Blockchain and bitcoin, as well as other cryptocurrencies, have been featured quite a bit in the news recently as companies like Kik, a MicroVentures portfolio company, raises funds via an initial coin offering (ICO) and the price of bitcoin crosses $8,000. We previously discussed the rise of blockchain and cryptocurrency in our last Blockchain 101, but today we’re exploring venture capitalists’ interest and investment history in this emerging field.
In 2012, there were only 19 unique investors funding blockchain or cryptocurrency companies. However, that number grew to 95 in 2013, 202 in 2014, and almost 300 in 2015. VC firms are on track to complete 77 traditional deals with blockchain startups by the end of 2017, which is more than had occurred any previous year. Among the VCs most active in this space are Digital Currency Group and Blockchain Capital, both of which focus specifically on cryptocurrency and blockchain companies, but traditional VCs like 500 Startups, RRE Ventures, Andreessen Horowitz, and Union Square Ventures are also topping the list.
All together, VC investment into blockchain has amounted to roughly $1 billion from 2015 to 2016. Notably, ICOs actually raised more than venture capital, with about $327 million raised year to date as of June 2017 (compared to $295 million from venture capital over the same timespan).
Major corporations are also playing a role, including Google and Overstock.com. Financial institutions, in particular, have had a major impact on the blockchain investment landscape in recent quarters, including the more than $20 million raised by Axoni’s Series A from Citi, JP Morgan, and Goldman Sachs, among others; the $107 million to R3 from Bank of America Corp., Wells Fargo, and SBI Holdings, among others; and the American Express/Santander partnership with Ripple.
Overall, there have been 42 equity investment deals by corporations as of October 2017.
Why are VCs interested?
While each VC will have their own list of things to look for when investing in new opportunities, there are certain points that may make blockchain companies and cryptocurrencies particularly interesting:
- A high number of cryptocurrencies are experiencing extreme growth rates. As of November 20, 2017, some have experienced a change of up to 72.52%, 37.76%, and 34.43% over a 24-hour period.
- A more liquid market, meaning investors may have the opportunity to reap gains quicker than a more traditional investment opportunities, where there may or may not be an active secondary market.
- Blockchain companies are introducing new founders within the innovative tech sector. From SimplyVital Health – a MicroVentures portfolio company that aggregates healthcare data while preserving data integrity through blockchain – to Circle – a payments processing company using blockchain to provide transfers for free – new entrepreneurs are catching the eyes of investors looking for the next disruption.
What are the potential downsides?
The technology is still in its infancy, meaning it’s hard to say how it will impact the way we do business in the future. Many governments around the world feel that cryptocurrency could result in a loss of economic power and a shift towards decentralized economies – in fact, China banned coin trading and ICOs in September 2017, although interest hasn’t slowed. Lastly, because cryptocurrencies are quite volatile even though they retain their hype, some analysts believe the industry could be in a bubble – and could eventually burst.
What is an ICO?
An ICO is similar to an initial public offering (IPO) in that it allows a company to sell its existing cryptocurrency tokens in exchange for bitcoin and ether. In other words, an ICO trades future cryptocurrency coins in exchange for cryptocurrencies that may have immediate, liquid value as long as there is a market for the coins and they are listed on an exchange. ICOs have the ability to raise significant funds for companies, just like the nearly $100 million raised by Kik earlier this year. ICOs have also been found to boost stock performance, as in the case of Overstock.com, which was not only the first major retailer to accept bitcoin but also saw stocks jump at the prospect of a potential ICO from the company.
Similar to a Simple Agreement for Future Equity (SAFE), Simple Agreements for Future Tokens (SAFTs) have also been developed. SAFTs will allow investors to invest in startups in return for a set amount of tokens to be distributed in the future, typically following an ICO. As explained in the paper outlining the SAFT structure, “The developers use the [investment] funds to develop a genuinely functional network, with genuinely functional utility tokens, and then deliver those tokens to the investors once functional.”
The SEC released a report earlier this year stating “offers and sales of digital assets by ‘virtual’ organizations are subject to the requirements of the federal securities laws.” That said, ICOs and SAFTs are risky. It can be difficult to vet an investment opportunity or the technology behind it, and many experts encourage extreme caution, as ICOs can be fraudulent within this emerging, often unregulated, space.
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