Cryptocurrency Venture Capital 101

In 2020, despite all of the volatility, Covid-19 and the side-effects of a pandemic, breakdowns in the supply chain and fractured workforces, there are still assets that continue to grow in value. In 2019, Bitcoin was the best-performing major asset for the entire year; more than gold, oil and more. The best performing investment fund in the world last year yielded 296% in appreciation, which is absolutely enormous compared to the S&P 500 (18.7%) and the Global Dow (12.9%).

Of course, this article is here to explore the space in the cryptocurrency world where venture capitalists are looking to make big bucks through solid investments. First of all…

What is venture capital funding in the cryptocurrency space?

Image via WiredVC

To begin with, Venture Capital is a type of financing or investing that is offered by professional and organised investors as a service or activity. These groups of investors may also contain banks and very wealthy individuals and they band together into VC firms to help entrepreneurs and startups, typically in the early expansion stages of their business, to secure funding that will accelerate their growth. 

Why would these VC firms help these businesses to get the money? The answer is profit. VC financing looks to support innovative business concepts, disruptive technology, and unmissable products so that gigantic returns can be made in exchange for helping to supply funding. Along with profits, they often provide some expertise and gain some voting rights or a position on the board of directors. 

Image via Researchgate

With all investment comes risk, and VC financing is plenty risky, which is why VC firms diversify their portfolio and fund various different projects simultaneously. When it comes to VC funding in the crypto space the only real difference is that the businesses and projects receiving the financial injections are cryptocurrency companies. So, if investing in established industries is risky, then investing in an industry little more than a decade old that is burdened with chaos, scams, and volatility seems pretty akin to gambling.

Digital businesses and products have a pretty short shelf life in general terms, but most investors would have loved to have bet on Apple, Microsoft, AOL, and more. Accepting that some of these crypto-companies won’t survive five years, as the technology outpaces itself, is part of the risk VC firms are (or aren’t) willing to make. Some of these cryptocurrency projects will be major players in the financial space, and already some of them are worth hundreds of millions and even billions of dollars. 

Amazingly, we are already seeing VC firms that invest solely in crypto, as you will see in the next section.

Who are the top cryptocurrency venture capital firms?

Image via CryptoFundResearch

Below you will see the top 10 cryptocurrency VC firms and the number of deals that each one has made in the crypto-world. 

  1. Digital Currency Group – 127
  2. Blockchain Capital – 57
  3. Pantera Capital – 56
  4. Digital Horizon Capital – 38
  5. Fenbushi Capital – 36
  6. Plug and Play Tech Center – 32
  7. 500 Startups – 31
  8. Andreessen Horowitz – 30
  9. NEO Global Capital – 27
  10. Boost VC – 25

Topping that list by a country mile, you’ll notice the name Digital Currency Group. If you’re not familiar with DCG, you might be familiar with some of the crypto projects that they’ve invested in, such as Decentraland, a similar game where you can create the world you play in and the avatars with which you explore. Back in the real world, they’re also major investors in well-known crypto businesses like Coinbase, Bitpay, Ripple and Ledger. 

What are the biggest VC deals ever?

Back in July 2018, a mining giant in the crypto-world called Bitmain closed an exceptional Series B funding round that saw them valued at an extraordinary $12bn. As a result of this valuation, they raised a lot in equity finance, and whilst the exact figure has not been announced, it is confirmed to be approaching $400m. This would make it possibly the biggest VC deal ever, although the Chinese firm is not fully transparent over the circumstances.

Second on this list is Robinhood, a trading app that offers zero-fee exchange activities, and raised a stunning $363m in May 2018 with a valuation of $5.6bn. The platform already boasts more than 4 million brokerage accounts and has processed hundreds of billions of dollars in crypto-trades. The venture capital firms involved in this raise include DST Group, Sequoia, Kleiner Perkins, CapitalG, NEA and Thrive Capital. 

The next biggest VC raise comes from the very well-known Coinbase, which got a massive coup in October 2018 when they raised $300m after a valuation of more than $8bn. 

2019 saw Ripple raise $200m, whilst crypto-mortgage company Figure raised $103m. 

What’s the difference between an ICO/IEO and venture capital?

There is often a bit of confusion on the crypto-investment front when it comes to understanding the difference between ICO, IEO, and Venture Capital investments. Let’s try and simplify it to dispel the confusion.

  • ICO – An Initial Coin Offering is a crypto crowdfunding method whereby a new cryptocurrency sells its tokens at an introductory price to attract investors (which can be members of the general public). The investors are not obliged into any equity commitment and do not need to provide any expertise or support – it is simply about raising money by selling tokens.
  • IEO – An Initial Exchange Offering is very similar to an ICO, except rather than selling tokens to grow a cryptocurrency project, they sell issued digital tokens to help launch or grow their cryptocurrency exchange. Many of the people or groups who purchase these tokens are retail investors. 
  • Venture Capital  – Crypto-related venture capital firms are comprised of institutionally recognised or accredited investors who bring high levels of expertise, quality demands, and particular connections to a project. 

There’s another major difference too, and it relates to reliability and trustworthiness. Anyone can release an ICO, all you need is a short white paper, half an idea, and a bunch of friends who know how to use a computer, and to be frank, you can also just pay a service to do all that for you. Launching an ICO doesn’t mean your project is real or ever will be, which is why thousands of people have been scammed over the last few years, as opportunists launch bogus ICOs and then disappear with whatever they can quickly raise through token sales. The VC space doesn’t have the same problem, as so much vetting and investigation takes place to ensure that the company has a bold vision, an experienced team, and a viable technology.

Note: Another notable dissimilarity between VC financing and ICO/IEO is that with VC it can be 10 people investing $1m each, whereas an ICO/IEO is more likely to be 1 million people investing $10 each.

Can any crypto project seek Venture Capital financing?

Technically yes, but realistically, no. Any crypto project, business, or startup that wants venture capitalists to put their money into their mission must be able to demonstrate at least a working minimum viable product, or deliver an exceptionally well-prepared pitch. The people who comprise the crypto-team should be experienced, qualified, or bring knowledge that few others can offer, as the team will be vetted to a high degree by any potential investors.

Another quality that a crypto project should have is a willingness to embrace outside ideas and opinions, as well as being accepting of the fact that accepting VC will require the founders to give up a significant stake in their business. 

Retail investors are perhaps the largest type of trader by volume in the crypto world, and you could think of them as small brokerages, newer exchanges, or traders who run their own trading collective on behalf of friends or paying customers. In order for them to maximise profits, they will buy coins at low prices and sell them to new customers at higher prices. For them to ‘invest’ in a startup or new project and try to sell those tokens to their retail customers, they will need to see a high-quality white paper and a clear roadmap for the project.

The brightness of the future…

It would appear that venture capital firms are in a really great place now with the cryptocurrency market. 2020 has seen Bitcoin’s value steadily rise whilst at the same time, the number of scam ICO projects has dropped. Those scammers have moved onto other avenues, meaning that a higher percentage of legitimate crypto-businesses are getting off the ground. 2020 has also seen crypto play an exciting role in the global pandemic, as people around the world were able to use cryptocurrencies when their financial situations took a dire turn. The advancements in Blockchain technology also helped around the world when it came to creating track and trace systems, as well as advanced databases for patients and testing. 

The future is truly bright for cryptocurrency venture capital firms…

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