With any new and exciting technology, startups flourish – and bitcoin is no exception.
Not all startups succeed, of course. Mt. Gox imploded in spectacular fashion, and BitInstant, too, went down in flames.
So, what does it take to make a startup work?
Bitcoin may be an exciting new paradigm that changes the nature of financial transactions, but don't be fooled into thinking that the old rules don't apply.
The most common piece of advice from the successful entrepreneurs CoinDesk spoke to was: don't develop a solution looking for a problem. Yet, many would-be entrepreneurs in bitcoin and other industries make that mistake all too often, by failing to let the market guide them.
Old rules may apply
“A new bitcoin business must be able to identify a problem, and solve it in a way that allows them to monetize their solution,” said serial bitcoin startup investor Roger Ver, who holds a majority stake in Blockchain, and who many call the ‘bitcoin Jesus’. He explained:
Joseph Lee, founder of derivatives trading site BTC.sx, has opened offices in Singapore, London, and New York since starting his company just over a year ago. He agrees, but adds that simply having an idea isn’t enough. Execution is key, he says.
Mt Gox was an example of a company that snagged a good idea before anyone else, but executed it poorly. BitInstant, too, failed because its website was improperly developed. Charlie Shrem’s indictment for money laundering came later.
Classifying startups
Serial bitcoin entrepreneur Erik Voorhees has had his fair share of bitcoin successes and failures. He was director of marketing at BitInstant, but redeemed himself with the 126,315 BTC sale of his online bitcoin gambling company, SatoshiDice, to an undisclosed buyer a year ago.
As such, he can speak from experience when he describes three different types of bitcoin startup.
The first are formal companies that are constrained by regulatory guidelines, such as in the US.
“These companies must prepare to follow not only every US government rule, but every potential future government rule, and every potential future retroactive rule,” Voorhees explained.
The second type are formal companies that abandon a strict regulatory jurisdiction and find a more liberal climate for their operations (SatoshiDice stopped serving US residents, for example). They lose a large market, but they also lose a large legal headache, Voorhees pointed out.
The third type of corporation wasn’t possible before bitcoin, he suggested:
Funding options
The type of company that you choose will inevitably have a bearing on the type of funding you need – and how you can get it. Many companies remain bootstrapped, developed by their founders without external funding beyond some basic friend or family input.
"It is certainly possible to bootstrap, but oftentimes angel and VC funding can quickly help to move things into high gear," said Ver. “Mostly this will depend on how capital intensive the business is.”
Typically, bootstrapping is more possible with offshore or decentralised bitcoin companies, suggested Voorhees. He adds, though, that companies enmeshed in onshore US regulatory issues will require more significant funding to overcome those legal hurdles.
Having said that, companies in the first category can go a long way before approaching investors.
Stephanie Wargo, BitPay's Vice President of Marketing, said that for the first two years or so, the company funded itself, and became profitable. It only went after angel funding at that point.
“We found that we needed to expand faster than our cash flow and took angel funding in early 2013,” she said.
will become an integral part of the bitcoin funding process, say experts.
“Once they become fully regulated then they will become an unstoppable force in determining which startups receive funding and which don’t,” says Lee, adding that crowdsales carry a unique advantage: validation.
That is, unless companies create a product or service that resonates with users and solves a clear problem, it is unlikely to attract the funding it needs through a crowdsale platform.
Team building
There are other important critical success factors for entrepreneurs wanting to develop successful bitcoin startups, said Lee. For one, become an expert in your field, he said. Lee worked in banking on two continents and wrote his own trading bot software before he started BTC.sx.
However, you can’t be an expert in all the aspects of running a company, so having a solid team is also vital.
“As your startup grows, surround yourself with the best people you can find, believe in them and the advice they give,” he said. “And, most importantly, have a little faith.”
Disclaimer: CoinDesk founder Shakil Khan is an investor in BitPay.
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