Most countries in the world are now democratic places where anyone with enough skills and the right knowledge can own and start a new business. The biggest companies in the world today are some places that had to start from a small scale.
In the same manner, there are many people today who aim to create a new organization from scratch. These small-scale organizations are known as startups. Since the world is filled with enthusiasm for tech products and services, therefore tech startups that focus on blockchain and cryptocurrency organizations have gained massive popularity in the world today.
What is a Startup?
A startup is a company that is just getting started. In most cases, a tech startup happens when a developer can create a new product or service that they believe is going to create a massive demand in the marketplace.
Startups can have a core product or a mission to create an envisioned project that plans to generate a massive amount of income and make the lives of people easier. Before Personal computer startups like Microsoft, most people in the world were not familiar with operating systems, the internet, and any type of technical communication.
Why Do Startups Need Financial Aid?
A tech startup is almost always going to need a considerable amount of funding to achieve its goals. The term startup means that the company in question has a limited amount of human resources.
At the same time, the person with the startup idea or product is going to need a significant amount of financial aid to transform it into a professional work environment. A company needs several resources such as building, office equipment, human resource, transportation, communication equipment, marketing budget, and much more.
In most cases, startups try to gather the attention of commercial investors to get a loan or collect funding.
Types of Funding Sources for Startups
There are several different types of methods for collecting funding for startups for any company. Here are some of the most basic options available:
In the current day and age indie projects are getting a lot of traction among the masses. It happens because technology has made reaching a considerable amount of consumers very easy. People can hire freelancers for projects like creating a professional website, writing content, or performing digital marketing for their products.
Therefore, any individual who has a considerable amount of experience under their belt can erect a new business empire with a very conservative amount of resources at their disposal. Therefore, personal investments are also becoming very popular and more frequent in the current digital economic setup.
Social Circle Investment
Social Circle Investment is a type of startup funding that is collected from the masses that can get financial aid from their social circle. There are a lot of people who belong to wealthy and well-off family backgrounds. Under these circumstances, people with enough community reach can collect enough funds to support their startup project and make it a success.
Venture Capital firms are financial organizations that are actively looking for promising startups. These companies allow startup founders to present their products and create formal feasibility for their products.
In most cases, Venture Capital firms collect financial funds from high-net-worth individuals who want to use their savings for generating profits. in some cases, Venture Capital firms allow startups to organize several series of funding rounds to help them keep moving to the next stage throughout their initial life cycle.
Angel investors are also financial investors who are looking for startups that they can generate a profit from. However, these investors are usually individuals with retirement money or have some fund collection from their inheritance or any other resources.
In most cases, the startups and angel investors are not familiar with each other outside of their business acquaintances. Some people can get angel investors after networking within their social circle as well. In most cases, the angel investors only provide financial aid to the startups and do not play any active role in the business development process. Angel investors can also form unions and organizations in some cases.
Incubators that are also known as accelerators in some cases are known to support the startup. However, the aid grants from incubators are in the form of fixed assets and already purchased equipment. In some cases, incubators can allow a business to commence its operations in an allotted building without rent.
In other cases, these investors provide human resources or even contribute to granting special requirements such as research facilities, etc. In simple words, incubators focus on reducing the operating costs for a new business rather than bringing in a lot of cash resources for them. The average incubator contract with a startup can last up to 2 years.
In capitalist regimes, the government plays an important role in encouraging the emergence of new businesses under their jurisdiction. A country can increase its GDP if the number of independent businesses in the region keeps increasing.
Therefore, in some cases, startups can take advantage of the economic incentives and subsidies granted by the state. The state can exempt taxes and provide limited financial aid for startups that have signed up for the program.
One of the most popular and well-known methods of getting financial aid is to apply for a loan with a bank. There are micro-investment banks that grant financial aid to small businesses. On the other hand, there are also commercial investment banks that provide a loan option for startups based on investigation and extensive documentation.
Startups that have been around for while having an aim to become big enough for a public listing. It means that these companies apply for a loan from the members of the public by issuing stock.
The first stage of preparing for public listing is also known as IPOs or Initial Public Offering. IPOs allow individual investors to purchase the shares of a company with the promise of sharing profits and getting an ownership percentage.
What is DEX?
DEX is an abbreviation for Decentralized Exchanges. Social media has made people aware of cryptocurrencies and blockchains. At the same time, cryptocurrency investors are also looking for the best investment opportunities within the DeFi or Decentralized Finance ecosystem. Just like stocks of a regular company are listed on stock exchange markets such as NYSE or NASDA, the same is true for DeFi tokens.
Blockchain is the initial issuer of all cryptocurrencies. However, investors around the world head to cryptocurrency exchanges or DEX for purchasing their desired DeFi tokens. DEXs usually list cryptocurrencies after conducting background checks. In this manner, investors can purchase cryptocurrencies from DEX platforms securely and reliably.
What is an IDO or Initial DEX Offering?
A DEX is a type of crowdfunding platform dedicated to cryptocurrency exchanges. In most cases, IDOs are permissionless networks and are wholly decentralized. The cryptocurrency and blockchain sector has created an identity outside the traditional tech sector.
Therefore, IDOs work as specified fundraising platforms for cryptocurrency and blockchain organizations. Where traditional startups issue stocks or securities during an IPO, the IDOs usually issue cryptocurrencies for the investors. It is worth noting that since cryptocurrencies are not digital securities, they only promise the investors a profit share and do not represent any type of ownership stakes.
How Does an IDO Work?
When a cryptocurrency organization announces an IDO event, it means that the project is planning to release a new native token or core coin. Therefore, IDOs also need to have a liquidity pool to work as a distribution channel for investors. These liquidity pools contain a considerable amount of two or more cryptocurrencies.
The investors who are participating in the IDO can purchase the new token issued by the crypto startup in exchange for another cryptocurrency in their reserves. The CoinMarketCap IDO calendar is a place where all upcoming and already-happened IDO events are recorded.
Investors who are looking for a new cryptocurrency venture that can generate a massive amount of return for them can look for suitable swap opportunities there.
In reality, navigating through an IDO from A to Z points is a complex and technical process. However, the steps of IDOs can be explained in three basic steps:
IDOs organizers conduct a vetting or auditing process so that the project under question is accepted for an IDO event.
The total supply of the IDO tokens is determined in advance. The users also need to pledge their funds in exchange for the acquisition of these new tokens.
The tokens are distributed by the IDO after a token generation event or TGE on the decided date and time.
The investors who are willing to participate have to be added to the whitelist of IDO receivers. It can require the investors to provide their digital wallet addresses.
The funds collected from prospective investors are pledged into a liquidity pool. The same LP also contains a suitable amount of the native token issued during the IDO.
After all, tokens are distributed to pledge investors, the remaining funds are distributed among the project contributors or employees.
Investors have the freedom to swap their IDO tokens in the open market after TGE is completed. However, the liquidity pool of the IDO locks funds for a predetermined period.
Eventually, the trading cycle begins when the LP opens up for inviting all cryptocurrency investors after the sanctioned period is over.
Advantages of IDOs
Automation of Funds
In contrast to traditional funding events, the investors who are participating in an IDO do not have to deal with the project directors directly. The funds are distributed with the help of an automated blockchain protocol called smart contracts that limit the possibility of foul play or scams. The investors only need to worry about investigating the product’s legitimacy for the most part.
IDOs used LPs or liquidity pools to distribute new tokens and collect funds from their investors. In most cases, these LPs remain functional for a considerable amount of time after the completion of TGE.
The funds collected from the IDO remain locked in the pool for a while which provides an immediate and instant liquidity option for their IDO tokens. At the same time, these LPs also work to reduce price volatility, supply excess, and slippage.
Unlike traditional IPOs, IDOs are open to everyone regardless of their age, gender, educational background, or financial status. Many people are unable to participate in stock trading unless they possess a certain amount of wealth or risk appetite which is also called accredited investors.
However, IDOs are permissionless and decentralized. Therefore, in most cases, anyone can sign up without going through a hectic inclusion process.
Traditional IPO events require a massive amount of networking and expenses to attract the biggest investors in the world. However, IDOs can happen online and they do not need to take place in a physical venue. All the potential investors can gather information about the upcoming IDOs from social media platforms.
IDOs are designed in such a manner that single investors can’t purchase a massive amount of these tokens. In this way, IDOs prevent hijacking of a promising project by whale investors and everyone hailing from anywhere can participate in the project without worrying about falling behind.
Limitations of IDOs
User verification methods that are present in centralized investing platforms such as KYC and AML are not present in IDOs. It means that one investor can create multiple IDs to participate in the funding event. At the same time, anyone trying to wash their illegal funds can also hide from law enforcement by participating in IDOs.
In many cases, IDOs have gained a bad reputation since they are not seen as a financial threat. It happens because in many cases, the investors end up investing in sham IDOs. However, anyone can prevent falling into a trap by conducting a detailed investigation of an IDO beforehand.
IDOs are so cheap and easy to organize that several small and unknown companies can arrange these funding events. Therefore, investors who are not well-versed with the technical, financial, and legal aspects of funding events have little way to conduct due diligence for these IDOs. Therefore, IDOs have a considerable chance of resulting in a scam or unpromising investment.
In many cases, investors in an IDO are unable to ascertain if the tokens distributed during an IDO are digital securities or not. In many cases, investors can get in trouble if the financial regulators open an investigation of the IDO tokens for being digital securities and it can affect the spot price of the token in question significantly.
There are also instances where the investors as well as token issuers do not have any confirmation if their tokens are digital securities or if they are violating any other state regulations.
Different Types of Initial Offering Events
In the seas of cryptocurrencies, blockchains, and funding events IDOs are not the only type of investment opportunity. Here are some of the most common initial offering events that every cryptocurrency investor should know about and not confuse with IDOs:
Initial Exchange Offerings or IEOs are cryptocurrency crowdfunding events that take place on CEX or Centralized Exchanges. These funding platforms can create and run smart contracts for token distribution and fund collection. The centralized exchange usually lists the token in question before IEO. Furthermore, this forum also mandates KYC and AML vetting processes for investors and token issuers.
Security Tokens Offering or STOs are cryptocurrencies that are the digital representation of a stock or security. STOs can be listed on both CEX and DEX platforms. These tokens are not cryptocurrencies usually since they also represent the ownership of the issuing company for the investors in addition to profit sharing obligation. STOs should always be regulated under state laws for stock exchange products to avoid any legal hassles.
Initial Coin Offering or ICOs does not have any vetting process for any stakeholders. The project is entitled to handle all the funds from investors. It can create smart contracts and it looks for an exchange platform for listing before TGE.
The initial DEX offering allows investors to audit the distributors but does not have any KYC or AML requirements for signing up. DEX where the LP and TGE are going to take place has complete control over investment funds. IDOs also use smart contracts for the automation of token distribution.
Initial Farm Offering or IFO is an advanced method of collecting funds for DeFi and cryptocurrency projects. The users can participate in the pre-sale of new coins or tokens with the help of a designated DEX. It is a unique method of crowdfunding where investors can invest in an upcoming initial offering before the tokens are listed on any DEX.
There is a considerable amount of investment risk involved in IDO participation. However, the investors can remain safe if they conduct a financial audit of the project beforehand, read reviews about the developers, and find technical viability reports before jumping into any investment commitments.
By approaching IDOs in a systematic and organized manner anyone can get successfully create a long-term and stable crypto investment position and diversify their portfolio.
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