Written by Ishita Srivastava
Compiled by: TechFlow
Fundraising isn’t easy — whether you’re a first-time startup founder or a seasoned builder, it can feel like sailing through a storm without a map. It would be easy to get caught up in the negativity in this post, but today we’re going to stay positive.
Figure: Founders navigating the DeFi/VC liquidity pool
In this first part, we will dive into the basics of angel investors and venture capital in the cryptocurrency space. Understanding what drives their investment decisions is crucial to understanding why they accept or reject deals.
We'll discuss their main goals when selecting investments, how they approach trades, and the three main criteria they use to evaluate potential investments.
Next, we’ll explore common points of failure, drawing on personal experience and that of second-time founders navigating this rugged terrain. Ultimately, I hope to equip you with the knowledge to view fundraising with a clearer perspective and be better prepared to navigate the challenges it brings.
Come on, friends, we can do it.
Your Angel Investors
Founders often raise their first angel round from Twitter friends and Discord groups. Structuring equity is critical during this process. Founders often bring in angels that make a lot of noise but lack substance, and then disappear when they need introductions or meaningful feedback. Here’s the hard reality: if someone has done 150+ deals in the past year, they’re probably not the reliable signal you need.
Figure: Top angel investors by number of deals, source: Rachit
What drives angel investing?
Angel investing is highly network-dependent. Some angel investors, like the founders of Polygon, support ecosystem projects, while others, like GMoney and Zeneca in the NFT space, operate within specific circles of influence. However, return on investment (ROI) remains the main driver for most angel investors.
There is a small but annoying group of angel investors who invest simply for signal - hoping to get into a hot equity structure so they can get more investment opportunities. While I don't think highly of them, they can still help make some connections if used correctly. This brings us to the two core elements of an angel round: signal and insight.
Signals vs Insights
Signals are industry specific. In Solana DeFi, getting support from Mert or Anatoly is a win. In gaming, getting support from Ellio Trades shows a deep understanding of the space. But getting support from the head of the Avalanche ecosystem in a ZK project? Probably not that useful.
Insights, on the other hand, can compress months of work into weeks — for example, experts like DCF God share TVL strategies. At the angel stage, you need both signals and insights, but understand that your equity structure may be 90% signals and 10% insights.
Equity structure construction and due diligence
Finding the right angel investors not only enhances credibility, but also sets the stage for subsequent rounds with higher risk and greater rewards.
You are offering ownership at the best price, so you must understand the added value each angel brings to the equity structure and know how to use it effectively. Core angels will use their network to help you refine the equity structure. Most angel rounds are high risk, high reward - they may lead you to a major tier one fund, or they may fail. These investments are very network dependent, and due diligence (DD) is usually simple at this stage - a simple presentation is often enough to get started.
The smartest founders will open their rounds to Series A, letting valuable stakeholders in at a significant discount. VCs generally don’t mind this “backdoor” approach because it increases the overall value of the company.
Once you've perfected your equity structure with early-stage angels, you move into the bigger arena: venture capital. In the next section, we'll explore how venture capital firms work.
Venture Capital
In this section, we will explore the investor perspective. Who drives these investors, what limited partners (LPs) expect from a fund’s return on investment (ROI), and how the venture capital world works. We will also delve into why venture capital firms choose the investment methods they choose, the typical process of deal processing, and why ROI is still the main driver of most investment decisions.
Limited Partners: The Top of the Liquidity Chain
Picture: Big Boss
At the top of the liquidity chain are the limited partners (LPs) who provide capital to venture funds. In the crypto space, these LPs are often early adopters of cryptocurrencies, including investors, operators, and miners who made their fortunes in previous cycles. After experiencing exponential gains, they now expect fast and high returns from venture capital.
In the crypto space, investments are often token-based, with vesting schedules, liquidity events, and market cycles that are much faster than traditional equity. As a result, the expected return cycle is much shorter. The opportunity cost of holding capital in slow, long-cycle projects is high, so LPs demand a faster return on investment (ROI), pushing VCs to invest at a pace that matches market volatility and speed.
Although the pressure from more LPs will not be directly passed on to the investment team because there are many legal isolations between the two, the key point is that the fund knows that in order to raise Fund-3 and Fund-4, they must satisfy the LPs by achieving a 1,000x return.
Figure: Venture capital firms raising new funds
Essentially, this dynamic makes venture capital in the crypto space unique: capital is impatient, risk is high, and the margin for error is small. VCs know that they must not only outperform their competitors, but also deliver quickly to meet the growing expectations of limited partners (LPs). However, this dynamic is changing as more sophisticated capital enters the space again, including from pension funds, family offices, and web2 venture firms.
From the perspective of investors
An interesting combination emerges as this LP capital is often combined with analysts and associates who are often fresh out of college with little to no operational experience (I was one of these) These analysts are expected to work on 360+ deals per year in a variety of different areas ranging from ZK to modular infrastructure.
Figure: A Dramatized and Simplified Picture of Crypto Venture Capital in Q2 2023
This toxic investor-founder relationship, fueled by rampant speculation, has led to a frothy fundraising environment. Unfortunately, the founders who suffer the most from this flawed system are those outside of traditional circles of success, such as Ivy League schools, Singapore VC networks, or London’s web3 running groups. These founders are often at a disadvantage because they a) don’t understand how deals are processed in venture capital in the crypto space, and b) have limited access to capital deployers, forcing them to pitch on the merits of their ideas with little room for error.
It’s a harsh reality, but if you’re an investor reading this, I strongly recommend you invite 5 non-traditional proposals per month. We can eliminate this systemic problem in our industry by inviting 5 deals at a time. Now, back to the agenda.
Transaction in progress
In order for the Investment Committee (IC) to approve an investment, conditions have to be perfect on Monday morning: the head of the deal needs to have distributed a 20-page investment thesis on the Thursday of the previous week (with final touches added on Sunday evening), while the chief investment officer’s coffee has to be the right temperature.
The first point of discussion is usually fit of investment thesis. The deal must align with the firm’s investment strategy in areas such as infrastructure, gaming, or the Bitcoin ecosystem. Next, the deal lead walks the IC through her investment thesis — why this is an interesting problem to solve, what is unique about the solution, why this is the right team to solve it, and what the returns could be from participating in the round.
Essentially, deal leaders focus on ROI and risk.
ROI
Let’s look at the construction of a typical portfolio to get an idea of what the average ROI expectations look like:
Very optimistic portfolio construction in crypto venture capital around 2021
Anyone looking to climb the VC ladder craves that home run deal, while more sophisticated investors are willing to take that 1 in 100 chance of striking gold. A 30x return is important, but even a 5x return can be attractive from a portfolio construction perspective if the risk on a deal is low enough.
To further illustrate this point, consider this: entering a deal at a $25 million valuation with the potential to exit at $250 million provides a better risk-adjusted ROI than joining a hot $1 billion seed round, which is less likely to achieve a 10x return. Yet, WLD did just that.
In the current cycle, funds are becoming more cautious about investment lock-up periods. A project that reaches 60x at TGE but drops to 2x by the time the funds are unlocked is far from a successful investment. We see a polarization in the field - either you are raising a $7 million seed round, or you are trying to get $1 million from third-tier investors, and there is almost no middle ground.
review
VCs typically spend only about 40 seconds reviewing each investment proposal, so following their investment framework is essential to surviving the fierce competition in crypto venture capital. Over time, this framework has been simplified to a one-line view for most industries:
There are too many Bitcoin infrastructure projects and large investors are not interested;
NFTs are considered a product of the previous cycle;
DeFi? Most of the infrastructure is already built. The best investors are flexible in their views of various industries and constantly update their positions on problem statements by reading and following thought leaders.
Founders who thoroughly research their competitors are like hidden diamonds in the investment market. The effective insight for founders is that by 2024, the investors you are facing may have seen similar deals as yours, and may have even lost money in this space. Your task is not only to explain why previous attempts failed (showing your understanding of the industry), but also why you are capable of success. Whether it is through execution insights, customer validation or technical strength, you need to redefine the ROI of the project. With each cycle, the benchmark will become more mature.
Throughout my career, I’ve used a rigorous framework to evaluate deals, but frankly (more often than I’d like to admit) strong deal leads and the fit of the founder to the problem often influence my decision making.
Rejecting someone is always unpleasant.
That’s why investors often give cookie-cutter responses like “the timing wasn’t right” or “it didn’t fit with our investment philosophy” when rejecting a trade. But here are some of the real reasons I personally reject trades:
Mismatch between founder and problem: If the founder lacks relevant experience, this is a red flag. For example, a hosting business requires enterprise sales experience, so the founder’s background must be closely related to the problem.
No Competitive Advantage: If a project lacks a competitive advantage — whether it’s better distribution channels, higher total value locked (TVL), more users, or greater technical capabilities — it’s hard to gain support. It’s hard to market the 17th stablecoin when a Stanford PhD in cryptography is already developing a similar solution.
Low Return/High Risk Industries: Some industries simply cannot provide the returns that most funds are looking for, DAO transactions often fall into this category. Similarly, most funds do not invest in gaming projects because the risk of failure is too high.
Zero-knowledge problem: Sometimes, a great project may not align with our investment thesis. For example, I would not invest in a ZK-intensive project unless it was led by someone known for deep technical due diligence.
SAFT > SAFE: Equity investments require more due diligence and are generally less flexible than token fundraising.
Over-transformers: Founders who frequently transform to cater to market trends often lose the trust of investors.
Distribution bottleneck: If Metamask or another large company develops similar features, your distribution advantage may disappear in an instant. I dare not risk participating in such a transaction.
Of course, not every rejection was a good one. Some of the projects I rejected turned out to be great. My anti-portfolio was painful, and when I talked to my VC friends, Celestia and Botanix were the most frequently mentioned missed opportunities in our circle.
Fundraising like a winner
Many tech-focused founders dread pitching because it feels too much like sales. But it’s unrealistic to expect to survive without it. Pitching to investors is a specialized skill, and your presentation and data room are like a good pair of running shoes. Sure, you can run a 5K without running shoes, but why would you?
Yes, please make a presentation
As we discussed earlier, investors are bombarded with deals. Unless you already have a strong network of contacts, having great sales materials like presentations and data rooms will help you land a lead or lead investor faster.
Keep selling
Another key step is to practice your pitch as much as possible and get feedback. You need to know your pitch inside out—you can’t be awkward about it. The more you talk to people (whether it’s marketing, business development, or technology—anyone who will listen), the stronger and more refined your pitch will become. Demo days and venture capital events are great opportunities to test your pitch and get real-time feedback from a diverse audience.
Additional reading: The Art of Feedback
As I mentioned before, people hate to say "no" and it's a basic psychological phenomenon. Therefore, investors often give some general reasons for no. For investors you respect, don't hesitate to ask for more specific feedback. Most people may not agree, but those who are confident enough to communicate with you will provide valuable insights that can help you really understand what problems your theory may have.
The more enthusiastic the better
The crypto community is small and enthusiastic recommendations are very important. Cold messaging is inefficient, I once sent 60 messages and only received 5 replies. Instead, spend time building real connections on platforms like Twitter and Telegram - relationships on these platforms are crucial. Similarly, submitting pitch materials through websites will not work - 99% of the funds I know of are either reviewed by interns or, worse, no one reads them at all.
Figure: The only metaverse that matters is the Twitterverse
The beauty of crypto is that everyone is on Twitter. It's an open platform that you can use to make real connections. Rushi from Movement is a great example of someone who used Twitter effectively to bring in leads to his project. The best way to do this is through warm referrals - through people you chat with on Twitter, Telegram, or meet at conferences (although I think conferences are pretty inefficient). Spending a month being active on Twitter before raising money is the best way to build relationships with investors. Introductions between founders are ideal, but unfortunately many are stingy when it comes to introducing investors.
Even my investor friends who got in in 2020 and transitioned to builders during this cycle are having a hard time pitching and getting intros. So yes – it’s hard.
Tomorrow will be better
The failure rate for startups is as high as 99%. There are many things that can go wrong — whether it’s poor product-market fit, difficulty building the right team, poor execution, low industry ROI, or simply bad timing.
However, there are specific points of failure that I see repeatedly during the fundraising process. At the execution level, failure often stems from insufficient founder fit with the problem, insufficient research, poor documentation, or a lack of polish in the pitch. Middling ROI industries, oversaturated markets, and over-reliance on cold introductions can also quickly lead to deal failure.
What to do if fundraising fails?
This is a difficult question to answer – if investor interest is low, should you still move forward with your project? The answer is: it depends.
It’s critical to remain flexible during the fundraising process. If you fail to close a round or are considering abandoning your project, remember that the design space is still vast. Good investors will be willing to back you again if you can demonstrate growth and learning. Always keep an attitude of learning.
Listen to Anonymous, a second-time entrepreneur in this space. He shared this key lesson:
There’s a difference between knowing it’s time to stop and actually admitting it. In [Project 1], I stayed the course until the end because I believed (and still believe) that VCs were on the wrong track — that there would eventually be markets for options and derivatives in decentralized finance (DeFi). But I knew from the beginning that raising money would be difficult.
Looking back, the biggest mistake was raising money on the fly and launching a product while we were raising money — this caused us to quantify the opportunity before we were really ready. It’s better to wait until you’ve raised enough money to perfect the product before going public. This was a hard lesson.
Ultimately, success for [Project 2] was about the opposite: building credibility, attracting interest, and closing a big deal. One investor gave me $2 million to use, purely because of the clarity of my capital structure and the trust I had in me as a serious builder.
— Anonymous, founder of Anonymous
Where to go from here?
My experience in the crypto VC space has been a rollercoaster. I entered the industry right out of college and witnessed the 2021 boom in my first year. Since then, my investment criteria have evolved. Today, I focus primarily on founders' ability to handle risk and failure. No due diligence questionnaire (DDQ) can fully cover this, but fortunately, processing countless business plans is no longer my KPI. This freedom allows me to interact more closely with founders, giving me the opportunity to identify those who I think will succeed and invest more time in these relationships.
The truth is, fundraising is often gut-wrenching and more of a struggle than a success. But with every failure comes growth. The conversations I have with founders and investors now are more vivid and profound because we focus on resilience, adaptability, and the courage it takes to push forward.
At the end of the day, this journey is always forward. Stay resilient and keep moving forward.
Life is funny, Anonymous, don't be so serious.
