Review of 2019 Blockchain VC Deal Activity
Review of 2019 Blockchain VC Deal Activity
Hutt Capital analyzed the blockchain venture capital investment data for 2019 to determine what insights could be drawn, and what trends are developing that impact how investors should approach this emerging space.
Given the global nature of the blockchain and crypto markets, our analysis focused on global deal data.
Here are a few of our key takeaways:
· The blockchain deal environment returned to a healthier level after the frenzy in 2018: The blockchain VC frenzy which resulted from the massive crypto bull run and ICO bubble in 2017–2018 is over. Deal activity has returned to a healthier level consistent with its long-term growth trajectory. In 2019, 622 blockchain deals were completed representing $2.75 billion of invested capital, up from 322 deals for $1.28 billion in 2017.
· Blockchain is growing its market share of VC deal activity: Blockchain deals accounted for 2.8% of all VC deals in 2019, up from 1.5% in 2017 and 0.7% in 2015. For seed and early stage deals, blockchain accounted for 3.6% of all deals, up from 1.8% in 2017 and 0.7% in 2015.
· Early stage valuations for blockchain deals are more attractive than non-blockchain deals: Median seed/early stage blockchain deal valuation was $12.5 million, 22% below the $16.0 million median valuation for all seed/early stage deals.
· The share of blockchain deals that are focused on “crypto” and its financial infrastructure is substantial but continues to decline as other categories experience growing investor interest: 68% of blockchain deals in 2019 were tagged as FinTech, down from 76% in 2017 and 90% in 2014. The trend is clear, though the true share of “crypto” deals is lower than the data stated above as FinTech includes blockchain deals focused on other non-crypto finance applications.
· Blockchain deal activity is more global than VC overall: North America represented 45.3% of all blockchain deals completed in 2019 vs. 52.8% for non-blockchain deals. Asia was the key beneficiary, representing 26.8% of blockchain deals vs. 20.5% of non-blockchain deals.
A more complete review of the data follows below.
Disclaimer: All data utilized and referenced in this post is sourced from Pitchbook, unless otherwise noted, as of January 13, 2020.
Blockchain Deal Activity & Trends
In 2019, there were 622 blockchain venture capital deals completed representing $2.75 billion of invested capital. This is a decline from 2018 when there were 833 deals for $7.75 billion of invested capital, but about double the deal activity from 2017 when there were 322 deals for $1.28 billion of invested capital.
2019 represented a healthy year for VC investment into blockchain startups, recalibrating the industry’s growth on a more sustainable path after the aberration which occurred in 2018. This aberration was driven by a combination of generalist investors chasing returns after the massive run up in crypto prices through early 2018, and a number of larger financing rounds which led to a higher average deal size vs. other years (as shown in chart below).
The median valuation for blockchain deals declined in 2019 after a notable jump in 2018, from $16.6 million to $13.0 million, offering a more attractive environment for capital deployment.
Looking only at seed and early stage deals, the median valuation for blockchain deals saw a similar decline, from $16.3 million in 2018 to $12.5 million in 2019, even though the median round size didn’t change ($2.8 million in 2019 vs. $2.9 million in 2018). This suggests the decline in blockchain deal valuations for 2019 was truly the result of a more attractive market for investment in blockchain startups compared to 2018.
Blockchain’s share of global startup investment similarly saw a decline in 2019 from 2018, but exhibited strong growth vs. 2017. In 2019, blockchain startups represented 2.8% of all deals and 1.1% of total capital raised, compared to 3.6% and 2.7%, respectively, in 2018, and 1.5% and 0.7%, respectively, in 2017.
The blockchain data on its own offers an informative narrative for how the market is growing and evolving in a compelling manner, but it is also interesting to compare various metrics for blockchain VC deals vs. the overall VC market.
For example, while the number of total venture deals completed has not changed meaningfully from 2014–2019, blockchain deal activity has more than quadrupled over the same time period.
As a result, blockchain’s share of deal activity has grown from 0.8% in 2014 to 2.8% in 2019.
Looking at dollars invested, blockchain’s growth has also outpaced the market. Venture funding for blockchain startups has grown over 5x since 2014 while overall venture investment has grown by just over 2x. Likewise, blockchain’s share of dollars invested has grown from 0.5% in 2014 to 1.1% in 2019.
For seed and early stage deals, blockchain’s share of venture funding has also seen growth in recent years, from 1.1% in 2014 to 1.2% in 2017 and 1.9% in 2019. Blockchain’s share of total number of seed and early stage deals is larger due to the growing prevalence of very large “early stage” non-blockchain venture rounds.
In 2019, blockchain deals represented 3.6% of all seed and early stage deals completed, up from 1.0% in 2014 and 1.8% in 2017.
Deal size for blockchain funding rounds vs. the VC market overall is substantially lower on average, though this is in part due to later stage deals representing a smaller portion of the blockchain deal volume.
Median deal size is also smaller for blockchain deals, though to a lesser extreme. For 2019, the median deal size for blockchain deals was $2.2 million for $2.9 million for all venture deals.
Valuations tell a more interesting story. The median valuation for blockchain deals in 2019 was $13.0 million, 42% below the overall market average of $22.5 million. Granted, this delta is overstated given the blockchain deal data skews earlier stage.
An analysis of seed and early stage deals shows, however, that blockchain valuations were still more attractive vs. the overall market, with a median of $12.5 million, 22% below the market’s median valuation of $16.0 million.
In fact, blockchain deal valuations have been equal to or lower than the market in five of the past six years, with the only exception being 2018 after the crypto bull market and ICO bubble led to a spike in blockchain startup funding (and valuations).
Further, the discount for seed and early stage valuations of blockchain vs. non-blockchain deals in 2019 was at its largest since 2015, indicating that relative to venture as a whole, blockchain deals saw their most attractive valuations in four years.
Since 2015, blockchain has progress significantly as an industry and experienced much greater investor interest, making the discount for blockchain vs. non-blockchain deals in 2019 even more impressive.
Part of the reason for the more attractive valuations for seed and early stage blockchain deals may be that average deal size has remained much more stable vs. the overall venture market, as shown below.
In fact, the average size of seed and early stage blockchain deals was $3.8 million in 2019, effectively unchanged from $3.9 million in 2014, and except for 2018 has remained in a tight range. For the broader venture market, average deal size over the same period has grown 116% from $3.4 million to $7.2 million as a market flush with capital has led to larger financing rounds for early stage companies.
Based on the valuation and deal size data discussed above, blockchain in 2019 offered one of the few areas to invest in startups while maintaining discipline on valuation and deal size. As the venture market stays awash with cash and blockchain deal valuations remain modest, I expect this dynamic to continue for the near-term, to the benefit of early stage blockchain investors.
Sector
The most intriguing question to me when looking at blockchain deal data by sector, is what portion of venture investments are “crypto” focused (primarily those building the financial infrastructure for crypto assets, but also some new base layer crypto protocols, etc.) vs. those utilizing blockchain for other use cases or representing non-financial blockchain infrastructure.
The best proxy for crypto deal data is to use blockchain deals that are tagged as FinTech (deals in Pitchbook typically are tagged in multiple categories). However, not all blockchain FinTech companies are crypto companies, and thus the percentage of deal activity I would truly consider “crypto” focused is slightly lower than displayed in the chart below.
As notable examples, Securitize (digital security infrastructure), Figure (blockchain-based lending solutions), PeerNova (big data for financial services companies) and Spring Labs (decentralized credit scoring and other fraud/identity solutions) all raised >$20 million in 2019 and are rightly included in FinTech but I would not consider them as crypto companies.
There is a clear trend that the portion of blockchain deals that are crypto focused is steadily declining (though still a slight majority), while the portion addressing other innovative use cases for blockchain technology is increasing.
Looking ahead, I expect this trend to continue as the industry matures and the use cases for blockchain being addressed by entrepreneurs continues to diversify.
Where is blockchain investment occurring outside of FinTech? Pitchbook’s industry tags are not well-suited for blockchain, so this analysis will require a deeper dive in the future, but the most common industry tags are shown below (excluding FinTech) for those who are curious.
Geography
North America is the most prolific market for funding of blockchain-related startups, representing 45.3% of the total number of deals. Asia and Europe are the other key geographies, representing 26.8% and 22.6%, respectively. Combined, these three core geographies represent 95% of total deal activity.
The market share of deal activity maintained by the three largest regions is almost exactly the same in blockchain as for non-blockchain. 94.7% for blockchain deals and 94.6% for non-blockchain deals.
However, blockchain deal activity is slightly more distributed compared to the overall market. North America’s share of blockchain deals is more than seven percentage points lower than for non-blockchain deals (45.3% vs. 52.8%).
As shown in the chart above, North America’s loss is Asia’s gain, with the latter capturing most of the blockchain market share being lost by the former. In 2019, Asia accounted for 26.8% of blockchain deals vs. 20.5% of non-blockchain deals.
It is not surprising to see Asia represent a larger market share of deal activity within blockchain given this emerging space has been global since its inception and is built around open-sourced software. This dynamic provides the United States with less of an entrenched advantage vs. other regions than it typically enjoys, though clearly the U.S. remains the global powerhouse in terms of blockchain startup activity.
Looking forward in Asia, it will be interesting to see how deal activity in China is impacted by President Xi’s recent announcement that blockchain is a national priority.
India, by comparison, has seen minimal blockchain startup activity given the country’s hostile stance toward crypto. If the Indian government were to relax these restrictions this would also benefit blockchain startup formation in Asia.
How does the geographic data impact how LPs should invest in blockchain? It is important to have a global mindset and perspective, even more so than for traditional venture capital. And while some funds based in the United States will also invest internationally, over the long-term I would expect those with a dedicated local presence to have a competitive advantage in any given region.
At Hutt Capital, we are reviewing blockchain VC fund opportunities in both Europe and Asia and believe this to be an important aspect of our strategy.
Conclusion
The 2019 blockchain VC deal data paints a picture of a robust global market which is compelling in its own right but which also offers a more rational market dynamic relative to venture capital overall.
In particular, as discussed upfront, we had the following key takeways:
· The blockchain deal environment returned to a much healthier level after the frenzy in 2018
· Blockchain is growing its market share of VC deal activity
· Early stage valuations for blockchain deals are more attractive than non-blockchain deals
· The share of blockchain deals that are focused on “crypto” and its financial infrastructure is substantial but continues to decline as other categories experience growing investor interest
· Blockchain deal activity is more global than VC overall
Hutt Capital is excited about the current investment landscape and the broad opportunity in blockchain for 2020. We look forward to watching these deal trends develop further over the next year and to another year of pushing the boundaries for blockchain innovation.
