Should you Launch an STO?

Determine if an STO is Right for You

Assessing the readiness of your company for a fundraise, positioning your fundraise to the investor public, and executing the STO all belong to a process that starts with considering the following diagnostic questions.

Have you Raised Money Before?

The logic behind these questions is that your experience in any past fundraise is the best approximation of what your next fundraise will be like.

 

Quantify and qualify your previous raise in detail to gain a better understanding of how much time and money is required to make your next raise a success. Crucially, identify which resources from your last fundraise can be recycled.

If you raised funds before, what was your experience?

What happened that was unexpected or surprised you?

How long did the process take?

How many investors did you approach?

How many meetings with each investor on average did you perform?

Of the investors you reached out to, roughly how many converted to investment?

If you raised previously using a crowdfunding mechanism, what were the lessons you learned?

How much time and money did you have to spend on marketing?

What kind of investors were you reaching out to?

Through what channels did you reach these investors and which ones performed the best?

How did you use the funds you raised to fund the growth of your company?

Did you make significant progress with previous investors funds?

Are your previous investors willing to invest again?

Is your business currently investable?

Investors prefer businesses that are growing. Venture capitalists in particular want to know that a company can execute. Being able to communicate your company’s three key metrics (growth, control, quality) is critical in showing investors that you have a solid understanding of your business and a balanced approach to growth.

Growth Metric: How much is your customer base growing over time?

In general, the growth metric should be one that can grow without bound. For a generic mobile app company, this could be the number of users that have downloaded the particular app. This is the fundamental metric that underlies your revenue. It should be impressive to investors and help to secure a request for more information.

Control Metric: How often are your customers interacting with your product/service?

The control metric is usually a percentage (ratio) designed to keep your growth metric honest. For the generic app company mentioned above, growth in the number of app downloads is meaningless if no one ever uses the app after they download it. A reasonable control metric could be 30-day retention or, for example, the percentage of users that pay for virtual items at least once per week. The control metric prevents your growth metric from being a vanity metric.

Quality Metric: What is the quality of those interactions?

The quality metric shows that the interactions between customers and the product/service is actually valuable (revenue-generating). For the generic mobile app, a good quality metric could be the average amount of time or money users spend on the app every time they open it. You need to know that of all the users described in the growth metric, a subset of users is using your app frequent and deriving great value from it.

How much do you want to raise and at what valuation?

These are the standard parameters of any raise:

Pre-money Valuation 

How much the company is worth before the fundraise

Amount Raised

How much you want to raise from investors in your current round.

Post-money Valuation

The sum of the Pre-money and Amount Raised.

In other words, if you are raising $1,000,000 at a valuation of $9,000,000, then you are giving away 10% to investors for an investment of $1,000,000. That is,

 

Amount Raised / (Pre-money Valuation + Amount Raised)

= Amount Raised / (Post-money Valuation)

= $1,000,000 / $10,000,000

= 10%

 

A valid method of getting a baseline of what your valuation should be is to look at what companies with similar key metrics as yours have raised.

What will you use the raised funds for?

Investors will ask you piercing questions to determine if you have a good case for raising funds. One question which you should be extremely well prepared for concerns how you will use their hard-earned money.

Probably not a good way to spend money for most investors
Typically, investors like to hear some version of the following story.

“We are ACME Company. Our customers have [this problem]. We provide [this solution]. Because so many customers want our service, there are many opportunities that we cannot take advantage of because of [these reasons]. We need your funds to build out the means to address these unserved customers and make even more money.”



Investors want to know that you are going to use their money as a key to unlock even greater value, to accelerate a business that has already found product-market fit and needs additional capital to scale.



What investors do not like to hear is that you need their money to figure out your business model. That just sounds like substantial risk with minimal upside in the short to medium term.

When will you need the funds?

The best time to raise is when you do not need to raise. You can use your runway as leverage with investors. By not needing investor money, you can negotiate better deals, mainly because you have more time.

What are your other financing options?

Keep it simple. If you need to raise a simple bridge financing, it may be simpler for you to raise from your own circle. If you have existing relationships to people within VC or PE funds, explore these options as well. A traditional loan may serve you better than an STO in these cases.

Who are your target investors?

You are advised to build a list of investor profiles. Similar in concept to customer profiles, investor profiles generalize the types of investors that you believe will be receptive to your message. If you are raising money for a restaurant management software, you will likely want to target investors that are familiar with the Software-as-a-Service (SAAS) or Food and Beverage (F&B) industry. Additionally, you will want to determine whether you will pursue large funds or smaller angel investors depending on the stage of your company or the size of your raise.


Make sure to research the other companies that your target investors have ownership in. If your company can be of value to their current portfolio, you have a leg up. If your company is a direct competitor, investors may pretend to be interested in your company in order to get information from you, which they can use to help the companies they have invested in.

Why are you considering an STO?

Is it just the hype or have you done some deep research on what STO can offer? Are you able to articulate why STO can be a transformational technology for your company? Investors may test your knowledge of STO to see if you actually have a well-researched use case or if you are just using STO and blockchain as buzzwords to raise money.

How much PR exposure does your company have?

An overlooked aspect of how investors make decide to invest is the Google/Baidu search. Do you exist publicly on the internet? Does your company have a public profile on social media (at least LinkedIn)? Does your LinkedIn list you all of the founders as employees of your company? Better yet, is your company covered by a reputable media outlet?

 

If your company is completely invisible to the search engine, this is a major red flag.

How much spare capital can you set aside for marketing before and during your STO?

STO will require some level of marketing efforts and expense. Since it is a form of crowdfunding (albeit to qualified investors), you are going to need to deliver your value message in a scalable way. Understand what your value proposition is to formulate your message.

What resources do you have in the crypto industry? Do you have advisors who can guide you through the process?

If you are not already familiar with crypto, it will not be worth your time to learn the ins-and-outs of the crypto industry. In that case, you will need advisors that you trust to assist you in your STO. Use your advisors to give you a shortcut into the industry.

 

Make sure your advisors give you guidance based on fact, not purely opinions. Check them by asking them how they come to certain conclusions. Alternatively, you can ask them where to find the best resources on certain topics. For STO resources reach out to us at Security Token Network.

More To Come!

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