Fund Raising for Startups (and monetization of business models) in the Bitcoin Era
By: Anuj Varma, Physicist, Technology Architect
Tags: Decentralization, Dapps, Blockchain, Ethereum, Bitcoin

Also read Blockchainable Industries, to get an overview of the industries being disrupted by Blockchain.

Say you are on the verge of launching your next killer app. A couple of immediate challenges that you will need to overcome include:

‘Don’t want to be shut down’ — You would like to ‘host’ your app in a manner that it cannot be shut down (think Napster for a real world example; think of a facebook like app in China for a hypothetical example). This is primarily a ‘technology’ challenge — and needs to be overcome using technology. ‘Don’t want to run out of money’ — Not only do you want to ensure that your app cannot be shut down, you also want to ensure that there’s enough funding to secure the longevity of the app. This is primarily a ‘business’ challenge — and may need more than just tech to overcome.

Essentially, you need a monetization model that is both, self-sufficient and self-sustaining (Monetization here includes start up funding (CapEx) as well as ongoing maintenance costs (OpEx)).

Traditional bank loans will not work, since the bank can either default or simply be subject to a ‘change of heart’ and withdraw funding (before they issue your loan). Also, such a model isn’t self sufficient or self sustaining.

So, your startup is faced with these two challenges:

Technical Challenge — You need to deny any single server / host / hosting agency the power to shut down your app. Funding Challenge — You need to monetize your app in a way that ensures longevity.

The solution to your first challenge is something called ‘Decentralization’. More specifically, we talk about the key defining feature of Decentralized Applications : Censorship Resistance.

Decentralized Consensus (aka Censorship Resistance)

Censorship resistance means that an application resists any form of censorship. This includes curtailing it’s hosting, it’s distribution, it’s viewership (think of a Facebook type of app in China) and most importantly, it’s transactionality.

Anything placed on a blockchain is replicated among hundreds (even thousands) of nodes, distributed across the globe. This process can take a few minutes to a few hours.

What goes into a blockchain cannot be deleted, modified or ‘silenced’ by any organization (including governments).

Yes — there are ways around this. If 20% of Bitcoin nodes reside in China and China bans bitcoin altogether, that’s a fifth of the network disappearing overnight. However, more nodes will spring up elsewhere in the world, should such a scenario occur.

Censorship Resistance isn’t just a fancy theoretical term. Bitcoin’s success is partly based on this censorship resistance; any transaction on the bitcoin network, once finalized (approved by 6 or more peers), is final and cannot be reversed.

ANYONE can become a validating node; regardless of where their computer may be located. Just like a jury, once the network (at least 6 nodes on the network) validate a transaction, it is deemed to be final and irreversible. This is sometimes referred to as ‘decentralized consensus’.

Censorship Resistance means that you have solved the ‘Technical Challenge’ listed above. There is no way to shut down the multitude of nodes involved in decentralized consensus.

While a global currency such as Bitcoin may need censorship resistance, it is important to note that the world has gotten along just fine without censorship resistant apps. The types of apps that may benefit solely from censorship resistance may seem to be somewhat limited.

Now let us examine our second challenge — the business challenge of ‘not running out of money’ (Ongoing Funding).

This too can be solved with Decentralization. More specifically, by introducing an internal, decentralized currency. That’s right, your very own currency!

Decentralized Internal Currency and Development Teams (Compensation for maintenance of Nodes)

If you were building a regular (non blockchain) app, your monetization options were aplenty. Your app could charge for subscription, could generate ‘ad revenues’ and more. However, in a blockchain, you do not have these options (how would your dAPP serve ads?).

So, that begs the question, how do you ensure a continuous stream of funding for your app’s day to day development and upkeep?

The answer is ‘scarcity’. If your app has resources that are scarce and you generate a demand for these resources, users would pay for these scarce resources. Such payment would typically entail an internal currency (token) defined specifically to work for that scarce resource.

What constitutes this scarce resource? It could be compute power (as in the case of bitcoin), it could be a combination of compute and storage (as in the case of Ethereum) or it could be something totally different that only exists on the app (such as kittens on CryptoKitties).

Such a monetization model (introduce a scarce resource and charge users to use this resource), is applicable to just about every dApp.

App Longevity — Decentralized Dev Teams

In addition, what if you could also decentralize your entire development team?

It strikes you, that app longevity is not just a question of having sufficient funding (monetization), it is also a function of having a team that survives the ups and downs of your startup. To accomplish this, you may find the need to decentralize your development team.

The answer, as you have guessed, lies in open sourcing your app, which means that ANYONE and EVERYONE (with a development background) can help maintain it. Of course, they have to believe in the vision of the app…

Summary — What’s the Trade-Off?

Decentralizing is a game changer and provides significant benefits that were not possible with centrally hosted software.

The tradeoff (since the server is absolved of all responsibility), is that you, the end user, are typically responsible for storing parts of the transactional data (your private key). Lose the private keys and you lose your underlying assets.

This happened very recently in the case of a bitcoin billionaire who died of a heart attack in Mexico; his next of kin were not privy to his private key, leading to millions lost.

This may sound scary, but there are several workarounds. For instance, it is possible to have multiple signatories on your private key storage, allowing retrieval of your private key in case you happen to misplace it. There are also the ‘Coinbases’ of the world, that will happily store your private key for you.

In the end, the decision rests with you — the designer of the app.

Will your app benefit from censorship resistance (think Facebook in China or Napster in the US)?

2. Will your users be willing to ‘pay as they go’ for the scarce resource your app provides?

3. Most importantly, will the end users of your app be open to ‘being their own bank’ as opposed to having someone be their banker?

If the answer to these questions is YES, your app needs to be a dAPP! And if you can successfully address the three questions above, chances are your app will outlast the Watsapps, Twitters and the Facebooks of the world.

Happy Monetizing in the bitcoin era!

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Also Read

Blockchainable Industries

Public Key Infrastructure (read this post to understand why PKI was as key an enabler for bitcoin, as was blockchain technology)