Crypto incubators have a responsibility to maintain financial discipline

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 investment helps startups focus on the fundamentals, which is beneficial in the long run. However, bear markets dry up sources of capital, and liquidity becomes the proverbial mirage of an oasis in the desert sands. Thus, startups turn to incubators who become messiahs with their networks of angel investors and venture capitalists.

Since 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 comply with crypto regulations to maintain fiscal discipline. To this end, guidance and advisory support help startups navigate the difficult terrain of the law while generating profits for investors.

But why must incubators focus on financial discipline? The answer lies in the past.

Ahistoricism could spell doomsday for crypto

Philosopher George Santayana said, “Those who cannot remember the past are condemned to repeat it.” Incubators have a lot 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 cash for new companies. However, the United States Securities and Exchange Commission (SEC) came down heavily on crypto startups using 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.

Related: CFTC action shows why crypto developers should get ready to leave the US

Without incubators, startups’ radar was less aligned with financial jurisprudence. The situation was a bit like a school without teachers to ensure discipline in the classrooms. However, 2017 had important lessons for the crypto sector.

Initially, incubators recognized the need for crypto startups to follow regulatory best practices. Therefore, some incubators recruited special teams that played an important role in helping startups comply with financial legislation. Complying with national crypto laws is essential if crypto companies are to continue providing services. One of the strategies for regulatory compliance is to develop a strong tokenomics model for crypto projects.

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

Strengthening of incubated projects with guidance

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

On the one hand, experienced experts reduce time to market, thereby helping projects grow and scale faster. On the other hand, mentors guide inexperienced developers in preparing project pitches for grants and fund applications. In addition, startups can take advantage of 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 track.

However, mentoring is not selfless service. Incubators have a stake in a company’s success because they are entitled to a significant portion of the company’s equity. So, a successful company will translate an incubator’s equity stake into millions of dollars with more investor interest. Thus, incubators have a great responsibility for maintaining a start-up’s tax 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 figure 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 can’t do much if the project founders can’t deliver.

In rare cases, startups ignore the advice of an incubator team, and abuse the support system. Instead of rejecting these cases, incubators can learn from these failed projects. First, incubators can strengthen the onboarding procedure and perform rigorous due diligence. Ultimately, incubators must work towards a more transparent and symbiotic relationship with start-up founders and management teams.

Related: Wave’s founder: DAOs will never work without fixing governance

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

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 herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.