Investment Risk Management for Crypto Companies Seeking Funding: A Guide

Mapping Out the Current Landscape of Crypto Funding

What has characterized the crypto market for two years now is impressive resilience and adaptability. PitchBook’s Q4 2024 report highlighted the industry’s almost flat YoY numbers despite increasing regulatory scrutiny and a volatile economic landscape, demonstrating the sector’s ability to surf the waves in a post-FTX and Silicon Valley Bank environment.

While deal numbers remained almost identical — 1,936 in 2023 versus 1,940 in 2024 — there were positive fluctuations in company valuations, which helped keep fundraising steady, especially for early-stage startups. In fact, their valuation more than doubled, jumping by 109% to $52.3 million. Although late-stage didn’t experience such a stark change, valuations still increased by almost 4%.

Overall, valuations went from $43.7 million to $45.3 million; a massive win for the industry.

These figures are also reflected in deal sizes. For seed stage, deal size rose by 20%, almost the same level as 27% for early-stage, and a slight decrease for late-stage startups.

This showcases investor behavior perfectly: they’re willing to go big on seed and early companies rather than scattering their capital across the entire lifecycle spectrum. They might feel as though crypto is freshening up, supporting young and bright ideas and moving away from the later stages.

Here’s how subsectors performed in 2024:

• Web3 initiatives received the bulk of the industry’s investments with $806 million across 18 deals.
• Companies that increase accessibility, such as wallets and exchange services, came in second for most capital raised, with $403.6 million across 14 deals.
• Surprisingly, infrastructure and developer tools only raised $239.2 million but got the most deals — 22.
• Blockchain networks and DeFi follow suit, with $220.1 million raised across 17 deals and $172 million across 14 deals respectively.

These numbers come after a year where global crypto regulation began to take shape, especially with the EU’s Markets in Cryptoassets (MiCA) regulation, which has become the pillar for future rules. This new framework aims to rein in stablecoins, e-money token issuers, crypto traders, exchange services, and more. It aims to protect users, overall financial stability, and reduce illicit activities — this is the same direction the rest of the world might be heading.

This includes the US, especially as the current administration increasingly supports digital currencies, with President Trump emphasizing that the country will become “the Crypto Capital of the world.” Shortly after, the White House released an executive order to promote responsible crypto usage (such as stablecoins), protect users, and avoid Central Bank Digital Currencies (CBDCs).

On the other hand, the Financial Action Task Force (FATF) was established in early 2024 to enforce Anti-Money Laundering (AML) standards that protect users even further.

Understanding the Unique Risks of Crypto Funding

These financial prospects and regulatory advancements are exciting for the crypto world, but don’t come without their share of ongoing risks. Whether to protect investors or startup founders, it’s key to highlight the unique and inherent risks that this innovative way of circulating capital brings.

Market Volatility

It’s no secret that the crypto market experiences volatility and price fluctuations, natural to such novel currencies. This means great highs today could be followed by extreme lows tomorrow, like the notorious Bitcoin (BTC) crash of 2011 — which fell by 99% to be worth one cent — or the 2020 crash, which halved prices due to the COVID-19 pandemic.

Although founders may be familiar with the ebb and flow of cryptos and comfortably overcome these crashes, investors might want to be more careful to avoid massive losses.

Regulatory Uncertainty

The crypto space has been pushing for regulatory standardization that can give players more stability and confidence, and attract more investors and users to join the market. However, there’s been anything but that, with MiCA beginning to scratch the surface of what global regulations can look like.

These fluctuations in how each jurisdiction regulates crypto, and the ongoing changes coming into effect at any point in time, add a level of uncertainty that can make investor due diligence a complex matter, driving funds away.

Technological Risk

Blockchain technology is lauded as a safe and bulletproof method to transact assets, record smart contracts, and avoid third-party involvement due to its decentralized nature.

The truth is, as an evolving technology, it’s been highly vulnerable to breaches that can erode investor trust, delay fundraising deals, and compromise a startup’s business model altogether. For example, costly DeFi protocol breaches and private key mismanagement can lead to immense asset loss.

Operational Risk

Crypto startups require a higher level of management, expertise, and cybersecurity to successfully navigate the ever-changing landscape. As such, founders, executives, and other team members must function in unison to ensure their objectives are met, systems function properly, and deals go through smoothly — avoiding timeline and budget overruns.

Competition

Crypto is known for welcoming fresh and enthusiastic entrepreneurs ready to challenge traditional financial institutions and services. This influx of players in the landscape makes competition fierce as innovations come and go at breakneck speeds. As a result, startups must always feel the pulse of the industry and iterate as needed to stay competitive and survive in the industry.

Liquidity

Crypto’s volatility lends itself to liquidity issues if users convert to fiat currencies during down periods. Just like a crypto bubble can return massive gains, this too can take a turn when there’s a crash. In 2024, the introduction of ETFs, the halving event, and increased regulation helped coins like Bitcoin regain momentum, making it a good time to convert. In less favorable times, crypto investments could translate into significant losses, and a decrease in valuation.

Reputational Risk

The industry’s unregulated and decentralized dynamics have led to numerous fraudulent activities, like scams, market manipulation, and rug-pulling that continue to happen even today. These incidents tarnish the industry’s reputation, making serious companies work harder to stay transparent and trustworthy.

Legal and Contractual Implications

Crypto contracts require lots of attention to detail and no space for ambiguity. Jurisdiction changes, the lack of standardized regulation, and market volatility can leave investors and founders vulnerable to the fine print, which is why protections, exceptions, and other contractual avenues are necessary to protect all parties.

Key Stages in Crypto Funding

If you’re looking to secure funding, it’s vital to understand every stage of the process to lead a comprehensive round that gets you exactly where you need to be. Here’s what you need to know:

• Preparing for a Funding Round: Raising venture capital requires a strategic approach to secure funding on favorable terms. When your startup is preparing for a Series A or B round, you must develop a clear fundraising strategy, outlining key factors like a strong market traction, financial stability, and a scalable business model.

And, while there are no strict prerequisites, follow industry best practices by getting insights from experienced investors and peers to maximize your chances at succeeding.

• Finding the Right VC: Securing the right venture capital partner goes beyond just obtaining funding — you must build a strategic relationship that aligns with your company’s vision and growth goals. In this process, identify investors who specialize in your industry, have a track record of supporting similar startups, and can provide valuable mentorship and networking opportunities.

For Series B, your focus should shift to finding new investors who can contribute more than just capital, lending their expertise in scaling operations.

• Creating the Perfect Pitch Deck: A compelling pitch deck is essential in attracting investors, as it’s the primary tool for communicating your startup’s vision, business model, and market potential.

The pitch deck should be clear, concise, and visually engaging, covering key areas such as the problem you’re solving, the solution, market size, competitive advantage, traction, financial projections, and the funding ask. Aim for a strong opening — as it sets the right tone — and build each slide persuasively.

• Navigating the Term Sheet: A term sheet outlines the key terms and conditions of a VC investment and serves as the foundation for legal agreements. While not legally binding, it helps you set expectations for valuation, ownership structure, investor rights, and governance. So, you must carefully negotiate terms to ensure they retain sufficient control and flexibility for future growth, instead of being a losing deal for you.
• Getting D&O Insurance: Directors & Officers (D&O) insurance is an essential safeguard for your startup, protecting executives and board members from personal liability related to company decisions. It’s also a requirement for investors in many cases because it adds legitimacy and mitigates risks associated with leadership actions — it covers legal costs, regulatory investigations, and financial damages stemming from management decisions. That way, you can operate with confidence and investors can trust you with their capital.
• Negotiating the Deal Closing: This requires skillful negotiation and lots of attention to final details. For example, for Series A, founders must align with investors on valuation, governance, and growth expectations before finalizing agreements. Series B introduces additional complexities, including operational changes, expanded teams, and new product developments.

Building an Investment Risk Management Framework

Shielding from risks requires certain steps to help you identify, assess, mitigate, and monitor potential threats. Following them can keep your funding rounds safe from harms like unfavorable terms, difficult investors, downrounds, and more.

Risk Identification

First-time founders can greatly benefit from leaning on their more experienced peers and doing networking to discover the potential risks their crypto business might face when entering a funding round.

Since you might have little to no historical records to assess your future risks, explore industry reports of identified risks. This can give you a real-life perspective on issues that could pose significant risks, whether they’re technological failures, market conditions affecting prices, faulty operations, legal issues, etc.

Risk Assessment

After identifying potential risks, make sure you know which ones are more likely to arise in the investment process based on the nature of your business model, current industry landscape, and your management team. A risk assessment matrix might make the process easier as it helps you visualize the probability and severity of threats.

Risk Mitigation

While the potential risks your startup could face are spine-chilling, there will always be ways to effectively mitigate them. In the crypto space, there are multiple ways to do this. Here are a few examples:

• Diversification: Diversifying your project’s token holdings and treasury management.
• Hedging: Using derivatives or stablecoins to mitigate market volatility when other cryptocurrencies show signs of slowing down.
• Insurance: Exploring available insurance options for cyberattacks, theft, downtime, and other risks.
• Compliance: Implementing robust KYC/AML procedures, keeping an eye on evolving regulation, and promptly adhering to them.
• Security Audits: Conducting regular security audits of smart contracts, systems, and other activities involving sensitive data.
• Contingency Planning: Developing plans for responding to adverse events, such as market crashes or security breaches.

Risk Monitoring and Reporting

Keeping current threats at bay involves constantly monitoring them to ensure their severity or likelihood hasn’t increased due to internal or external company changes. Regularly reporting any findings can help you build a track record of ongoing threats, enriching your own risk analysis and management strategies with relevant data as time goes by.

Setting up key risk indicators (KRIs) can be quite helpful in this phase as they provide a roadmap of your main and significant risks as opposed to less important ones, helping you increase your chances of success. This is also where identifying your startup’s appetite and risk tolerance becomes crucial, learning how many risks your company can and is willing to take.

Building Investor Confidence Through Risk Management

Instilling confidence in investors that your startup is worth betting on has a lot to do with effective risk management strategies. Demonstrating that you’re committed to responsibly and successfully growing your company — and their capital — makes you an attractive candidate on top of your business model.

To start, it’s important to maintain ongoing and transparent communication with investors, informing them of what’s truly happening at your startup without sugar-coating or withholding key information. This shows them you’re willing to show the good and the bad; at the end of the day, the startup journey isn’t pitch perfect.

This ties into making the due diligence process easier for investors, which helps you secure good deals without friction. Providing relevant documentation like management team profiles, financial records, technical files, and legal documents will streamline their vetting process.

Likewise, demonstrate your risk management strategy in a legible and even take-home format for investors to assess. For example, a SOC 2 report validates technical analysis of your risk exposure and data security practices by a CPA firm in a digestible format. So, provide worthwhile documentation that you’re taking risks seriously and working to mitigate them.

Lastly, ensure you’re pulling your startup messaging together by building a strong and trustworthy team, and crafting a compelling narrative that communicates your values, mission, company culture, and using proper risk management and assessment strategies.

Crypto Investment Risk Management Done Right

Learning lessons from those who’ve already walked the walk works like a charm — let’s highlight a notable recent example of a startup that successfully navigated funding rounds despite headwinds.

Fireblocks is an enterprise-grade platform that helps move, store, and issue digital assets. The company has raised funding up to Series E, which it recently closed at $550 million with investors like Sequoia Capital and Spark Capital.

Their success could be attributed to key factors like investor portfolio diversification by securing investment firms and strategic partners, focusing their attention on implementing innovative technologies that address salient market risks, and partnering with experienced financial institutions.

As a company that securely stores crypto assets, they use breakthrough MPC (Multi-Party Computation) and patent-pending chip isolation technology to protect private keys and API credentials. This demonstrates they’ve invested the time and capital in building a trustworthy team of experts and a product that solves one of crypto’s biggest concerns: asset theft. They’ve also managed to stay relevant in a fast-evolving industry and gain credibility thanks to their financial partners.

Delving into the crypto world can be daunting yet highly rewarding for those willing to gather the best teams and technology to build safe and democratized solutions in the blockchain. As the industry goes through a positive financial time, market capitalization and more regulations give investors a confidence boost, fundraising becomes more approachable — and we can help you avoid risks and pitfalls along the way.

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