Venture Capitalists Have Discovered Blockchain: Where Does the Money Go?
Venture capital investments in the blockchain space have more than doubled in 2018 compared to the previous year; we take a closer look at where the money goes and where it comes from.
“Be fearful when others are greedy and greedy when others are fearful,” says Warren Buffet. Does that mean the “crypto winter” is the right time to invest in blockchain and digital currencies? If you ask venture capitalists, the answer will be “Yes.”
VC investment in crypto startups was up nearly 300% in 2018 compared to the previous year and the number of deals has doubled, according to data from Pitchbook. In dollar terms, VC investment increased to more than $4bn.
Digital currency-related startups attract the lion’s share
The data shows that most VCs are investing in start-ups related to digital currencies. Start-ups that receive most funding work around exchange and trading of digital currencies, issuance, mining, wallets, and payments.
There are two main reasons: Firstly, the majority of tokens have dropped in price by more than 80% since December 2017. Thus, companies are desperate to raise money, and VCs can get attractive deals.
Secondly, the ICO market has slowed down dramatically. Investors have lost confidence and regulators have clamped down on ICOs in many jurisdictions. As token-based fundraising has dried up, startups are looking for equity injections. 75% of all deals in 2018 were early stage investments.
Although most of the money goes to startups related to digital currencies, VCs are increasingly looking at the underlying blockchain technology. In particular protocol development has caught investors’ attention. As most existing protocols are still far from being perfect, there is room for innovation and improvement.
Most funding comes from blockchain-dedicated VCs
Most VCs active in the space are funds dedicated to blockchain investments, like Digital Currency Group or Blockchain Capital. Traditional VCs, even those with tech focus, remain shy regarding blockchain investments.
That’s not surprising. There is a high knowledge barrier in understanding the technology and its real-world applications; not many VCs have this expertise. Also, to successfully implement the technology, VCs need to have access to the ecosystem and an industry network.
Likewise, most M&A deals involving blockchain companies are conducted within the industry; cross-industry deals remain a rarity. Most acquiring companies where either blockchain companies themselves or technology companies.
While the number of M&A deals has more than doubled in 2018, from 40 to 91, just 38% were made by public companies. Corporations and traditional financial institutions have not gotten heavily involved in blockchain M&A deals yet.
US, China, and Canada are the most popular markets
75% of funding was raised in the US (51%), China (17%), and Canada (7%). Next on the list are the UK, Switzerland/Liechtenstein, Israel, Singapore, South Korea, Japan, and Hong Kong.
Most Chinese startups that received VC funding are related to digital currencies and actively targeting Chinese residents. Despite regulatory difficulties, digital currencies remain popular in China due to a slow stock market, the depreciating Chinese Yuan and the lack of alternative investment channels.
Outlook: institutional adoption and greater focus on blockchain technology
In 2019, it’s likely that more investment will flow into protocol development, blockchain securities trading, asset tokenization, financial software, stablecoins and enterprise platforms.
Institutional investors are waiting in the starting gates. As regulators are creating more legal certainty and exchanges and banks are launching regulated trading infrastructure, it’s likely that institutional crypto adoption will speed up in 2019.
We also believe there will be greater cross-industry convergence with more corporations outside of tech acquiring blockchain startups to solve industry-specific problems.
Will Order from Oxford Capital says, “Over time I think the more interesting applications are using distributed ledger technology in more practical situations.” Alicia Garabedian from Samsung Next agrees, “We are interested in the deep, enabling technology that capitalizes on the potential of blockchain. We look at companies that are doing something new and innovative.”
