An Overview of VC Funding in Blockchain Technology
By Siddharth Choksi, Summer Analyst at Samaipata Ventures. With blockchain technology, and cryptocurrencies in particular, having recently become the subject of major media attention, it seems fit to explore the role of venture capital in the decentralised market.
BLOCKCHAIN 101: THE BASICS
Given the extensive media coverage that blockchain has recently received, it should come to no surprise that the technology has completely altered the way in which industries and corporations conduct business.
WHAT IS IT?
The blockchain is essentially a new way to store and record transactions; at first glance it seems pretty similar to a traditional ledger or database, except for the fact that the “blocks” are all cryptographically interconnected, thereby forming a water-tight system against fraud, corruption, etc.
HOW DOES IT WORK?
Simply put, each “block” contains some sort of information — e.g. a proof of transaction or a contract — which is securely connected with the rest of the chain through a digital signature. This technology allows users to conduct transactions virtually instantaneously without having to go through any sort of ‘middle man’.
Although the technology was first conceptualised back in 2008, and took its first widely recognised form as Bitcoin in 2009, it has only recently (nearly a decade later) started to truly pave its way into common business practice.
WHAT MAKES IT SO INTERESTING?
Due to the fact that blockchain eliminates any necessity for a central authority, the technology allows for a world of complete transparency.
Listed below are just a few potential applications of the technology that could have a significant impact on people’s day-to-day lives:
- Politics: by running a nation’s political elections on blockchain technology, it eliminates any chance of corruption or miscounting votes.
- Fight Against Illicit Activity: the technology allows for incredibly accurate tracking and tracing of information through its permanent ledger, making it next to impossible for people to indulge in the black labor market or money laundering.
- Financial Services: blockchain could make transaction fees redundant, thusly saving consumers and businesses billions of dollars. Not to mention, transactions would occur far faster with a greater sense of transparency.
Wikinomics author Don Tapscott and blockchain expert Alex Tapscott explain. fortune.com
Venture Capital Landscape
Venture Capital investment into the blockchain economy has remained rather constant between 2015 and 2016, with the technology attracting approximately $1 billion over the 2-year time frame.
Despite experiencing a slight decrease in funding in the first 2 quarters of 2016, in the latter half of the year the technology managed to achieve encouraging figures; nearly 2x and 3x 2015 levels in Q3 and Q4 respectively.
VENTURE CAPITAL VS ICO
ICO is an abbreviation for Initial Coin Offering, which in essence is rather similar to a traditional IPO, except for cryptocurrencies. The Financial Times has recently described the fundraising technique as:
“unregulated [meaning decentralised] issuances of cryptocoins where investors can raise money in bitcoin or other cryptocurrencies”
It’s worth a mention that the SEC just recently ruled that the US blockchain-community will from here on out be regulated in response to the recent hackings of The DAO. According to the announcement, cryptocurrencies and token sales will from now on be seen and legislated as securities.
For the first time, entrepreneurs are attracting more investment through ICOs or so-called “token sales” than from traditional venture capital funds.
In the 2nd quarter alone, crypto-entrepreneurs managed to raise a whopping $291 million through ICOs and $187 million in traditional venture funding. Remarkably, over 80% of that VC funding in Q2 came from just 2 deals:
- Canaan, a startup that manufactures and sells bitcoin mining chips through its e-commerce platform, raised $43,6 million
- R3, the startup behind the distributed ledger platform Corda, raised a staggering $107 million
Given the increased interest in crypto-investments, both from wealthy individuals as institutional investors like venture capitals, I’m bullish on the upward trend in [new] ICOs to continue in full-fledge.
A new study by CoinDesk has revealed that all-time cumulative ICO funding stands currently over $1.7 billion, an astonishing $1.4 billion (or 82%) of which was raised in 2017.
🎈 Before going any further, I must mention that this is a special week in the blockchain calendar; FileCoin’s ICO is upon us - this Thursday (August 10th) at 9pm (GMT+2)! FileCoin is a decentralised market for storage allowing anyone with unused storage host files in exchange for tokens (that one can later easily exchange for fiat currency such as USD).
WHY DO VCs INVEST IN BLOCKCHAIN?
As mentioned in the beginning, the nature of blockchain is to i.a. enhance transparency and eliminate any shred of corruption, therefore common procedures in venture investing, such as in-depth due-diligence, loses relevance. However, there are 2 main attraction points:
- Profitability: the table below depicts the 5 top performing cryptocurrencies of 2017 (up until May 31st); the figures are plucked from CryptoCompare’s public crypto database.
As we can see, a considerable amount of cryptocurrencies are experiencing growth rates of well above 5000%, all of which occurred in a mere 5-month timeframe, thereby exemplifying the exponential growth potential of the crypto-world.
- Liquidity: in comparison to traditional venture capital investments, cryptocurrencies are extremely liquid; typically, VC firms only really reap the fruits of their investment after several years — i.e. once one of their portfolio members sees an exit. In this case, however, VC’s can invest in startups in the crypto-market and see their gains far quicker through ICOs, which will allow them to convert their tokens into Bitcoin or Ether, which can easily be exchanged for fiat currency through numerous platform like Coinbase.
As expected, with great returns comes great risk, and the crypto-market is no exception — investors seem to shy away from partaking in the highly speculative market for numerous reasons, including: the regulatory uncertainty, the number of plunges and scams in the earlier stages, and above all the fact that it yet hasn’t truly paved its way into common business practice.
However, with the emergence of initiatives like ICO Rating (a rating agency for blockchain startups) and networks of self-organised due diligence, the market is starting to clean up.
LEADERS IN THE VC LANDSCAPE
As the infographic above illustrates, numerous prestigious VC-firms such as 500 Startups, Andreessen Horowitz, and USV, have indulged in the rapidly expanding world of blockchain and cryptocurrencies.
However, the one investment company that truly stands out from the crowd is Blockchain Capital, a venture capital firm that is exclusively dedicated to the Bitcoin/Blockchain ecosystem. They recently closed their latest fund, of $10 million, through their very own token offering (BCAP). In the 3 years since its launch, the firm has invested in 40+ companies, some of its top performing portfolio members includes: Circle, Coinbase, and Blockstream.
BLOCKCHAIN IN SPAIN 🇪🇸
As the technology develops, market confidence increases — and Spain is no exception — here are just some of the nation’s recent blockchain innovations:
ARAGON: Powered by Ethereum, Aragon was built with the ambition to eliminate the need for middle-men and third-parties (e.g. governments) to stimulate the creation and output of companies. Despite that their ICO -which netted $25M in 15 minutes — was merely 3 months ago, Aragon’s community currently consists of 2.3k+ members and 2k+ test organisations.
STAMPERY: An innovative startup that seeks to replace trust with mathematical proof. Stampery leverages blockchain technology to ensure the existence, integrity and attribution of communications, processes and data important for your organisation.
RED LYRA: Spain’s first multi-sectoral blockchain consortium, formed by a group of Spanish banks, and corporations. The Lyra project will initially focus on digital identity and smart contracts, which will be developed in partnership with top law firms and legal experts.
The fact that Spain’s private sector is investing a considerable amount of its time and resources behind blockchain technology is highly encouraging and exemplifies how Spain’s financial institutions and corporations are fostering innovation in an effort to strengthen their position amongst their European counterparts as a corporate ecosystem that strives to cope with the ever-increasing technological advances.
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