Blockchain Startup Funding: New Sources of Funds

Initial Coin Offerings, or ICOs, were the primary driver of the blockchain ecosystem in the 2017-2018 cryptocurrency boom. Through ICOs, blockchain startups tokenized access to services or digitized assets, allowing investors to purchase tokens in advance of the launch of a blockchain enterprise.

Tokenization is not the powerful tool it once was in the 2017-2018 blockchain ecosystem, however. The 2018 cryptocurrency bull market, combined with loose regulatory structures governing the issuance of tokens through initial coin offerings, saw the ICO model explode in popularity.

Blockchain-based renewable energy platform Power Ledger raised $34 million through a 2017 initial coin offering, while stablecoin platform Havven raised $38 million through a pre-sale of blockchain-based HAVE tokens.

Recent changes to the way in which initial coin offerings and token sales, however, have significantly reduced the viability of the initial token offering model as an effective means of raising startup capital for Australian blockchain startups. In 2019, just $17 million was raised through Australian ICOs. In the first half of 2020, Australian initial coin offerings raised just $35,000 — signalling an end to the Australian ICO boom.

With the ICO model no longer offering Australian blockchain startups with an explosive means of generating startup capital, blockchain entrepreneurs are now turning to a variety of different funding strategies in order to generate the funds necessary to launch.

Crowdfunding was, until recently, a widely used means of generating startup capital for new blockchain ventures. While blockchain-based crowdfunding methods differ, most follow the same basic principle: a startup will create a blockchain network — or use an existing blockchain network — and create tokens, which are then distributed via a token sale.

Initial coin offerings and other token sale models are subject to Australian financial law. Should the tokens issued in a sale meet the requirements to be classed as financial products, the sale is subject to the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001.

ASIC now provides detailed guidance regarding initial coin offerings and crypto assets. The regulatory framework governing ICOs and more complex offerings such as initial exchange offerings or security token offerings now obligates token sale operators to meet anti-money laundering and know your customer (KYC) requirements, as well as report to the Australian Transaction Reports and Analysis Centre (AUSTRAC), keep detailed records, and meet complex qualification requirements.

Australian blockchain accelerators and incubators provide blockchain startups with the ability to fast-track the development of their product or service with the assistance of industry experts, mentors, and other resources and, in some cases, access startup funding.

There is a key difference between startups and accelerators that should be noted by blockchain startups seeking funding. Incubators are primarily focused on helping very early stage, pre-launch startups build a product or service from the ground up, while accelerators are focused on helping startups that have an established product bring it to market. Accelerators are more likely to provide startups with potential equity finance opportunities.

Australian accelerators and incubators that focus on technology startups offer the most attractive development environment for blockchain-based startups. Startmate offers a five-month accelerator course that offers up to $75,000 in funding for a 7.5 percent equity stake, as well as providing startups with the opportunity to work and network in San Francisco.

Melbourne’s Blockchain Center startup co-working platform doesn’t offer funding, but does offer a 10-week Block Engine course of workshops, mentor sessions, and community events through an incubator program designed specifically for blockchain startups. Block Engine is designed to put startups in touch with potential investors at the conclusion of the incubator program.

The innovative nature of blockchain technology often necessitates significant research and development expenditure — which can, in many cases, be leveraged in order to access R&D tax incentive financing. R&D tax financing is a relatively new option introduced to the Australian financial ecosystem and focuses on assisting new startups in accessing capital through tax incentives.

The R&D tax incentive is designed to assist Australian businesses enterprises focused on innovation by lowering the effective spend on research and development through tax credits. The R&D tax incentive scheme has existed since the 1980s, but is particularly effective in assisting tech or blockchain oriented startups.

A key obstacle faced by Australian blockchain startups seeking to access the tax credits provided by the R&D tax incentive scheme is the delay involved in claiming. In order to benefit from the R&D tax incentive scheme, a business must file a claim as part of an annual tax return in the same year that R&D spending was performed.

R&D tax incentive financing allows blockchain startups to free up initial capital by accelerating the R&D tax incentive claim process. Platforms such as FundSquire provide Australian startups with guidance through the claim process, making essential capital available in order to fuel business growth.

FundSquire makes it possible for Australian blockchain startups to complete a simple application process that, if specific requirements are met, can allow startups to access $100,000 to $3 million within 48 hours of approval.

Importantly, R&D tax incentive finance doesn’t interfere with equity stake in a startup, allowing startup owners to retain full control over their business while scaling and growing. For more information on startup R&D tax incentive finance, take a look at FundSquire or check the Fullstack guide to the R&D Tax incentive: How it Works.

Venture capital is a widely used means of generating startup capital for many new businesses and pre-launch enterprises, but the VC ecosystem can be complex and difficult to navigate.

Venture capital, in simple terms, involves capturing startup capital from venture funds in return for an equity stake in a business. The VC funds that invest in blockchain startups are typically backed by corporate entities, high net worth individuals, or giant super funds.

VC funds are typically only interested in startups that are able to demonstrate a high growth potential or significant opportunity for rapid scaling. Many VC firms specialize in specific industries — Apollo Capital, for example, is an Australian crypto asset investment firm that focuses on investing in crypto assets and blockchain projects that drive the next generation of computing infrastructure.

VC firms are highly active in the Australian startup ecosystem, with the first half of 2020 seeing over $1.7 billion invested by VC firms into promising Australian startups. While VC firms can provide blockchain startups with a significant amount of launch capital, startups should carefully consider the potential benefits or disadvantages associated with VC stakeholders — VC investors typically demand presence on the board of a company, expecting to take an active role in the management and direction of a startup.

Determining the best funding strategy for your blockchain startup can be a complicated and difficult process. Blockchain startup funding is not the largely unregulated ecosystem it was in 2017 — startups focused on launching token sales or other blockchain crowdfunding ventures are now obligated to meet a broad variety of regulatory and compliance obligations.

Many startups operating in the blockchain ecosystem are uniquely positioned to take advantage of grants and tax initiatives introduced by the Australian government, or access startup capital through innovative solutions such as R&D tax incentive finance.