Most startup ventures find themselves struggling to get customers and make adequate money during the first two to five years. There are several reasons for this. A large number of startup ventures are copycats of successful businesses and lack any innovation.
Hence, customers prefer established brands and companies with excellent market reputation. Others simply cannot make profits and find it difficult to sustain operations after the first year. Long payrolls, bills and other expenses threaten their existence and often sound death knell of the venture.
To overcome these problems, several entrepreneurs are now eyeing the blockchain technology. Some startups have launched blockchain-based ventures and offer services to crypto-currency exchanges and investors.
Others offer products and services in exchange of payments made in crypto-currencies, including Bitcoin. There are a few benefits and disadvantages associated with using blockchain for raising funds and keeping the business profitable.
Before exploring pros and cons of using blockchain for a startup, we have to understand what the term implies. In simple words, blockchain is an Internet based process that allows the flow of information. Blockchain is fairly secure since it prevents information being copied and manipulated.
Blockchain is used for the process of maintaining ledgers and enabling smooth flow of Bitcoin and other crypto-currencies that are gaining popularity worldwide. It is an emerging technology. Hence, it has several proponents and critics. Regardless, the blockchain holds some benefits for startups who wish to raise funds or make profits.
Pros of Blockchain for Startups
Blockchain can be used for a variety of purposes by startups. Here we look at the salient features of blockchain.
Blockchain Based Startups
Since blockchain is relatively new technology, there are very few startups who offer services directly connected with the electronic process of information flow and maintaining ledgers for crypto-currency transactions.
Hence, startup ventures can raise funds from crypto-currency aficionados to provide assorted services associated with blockchain. Indubitably, crypto-currencies are emerging as one of the lucrative forms of investment for high returns.
Hence it attracts people with moderate budgets to eye Bitcoin and other crypto-currencies as an ideal way to make money fast. This augurs well for blockchain based startups because they can offer products and services to the growing number of crypto-currency investors.
Attracting Seed Money
Startups require money to seed their business. Raising this amount can prove difficult since Venture Capitalists (VCs) are spoilt for choice when it comes to funding a business. Raising money through crowdfunding can prove cumbersome unless the startup offers excellent returns to investors. Using blockchain can help overcome these problems. A lot of VCs and members of the public hold Bitcoin and other crypto-currency.
Instead of seeking capital in traditional fiat currency, a startup can accept seed money in Bitcoin. Funding a startup with Bitcoin and other crypto-currencies enables VCs and others to leave their bank balance intact. Instead, they can put crypto-currencies to work and fetch high returns on investment.
Fundraising Across Borders
Blockchain is universal and unregulated by any individual, organization, conglomerate or government. Hence, it is easily accessible by anyone connected to the Internet from any location in the world.
This feature of the blockchain opens amazing vistas for startups. They can attract funding from any corner of the world, including countries that prohibit individuals from investing abroad in crypto-currency.
Secondly, startups can sell product and services in exchange of Bitcoin and other crypto-currencies. Startups can maintain a specific price in crypto-currencies for their services and products, without having to bother about exchange rates typical of metal-and-paper money.
Cons of Blockchain for Startups
While blockchain offers some inherent benefits for startups to raise funds and do business, there are also some major disadvantages.
Lack of Regulation
As mentioned earlier, the blockchain is not regulated by any entity. Hence, there are various risks a startup will have to deal with. There is no dearth of hackers who will try and access crypto-currency wallets. Unless startup founders are well versed with blockchain and its risks, they can lose all money they collect through fundraising.
Hacking can also deprive a startup of its profits and money set aside for operations. There are no guarantees from any source that blockchain will remain in existence for years to come. Some governments may ban blockchain altogether because crypto-currencies are being increasingly used for illegal activities ranging from tax evasion to funding terror. Rogue regimes are also using crypto-currencies to sponsor various activities against other countries.
Wild Swings of Crypto-Currencies
Raising funds in crypto-currencies is fine. However, startup founders need to be aware that crypto-currency rates fluctuate wildly. Unlike fiat currencies, the rate of Bitcoin and its counterparts are decided purely by market demand and supply. A VC may invest in a startup using crypto-currencies worth a fixed amount of UD Dollars, Euro, Yen or other major currency.
Return on investment a VC will expect will depend upon the value of the crypto-currency on the date it is deposited into a startup’s account. Should a crypto-currency rate fall drastically, startups will find themselves falling short of the necessary capital. A classic example is Bitcoin that almost touched US$ 20,000 mark in mid-December 2017. Three months later, in March 2018, Bitcoin rates hovered around US$ 6,500.
Though blockchain has been around since 2008, a little before Bitcoin made its appearance, its technology remains complex and difficult for most common persons to use effectively. This means, startup entrepreneurs will have to hire blockchain experts while raising funds for the venture and sustain business with crypto-currencies.
The number of blockchain experts is also limited. Those available will demand very high salary or work only as consultants. This is detrimental to startups that lack sufficient funds to pay huge salaries and consultation fees. Accessing the blockchain is also a slow and often tardy process. Computing to access blockchain consumes massive amounts of electricity and can send power bills skyrocketing for startups. The huge amount of power and massive data also makes blockchain to create an adverse impact on environment in an era where green businesses are in demand.
Before venturing into any startup that utilizes blockchain, it is advisable to familiarize with this technology. An increasing number of businesses now offer Bitcoin and other crypto-currency payments in return of goods and services. It is quite likely this number will increase in years to come.
For any startup, using the blockchain for fundraising and doing business is preparing for future and stealing a heads-start over competitors. Blockchain dispenses with the need for a startup to keep complex records of financial transactions. Blockchain can be accessed round the clock and hence, transactions can be made without any interruptions throughout the year.
On the other hand, a startup that raises funds or conducts business through blockchain also faces the risks of being labeled as scam or falling prey to frauds associated with Bitcoin. Crypto-currencies have come on radar of law enforcement agencies around the world.
Hence, even a perfectly legit business faces the risk of doing business with a terror network and facing severe legal consequences because there are no known ways to identify a customer or financer. Hence, it is essential to know the pros and cons of blockchain for fundraising and business operations for a startup.