The prices of cryptocurrencies, including for the most popular tokens such as Bitcoin and Ethereum, have been hammered since the beginning of the year, as the ongoing crypto bear market continues to take its toll. Indeed, Bitcoin, the most popular digital currency by market cap is currently down 53% from where it started 2018; Ethereum, which remains the second largest alt-currency by market cap, is off more than 60% for this year.
Just yesterday, the Financial Times featured a headline asking, What Next for Cryptocurrencies After Bubble Bursts?. The answer, perhaps, is somewhat counterintuitive: despite the ongoing bearish environment for alt-currencies overall, significant funding for the deployment of new exchanges, blockchain projects and initial coin offerings (ICOs) hasn't slowed. But the ways in which new token offerings occur—as well as those who invest in them—is shifting.
Indeed, the market is seeing increasing interest from venture capitalists (VCs) who have grown keen on the potential of tokenization. As such, ICOs as a fund raising model have not lost their allure. Last year, ICOs became the tool for start-ups trying to circumvent traditional, often potentially slower routes for raising investor capital, such as VC funding.
Ernst & Young reported the total amount of funds raised via ICOs approached $4 billion at the end of 2017. That's twice the volume of venture capital investments in blockchain projects.
New Model for VCs, Smart Money
Alexander Tkachenko, founder and CEO of VNX , which bills itself as a platform for 'unlocking liquidity for the VC industry' says there has been a shift from what was in essence a crowdsource model, to a more traditional model with funds and crypto pools taking a lead role in assessing projects, performing due diligence, analyzing and leading investment rounds.
“The focus of VCs on large markets, disruptive innovations and teams that can execute has not changed. What has changed is that many VCs are looking for the opportunities that blockchain opens to the VC industry itself.”
Though the initial excitement surrounding blockchain and ICOs attracted primarily short-term investors looking for quick profits, that chapter is fading says Roger Lim, founding partner at investment group, NEO Global Capital (NGC). He expects to see long-term investors coming into the space, investing in infrastructure, setting up and enhancing standards and creating a foundation for the greater adoption of the overall technology.
“I believe smart money is beginning to realize that fundamentally, distributed ledger technology is a great technology with the potential to have tremendous impact on our lives—moreso than the internet did. If this is the case, it is a once in a generation opportunity; and I expect new money to increase its flow into the space.”
Some investors were quick to enter the space and now have a more in-depth understanding of the technology. Chance Du, the Founder and CEO of Coefficient Ventures and Chance Ventures notes that every firm has a different understanding of the benefits and activities within the blockchain space. He points out that some are pursuing immediate gains while others are in it for longer-term win.
Still others, he says, are VCs that look to invest in a combination of both short- and long-term opportunities.
As this industry turns into a more sustainable and long term [arena], my recommendation...would be to tread extremely carefully as there are serious scam projects which can majorly damage any company.
Multiple Fundraising Strategies Ahead?
As blockchain technology gains adoption across major industries, right now Ben Jorgensen, a venture capitalist who is also COO of Constellation Labs, thinks investors would be wise to put their money into foundations with solid reputations and companies that are structuring innovation in such areas as smart contracts, distributed ledgers, transparency and speedy transactions.
He believes investor sentiment is shifting. "We are moving out of the ‘get-rich quick’ era of the crypto space and ICO hype." It's his view that the fundraising environment is maturing, driving the possibility for more considered, potentially more successful investing.
“We need to incorporate traditional fundraising strategies into crypto communities. Projects are no longer raising tens of millions of dollars in minutes on gimmicks and bare-bones whitepapers; investors are evaluating company milestones, stage of technology, business roadmaps, as well as the capability of the team behind the project to execute. This shuts the door on many of the potential scams of the industry while simultaneously bringing fiscal accountability and milestone-based investing with clear go-to-market strategies to the space.”
Ultimately what appears to be evolving is an environment where multiple fundraising strategies will be deployed, including token pre-sales as a seed-stage round. This would remove the emphasis on ICOs, which proliferated in 2017, leveraging company equity instead as a way of inviting established venture institutions and smart money investors into helping build these massive blockchain product visions.
While the increase in VC funding of blockchain projects signals broader adoption and legitimacy for the asset class, Kyle Chapman, Associate at COSIMO Ventures, a private equity and venture capital firm, says, there are still a significant number of “blockchain companies” that have weak value propositions. Eventually, there will be a correction that eliminates such entities, shaking them out in similar fashion to what occurred during the dot-com bubble.
“Raising a successful, private funding round before an ICO signals legitimacy to the market, which can distinguish an opportunity from hundreds of similar, less attractive offerings while also allowing the company to benefit from immediate access to capital. In exchange, early private investors are rewarded with better deal terms, higher bonus structures, and a guaranteed number of tokens from the issuer.”