all organizations, Web3 companies, or blockchain platforms that provide grants. They are grants. They don’t take any ownership. If you can’t find or don’t get good responses from Angel Investors or professional VC outfits, you’ve got Y Combinator, you’ve got Techstars, you’ve got blockchain grants, and you’ve got accelerators that are coming up as well. Treat this fundraising process as an experience and a learning process. If you’re not getting the money, take feedback. If anybody rejects you, get feedback on why they’re not giving you money, and improve your pitch. It’s a learning process.