Let’s explore how a token-based funding mechanism would work in the case of Juicebox. If we’re referring to tokens as a form of digital ‘equity’ that quantifies investor appetite to invest in an early-stage project, we must first understand how early-stage investments work for both startups and investors.
Firstly, it’s no question that private (pre-IPO/ICO) investing is risky, however, it’s an incredibly popular model among angels and VCs that attract huge upside. The rate of startup failure is in the 90th percentile, meaning the majority of investors lose their money on one or multiple investments. Given these statistics, investors typically have a diversification strategy that splits their capital allowance across several startups. For example, if an investor had $100,000, they might allocate $10,000 across 10 different startups, betting on 1 to make 100x (or more) on their money. There are main things that govern how investors decide to invest in a startup. These are:
Investors may consider other points when deciding to invest in a startup that can be unique to their strategy and ethos, however, all of the above points are standard.
Apart from how investors decide to invest, there are some other commonalities in early-stage investments that govern how the industry works. These are:
The majority of startups (unless bootstrapped) go through multiple funding rounds. These are referred to as pre-seed, seed, series A, B, C, and so on until they go public. Rounds are important as the activities of successful fundraising are time and resource intensive. You can’t always be raising. You need to be operating majority of the time.
Let’s liken rounds to cycles, but while cycles are perpetual, rounds are not. They last for a specified period of time, they open and close. This is by design and creates exclusivity and control. A constantly ‘open’ means of funding is an exchange or market and with that traditionally comes lots of legal, responsibilities and administration.