Crypto incubators have a responsibility to maintain fiscal discipline

Published at: Oct. 23, 2022

Contrary to popular belief, a bear market provides ideal conditions for startup founders and developers to work on technological innovations. The absence of market frenzy and speculative investing helps startups to focus on the fundamentals, which are beneficial in the long run. However, bear markets dry up capital sources, and liquidity becomes the proverbial mirage of an oasis in the desert sand. Thus, startups turn toward incubators who become messiahs with their network of angel investors and venture capitalists.

As incubators hold the key to funding, they are powerful enough to make or break a crypto startup. And, as Marvel’s Spider-Man reminded us, “With great power comes great responsibility.” Incubators, therefore, play a crucial role in guiding startups to adhere to crypto regulations to maintain fiscal discipline. To this end, mentoring and advisory support helps startups to navigate the tricky terrain of law while generating profits for investors.

But why do incubators need to focus on fiscal discipline? The answer lies in the past.

Ahistoricism could spell doomsday for crypto

The philosopher George Santayana said, “Those who cannot remember the past are condemned to repeat it.” Incubators have much to learn from the 2017 initial coin offering (ICO) craze to avoid the same mistakes in 2022.

Crypto startups flooded the market in 2017, with ICOs generating quick money for new companies. However, the United States Securities and Exchange Commission (SEC) came down heavily on crypto startups in applying the Howie test used for traditional securities.

A later report found that 80% of 2017 ICOs were scams, and crypto’s legitimacy took a hit. But to be fair, there was an absence of crypto incubators to guide startups in the right direction.

Without incubators, startups were radar less in conforming to financial jurisprudence. The situation was somewhat like a school with no teachers to ensure discipline in classrooms. However, 2017 had important lessons for the crypto sector.

To begin with, incubators realized the need for crypto startups to follow regulatory best practices. Therefore, some incubators recruited special teams who played an important role in helping startups comply with financial legislation. Adhering to national crypto laws is crucial if crypto companies have to continue providing services. One of the strategies for regulatory compliance is developing a strong tokenomics model for crypto projects.

Therefore, incubators became responsible for overseeing robust, utilitarian and growth-based tokenomics with appropriate safety nets like token vesting to prevent scams. By focusing on strong token economies, incubators ensure a safe investment space and sustainability for crypto projects. Apart from tokenomics, incubators have other responsibilities to maintain fiscal discipline.

Strengthening incubated projects with mentoring

People tend to believe that the most important role of incubators is bootstrapping liquidity for new projects. However, incubators have a larger role in guiding and mentoring startups. Some incubators have their own crypto experts and professionals who assist startups with ideation and strategizing. These in-house crypto veterans contribute during the ideation stage, utilizing their vast knowledge base to refine project ideas.

On one hand, seasoned experts reduce the time to market, thereby helping projects to grow and scale faster. On the other hand, mentors guide inexperienced developers to prepare project pitches for grants and fund applications. Moreover, startups can benefit from the wide network of experienced professionals to connect with influencers, domain experts and CEOs. These advisory forums provide the necessary guidance to help startups stay on the right track.

However, mentoring is not selfless service. Incubators have a stake in a company’s success because they have a claim over a significant portion of a company’s equity. So, a successful company would translate an incubator’s equity shares into millions of dollars with more investor interest. Thus, incubators have a huge responsibility for maintaining a startup’s fiscal discipline.

But, there is a caveat.

Responsibility should never become a burden

The National Business Incubation Association has highlighted that 87% of incubated businesses survive after five years. That’s an impressive number considering companies that go solo have a success rate of just 44%. However, incubators cannot go overboard to ensure a project’s success. After a point, incubators cannot do much if the project founders fail to deliver.

On rare occasions, startups ignore an incubator team’s advice, misusing the support system. Rather than dismissing these instances, incubators can learn from these failed projects. For one, incubators can strengthen their onboarding procedure and conduct stringent due diligence. Ultimately, incubators must work towards a more transparent and symbiotic relationship with startup founders and management teams.

Incubators are not just another cog in the crypto machinery. Rather, they provide the foundational base on which crypto companies innovate to build an entire ecosystem. But, incubators must ensure that their responsibility to maintain fiscal discipline never becomes a burden.

Gaurav Dubey is the CEO of TDeFi, a crypto incubator and adviser for blockchain startups incubating and advising decentralized finance, nonfungible tokens, gaming and other crypto projects for more than 45 companies. Before joining TDeFi, he ran a Bitcoin mining firm and made several investments in crypto startups.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.