12. How to pitch your blockchain startup to a skeptical investors
If you are launching a blockchain based company, I have some specific advice for you. Right now, I see many times more blockchain and Initial Coin Offering pitches than anything else. And most of them are bad. This creates additional hurdles that I want to help you navigate.
Unfortunately, this tsunami of bad blockchain pitches means that you have very little time to convince me, or any other potential investor, that your business is different. In many cases it seems like the companies are just talking about blockchain to be buzzword compliant. It is the thing everyone wants to have, like AI or machine learning. They also frequently seem to be poorly thought through and run by inexperienced management.
I suspect that the fundamental problem is that many of these founders don’t really understand blockchain technology. In many cases they are being used for applications where other solutions would work much better. One reason I hear is that “blockchain is free”, which is a giant red flag to me. Not only is it not free, it is slow, inefficient, and one of the most expensive ways of processing transactions or storing data imaginable.
To really hammer home that point, let’s look at the cost to store a gigabyte of data forever. This already gives blockchain an advantage since it has to keep the chain forever while most databases don’t. This article shows that it costs about $100 to store 1GB forever using conventional databases on the cloud, while on Ethereum it costs over $4.5 million, and on the Bitcoin chain it would cost almost $23 million. Of course, there are hybrid solutions that avoid most of this, but as soon as I hear “blockchain is free”, I am done.
Many of these businesses are built on some kind of token. I can not imagine personally using most of the tokens I see in these proposals. If you can quickly and clearly articulate why this will be valuable to the end user, and provide a seamless experience, your pitch will already be far ahead of most others. Explain why tokens will work better than simple direct payments or other well known mechanisms.
Smart contracts form a key element of many of these proposals without much consideration for security or edge cases. There have been a number of situations where bugs in smart contract code allowed for huge thefts of tokens or coins. Smart contracts can also be brittle, failing if their assumptions are violated. In conventional transactions there are humans in the loop who can make exceptions. If you can show that you have thought through these issues it will help investors take the idea seriously.
If entrepreneurs who don’t understand blockchain are common, then investors who don’t understand them are almost ubiquitous. I often see angel investor’s eyes glaze over as soon as the founder starts talking about blockchain. It is critical to keep your explanations simple and at a high level.
One frequent area of confusion is over what the investor is actually buying. Is it equity in the company, a security token, use token, cryptocurrency, or something else? They are rightfully concerned that many of these vehicles lack the legal protections of ordinary stock purchases. In particular, they may not include voting rights, board seats, or other influence on the direction of the company. While that may be fine for a $20 crowd funding investment, people expect much more when they are writing a check for $100,000.
Investors also worry about how an exit will work. If the company is acquired, how does that flow through to the investors? Can this security token based company be acquired by a conventional company?
One of the claimed advantages of tokens is their liquidity. Investors will want to understand the mechanics of that. How will they find the people to buy their, tokens and how will the market set the price? This article analyzes the issues of token liquidity.
Investors need assurance that their investment is safe. They worry that a hard drive failure could wipe out the wallet with their entire investment, or a hacker could steal the tokens. Even worse, with over 80% of ICOs being scams according to a 2018 study, it may take significant effort to convince them that yours is not.
When I hear a blockchain company pitch, I am looking for five things:
Why is blockchain part of this business? Why can’t you use simpler and cheaper options?
What would I be buying? What kinds of rights and protections come with that?
If there is a utility token involved, why will people actually use it and what will cause the value to increase?
What is the full business plan? It should include things like marketing, sales, growth projections, defensibility, competition, and the management team.
How I make money if the company succeeds? What are the likely exit or liquidity events? Who are the likely acquirers? What comparable support your projected exit valuation?
If you have all five elements in your pitch, investors like me will take it seriously.
Till next time … Ciao!
