In recent years, fundraising has been crucial for startups to get off the ground and kickstart their growth. However, the current macroeconomic conditions have seen a decline in funding opportunities. This challenge is exacerbated for fintech startups and other Web3 players as the majority of venture capitalist (VC) investments are now directed towards new AI startups. So, what can these startups do to raise the necessary capital for sustained growth? We spoke to Lomesh Dutta, VP of Growth at DFINITY, who shared insights on how startups can raise funds without relying on VCs.
Investors in the web3 space are currently showing signs of fear and apprehension. According to recent data, only $500 million has been raised for decentralized projects this year, which is a staggering 98% less than the amount raised in 2022. This decline can be attributed to several factors, including numerous scandals within the space, such as the collapse of the FTX exchange, which has raised concerns among investors and led to regulatory scrutiny and enforcement actions.
Additionally, VCs are increasingly shifting their attention and investments to the booming AI space. Funding for AI startups has ballooned from around $400 million in 2018 to $4.5 billion in 2022. With the huge potential for growth in the AI industry, many investors are eager to get involved. Furthermore, the broader economic crisis has contributed to the lack of enthusiasm among VCs for web3 projects.
Even when funding is available from VCs, there is a concern that these external backers can significantly impact the projects they support. Investors often want a say in how the project evolves since they are providing a substantial portion of the capital. However, this can be problematic if the development team’s vision and the investor’s goals do not align.
Fortunately, the decentralized asset industry offers a solution to these challenges. Web3 projects no longer need to rely solely on VCs as their primary source of funding. Thanks to blockchain technology and smart contracts, startups now have alternative ways to generate funding by tapping into the power of their own communities, rather than relying on powerful individuals or companies.
One method that has gained traction is the concept of Decentralized Autonomous Organizations (DAOs). In a DAO, every member has a stake and a vote in determining the project’s direction. Rather than relying on a single or small pool of VCs, anyone can get involved and contribute to the project’s shared treasury. In exchange for their investment, supporters receive governance tokens that grant them voting rights on future developments. This decentralized decision-making process ensures that no single entity holds dominant control over the project’s direction.
There are already numerous successful DAOs in operation today, such as the Uniswap DAO, which governs a popular decentralized exchange, and the Decentraland DAO, which oversees a Metaverse platform. These examples demonstrate how Web3 projects can leverage community-led decentralized fundraising to finance their growth.
One project pushing the boundaries of this funding model is the Internet Computer (ICP). Through “decentralization swaps,” the IC ecosystem has raised over $10 million in recent months. Decentralization swaps allow developers to transfer their decentralized applications (d-apps) to token-based governance systems through a Service Nervous System (SNS), which is an algorithmic DAO. Unlike traditional DAOs that only control smart contract logic, SNS-based DAOs are entirely managed by the community. Governance token holders have the freedom to propose and vote on all changes made to the project, including code updates.
These innovative funding models that empower community involvement break away from the traditional VC funding model. They ensure that control remains with the project leads or, ideally, within the community surrounding the project. This shift aligns with the decentralized nature of the web3 space and opens doors for new and innovative developments in the future.
As the technology progresses, we can expect even more diverse avenues for generating income for new companies within the web3 industry. This transition away from relying on backers with deep pockets who seek control over project development represents an exciting opportunity for the decentralized space. With these alternative funding options, startups can secure the necessary capital for sustained growth while staying true to the decentralized spirit of the web3 ecosystem.
