Raising money isn’t easy—whether you’re a first-time founder or a seasoned builder, it can feel like sailing through a storm without a map. It’s easy to get sucked into the negativity with this article, but today we’re going to stay positive.
Image source: Deep Tide TechFlow founder sailing in the DeFi/VC liquidity pool
In this first part, we’ll dive into the basics of angel investors and venture capital in the cryptocurrency industry. Understanding what drives their investment decisions is critical to understanding why they accept or reject deals.
We will discuss their main goals when choosing investments. How they process transactions and the three criteria they use to evaluate potential investments.
Next, we’ll explore common failure points, drawing on personal experience and those of second-time entrepreneurs navigating this rugged industry. Ultimately, I hope to provide you with the knowledge to see fundraising through a clearer lens and be better prepared to deal with the challenges it presents.
Come on friends, we can do it.
your angel investors
Founders often raise their first angel round from Twitter friends and Discord communities. In this process, the construction of equity structure is crucial. Too often founders bring in angels who are loud but lack substantial support, and then are nowhere to be found when introductions or meaningful feedback are needed. Here’s the harsh reality: If someone has closed over 150 trades in the past year, they’re probably not the reliable signal you need.
Source: Rachit’s top angel investors by number of deals
What are the drivers of angel investing?
Angel investing is highly dependent on networking. Some angel investors, like the founders of Polygon, support ecosystem projects; others, like GMoney and Zeneca in the NFT industry, operate within specific circles of influence. However, return on investment (ROI) remains the primary driver for most angel investors.
There is an annoying minority of angel investors who invest solely for the signal – hoping to get into hot equity structures 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 the angel wheel: signals and insights.
Signal vs Insight
Signals are industry specific. In Solana DeFi, getting support from Mert or Anatoly is a success. In the gaming industry, receiving support from Ellio Trades shows a deep understanding of the industry. 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 improves credibility but also sets the stage for subsequent rounds with higher risk and greater reward.
You are transferring ownership at the best possible price, so you must identify the added value each angel brings to the equity structure and know how to leverage it effectively. Core angels will use their networks to help you improve your equity structure. Most angel rounds are high-risk, high-reward – they may lead you to major Tier 1 funds, or they may fail. These investments are very network dependent and due diligence (DD) is usually simpler at this stage – a simple presentation is often enough to get started.
The smartest founders will open their rounds to Series A, allowing valuable stakeholders to join at a significant discount. Venture capital firms generally don't mind this "backdoor" approach because it increases the overall value of the company.
Once you round out your equity structure with early-stage angels, you enter a bigger industry: venture capital. In the next section, we’ll explore how venture capital firms work.
venture capital
In this section, we’ll look at it from an investor’s perspective. Who leads these investors, what limited partners (LPs) expect from the fund’s return on investment (ROI), and how the venture capital community works. We'll also dive into why VCs choose how they invest, the typical process for deal processing, and why ROI remains the primary driver for most investment decisions.
Limited Partners: Top of the Liquidity Chain
Picture source: Shenchao TechFlow Big Boss
At the top of the liquidity chain are those limited partners (LPs) who provide capital to venture funds. In the crypto industry, these LPs are often early cryptocurrency adopters, including investors, operators, and miners who made their fortunes in previous cycles. Having experienced exponential gains, they now expect fast and high returns from venture capital.
In the crypto industry, investments are often token-based and come with vesting plans, liquidity events, and market cycles that are much faster than traditional equity. Therefore, the expected rate of return period is much shorter. The opportunity cost of holding capital in slow, long-cycle projects is higher, so LPs demand faster return on investment (ROI), pushing VCs to invest at a pace that matches market volatility and speed.
Although the pressure exerted by more LPs will not be directly transferred to the investment team because there are many legal barriers between the two, the key is that the funds know that in order to raise Fund-3 and Fund-4, they must achieve 1,000 times by achieving rate of return to satisfy LPs.
Image source: Shenzhen TechFlow Venture Capital is raising new funds
In essence, this dynamic makes crypto industry venture capital unique: capital is impatient, risk is high, and there is little room for error. Venture capital firms know they not only have to outperform their competitors, they must deliver quickly to meet the growing expectations of limited partners (LPs). However, this dynamic is changing as more sophisticated capital is entering the industry again, including venture capital firms from pension funds, family offices and web2.
From an investor's perspective
An interesting mix emerges because these LP capitals are often combined with analysts and associates who are often fresh out of college with little operational experience (I am one of them). These analysts are expected to work on more than 360 deals per year, across industries ranging from ZK to modular infrastructure.
Source: TechFlow: A dramatized and simplified picture of crypto venture capital investment in Q2 2023
This toxic investor-founder relationship, fueled by rampant speculation, led to a frothy fundraising environment. Unfortunately, those who suffer the most in this flawed system are founders who are outside the traditional circles of success, such as those outside the Ivy League, the Singapore VC network, or the Web3 running community in London. These founders are often at a disadvantage because they
Not understanding how crypto industry venture capital transactions are processed
Limited access to capital deployers forces them to sell on the merits of their ideas, leaving little room for error.
It’s a harsh reality, but if you’re an investor reading this, I highly recommend you invite 5 non-traditional proposals every month. We can eliminate this systemic problem in our industry five transactions at a time. Now, back to the established 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 distribute a 20-page investment thesis on Thursday of the previous week (with final revisions added by Sunday evening), while Investing in long coffee must be at the right temperature.
The first point of discussion is usually the fit of the investment thesis. Transactions must be consistent with the company’s investment strategy in industries such as infrastructure, gaming or the Bitcoin ecosystem. Next, the deal lead explains her investment thesis to IC - why this is an interesting problem worth solving, what makes this solution unique, why this is the right team to solve this problem, and what it takes to participate in this round What kind of return rate can it bring.
Essentially, deal leaders are focused on ROI and risk.
ROI
Let’s look at the construction of a typical portfolio to get an idea of what average ROI expectations look like:
Image source: Shenchao TechFlow
Very Optimistic Portfolio Construction in Crypto Ventures Around 2021
Anyone looking to move up the VC ladder is eager to land that home run deal, while more sophisticated investors are willing to take a 1/100 chance of striking gold. A 30x return is important, but if the risk on a trade is low enough, even a 5x return can be attractive from a portfolio construction perspective.
To further illustrate this point, consider: Entering a deal at a $25M valuation and potentially exiting at $250M provides a better risk-adjusted ROI than joining a hot $1B seed round , because the latter is less likely to achieve a 10x return rate. However, WLD did just that.
In the current cycle, funds have become increasingly cautious about investing in lock-in periods. A project that reaches 60x at TGE but drops to 2x by the time funds are unlocked is far from being considered a successful investment. We’re seeing polarization in the industry—either you’re raising a $7 million seed round or you’re trying to scrape together $1 million from third-tier investors, with little in-between.
review
VC firms typically only spend about 40 seconds looking at each investment plan, so following their investment structure is critical to surviving in the fierce competition for crypto VC funding. Over time, this framework was reduced to a single-line view of 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 has already been built. The best investors are flexible in their views on various industries and update their position on problem statements by constantly reading and following thought leaders.
Image source: Shenchao TechFlow
Founders who thoroughly research their competitors are like hidden diamonds in the investment market. The valid insight for founders is that by 2024, you will be dealing with investors who may have seen deals similar to yours, and may have even lost money in this industry. Your task is not only to explain why previous attempts failed (demonstrating your understanding of the industry), but also to explain why you have the ability to succeed. Whether it's through execution insights, customer validation, or technical prowess, you need to redefine your project's ROI rate. Each cycle, the benchmark becomes 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 founder-problem fit often influence my decisions.
It's always unpleasant to say no to someone.
That’s why investors often give cookie-cutter responses when rejecting a deal, such as “the timing wasn’t right” or “it doesn’t fit with our investment thesis.” But here are some real reasons why I personally refuse to trade:
Founder-problem mismatch: 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 will be difficult to gain support. Selling a 17th stablecoin becomes difficult when a Stanford PhD in cryptography is already developing a similar solution.
Low Return/High Risk Industries: Some industries simply do not provide the returns that most funds are looking for, and DAO trading often falls into this category. Likewise, most funds don't invest in gaming projects because the risk of failure is too high.
Zero-knowledge problem: Sometimes, a great project may not fit in with our investment philosophy. For example, I would not invest in a ZK-intensive project unless the project is led by someone known for deep technical due diligence.
SAFT > SAFE: Equity investing requires more due diligence and is generally less flexible than token raising.
Over-transformers: Founders who frequently transform to cater to market trends often lose the trust of investors.
Distribution bottleneck: If Metamask or another big company develops similar functionality, your distribution advantage could disappear in an instant. I wouldn't dare risk such a deal.
Of course, not every rejection is the right one. Some of the projects I turned down turned out to be really good. My anti-investment portfolio is painful, and when talking to my VC friends, Celestia and Botanix are the most frequently mentioned missed opportunities in our circles.
Fundraise like a winner
Many technology-focused founders fear pitching because it feels too much like sales. But it is unrealistic to survive without this ability. Pitching to investors is a professional 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, be sure to create a presentation
As we discussed earlier, investors are faced with a flood of trades. Unless you already have a strong network, having polished sales materials (such as presentation decks and data rooms) will help you find lead or lead investors faster.
Keep promoting
Another key step is to practice pitching as much as possible and get feedback. You need to know exactly what you're pitching - you can't be awkward about it. The more you talk to people (whether they’re marketing people, business development people, technical people – anyone who’ll listen), the stronger and more refined your pitch will become. Demo days and venture capital events are great opportunities to test pitches and get immediate feedback from a diverse audience.
Image source: Shenchao TechFlow
Additional Reading: The Art of Giving Back
As I mentioned before, it’s a basic psychological phenomenon that people hate saying “no.” Therefore, investors often give some general reasons for rejection. Don’t hesitate to ask for more concrete feedback from investors you respect. Most people may not agree, but those who are confident enough to talk to you will provide valuable insights that can help you really understand what problems you may have with your theory.
The more enthusiastic the better
The cryptocurrency community is small and enthusiastic recommendations are very important. Cold DMs are inefficient, I once sent 60 DMs and only received 5 replies. Instead, spend time building real connections on platforms like Twitter and Telegram — where human connection is crucial. Likewise, submitting pitches via a website doesn't work - 99% of the funds I know of are either reviewed by interns or, worse, not read at all.
Image source: Deep Wave TechFlow The only important metaverse is the Twitter world
The beauty of cryptocurrency is that everyone is on Twitter. It’s an open platform you can use to make real connections. Rushi from Movement is a great example of someone who effectively used Twitter to generate leads for projects. The best way is through enthusiastic recommendations – through people you chat with on Twitter, Telegram, or meet at conferences (although I think conferences are pretty ineffective). Spending a month before raising money and being active on Twitter 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 into the business in 2020 and transitioned into builders during this cycle are having trouble pitching and getting referrals. So, yeah – it’s definitely hard.
tomorrow will be better
The failure rate for new businesses is as high as 99%. There are a lot of things that can go wrong – whether it’s poor product-market fit, difficulty assembling the right team, poor execution, poor ROI, or simply bad timing.
However, there are certain points of failure that I see over and over during the fundraising process. At the execution level, failure often stems from a lack of fit between the founder and the problem, insufficient research, poor documentation, or a lack of subtlety in the pitch. Industries with moderate ROI, oversaturated markets, and overreliance on cold introductions can also quickly lead to deal failure.
What to do if funding fails?
It’s a hard question to answer – should you move forward with a project if there’s little investor interest? The answer is: It depends.
Remaining flexible during the fundraising process is critical. If you failed to close a funding round or are considering abandoning the project, remember that the design space is still vast. If you can demonstrate growth and learning, good investors will be willing to back you again. Always maintain a learning attitude.
Image source: Shenchao TechFlow
Hear from an anonymous person who is a second time entrepreneur in this industry. 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 until the end because I believed (and still believe) that venture capital was going in the wrong direction—that there would eventually be a market 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 the product while we were raising money - this caused us to quantify the opportunity before we were truly ready. It’s best to wait until you’ve raised enough money to perfect the product before going public. This is a profound lesson.
Ultimately, [Project 2] succeeded by doing exactly the opposite: establishing credibility, attracting interest, and closing a big deal. I had an investor give me $2 million to spend at my disposal purely because my capital structure was clear and I had earned their trust in me as a serious builder.
——Anonymous, anonymous founder
Where to go next?
My experience in the crypto venture industry has been a roller coaster ride. I entered the industry right out of college and saw the 2021 boom in my first year. Since then, my investing criteria have continued to evolve. Today, I focus on founders’ ability to handle risk and failure. No due diligence questionnaire (DDQ) can fully cover this, but thankfully juggling countless business plans is no longer a key performance indicator for me. This freedom allows me to interact more closely with founders, giving me the opportunity to identify people I think will be successful and invest more time in those relationships.
The truth is, raising money is often nerve-wracking and more of a struggle than a success. But with every failure comes growth. My conversations with founders and investors are more vivid and profound now because we focus on resilience, adaptability, and the courage it takes to push forward.
Ultimately, the journey is always moving forward. Stay resilient and keep moving forward.
Life is funny, Anonymous, don’t be so serious.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reproduced with permission from: (Shenchao TechFlow)
Originally Posted by Ishita Srivastava
