Council Post: Five Ways Digital Asset Startups Damage Their Credibility With Investors

Co-Founder of venture-backed startup Xangle — bringing disclosure and information aggregation services to crypto.

You might be endangering your cryptocurrency project without even knowing it. If you’re not devoting time and energy to building trust and relationships with your investors, you could be putting your project’s future at risk. In fact, when it comes to investing in crypto startups, especially those launching their own tokens, founders are already fighting an uphill battle.

The year 2017 seemed like it was going to be a big one for crypto startups, as many companies issued coins and tokens as an alternative to early stage funding, earning over $5.6 billion from investors. As it turned out, more than 80% of the companies issuing initial coin offerings ended up being scams and took investors’ uninsured dollars with them.

Are your investors afraid you’re going to do the same thing? Crypto startups need to prove they have a great business concept that warrants investment and that they won’t disappear overnight with their investor’s money.

Additionally, investing in crypto projects is a bit different from traditional investments in startups. Because it’s a growing industry that’s proving itself in the absence of regulations around disclosures and no protection behind capital, investors are taking on more risk with these types of ventures. 

On top of that, investors might not have experience putting their money behind projects based solely on the blockchain or other crypto technologies. This is why building and sustaining relationships with investors is key to sustainable growth, having access to capital for future projects and building trust around crypto companies, therefore leading to legitimacy around the industry in general.

If you’re working on a serious project with an innovative idea that adds value to customers and you’re looking for investment partners, there’s great opportunity in crypto. Startups can, however, damage their credibility with their investors before the business even gets off the ground.

The following are five pitfalls to avoid when bringing on investors:

1. You have too many investors or too much investment.

Make sure you’re taking on the right number of investors and the right amount of money from them. Be realistic about your valuation and the timeline around when investors can expect a return. More money might seem great in the early days when you’re launching and strapped for cash, but higher investments mean you need quicker returns — which means unnecessary pressure to scale when you can’t. Think about your investors’ exit strategies as well, and manage expectations around what you both can handle.

 2. You have no clear use case for tokens.

Issuing coins is a fairly easy use case to understand: It’s a currency in the ecosystem. But if you’re issuing tokens, you need to know what they will be used for and what value they will bring to those who have them. Tokens can be used in a number of different ways: They can represent an asset, be part of a loyalty program, grant access to future products or any number of other usages. But how will the actual end customers use them? Having only a vague sketch of how your token will be adopted will hurt your credibility with investors and could flag you as an exit scam before you’ve even launched.

3. You’re pursuing the wrong investors.

Not all investment money is the same. Are you taking on investors who don’t know the crypto space and might not know the nuances of the industry? Are you taking on investors who could impose requirements around growth that you might not be able to satisfy? Are you taking on short-term investors who need faster returns or who are looking to make a quick buck from your project? Not knowing what kind of capital you’re looking for can hurt your credibility and put you in a position in which you don’t want your business to be later on. Additionally, lacking a lock-up period for the founding team’s tokens could signal to your investors that you haven’t stabilized your business model.

4. You’re using your capital wrong.

Similarly, are you funneling invested cash to the right areas of your project? Are you seeing healthy, steady growth from your project, or are you relying too heavily on your investments? Have a solid business plan you can communicate with investors that lays out your milestones step-by-step to ensure sustainable growth. Otherwise, relying on investor capital to scale your business without thinking through how you’ll generate organic growth will be a signal to investors that you don’t really know what you’re doing.

5. You’re trying to solve it all.

Startups focus on solving a specific problem with their idea, yet crypto startups are often after industry disruption with their concept. They typically don’t just tackle one problem, but all them — often with a visionary lens instead of a practical one. While vision is key for entrepreneurs, showing investors that you’re more concerned with the big picture than the problem at hand can sink your credibility. Instead, focus on addressing the issue your business is solving, and work to ensure you fulfill your promise. 

How To Build Credibility

What is a sure way to build credibility with your investors? First, have a clear business plan and a set of achievable long-term and short-term goals. Keep investors engaged in what you’re doing through regular reporting and consistent disclosures for anything that could have a material impact on their investment. Finally, build trust and credibility by focusing on steady, sustainable growth instead of quick returns.

Investors want to know they’re putting capital into worthy projects that won’t disappear overnight. A focus on your investor relations strategy can go a long way toward building trust, generating more opportunities and facilitating better growth for both you and your investors over time.


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