Fervent blockchain supporters claim the technology has the potential to transform the world we live in – and venture capital investors (VCs) are paying attention.
With hefty funds to deploy, and returns to make for their limited partners, it’s common knowledge that VCs are always looking for the next big thing.
A huge part of their job entails evaluating nascent technologies to separate innovative companies doing revolutionary from more derivative projects – and blockchain is no exception.
In fact, research released last year showed that the number of VC blockchain deals doubled in the 12 months up to October 2018, by which time investors had already poured $3.9 billion into companies across the globe.
According to Pitchbook data shared with Hard Fork, venture capital investment in the US cryptocurrency and blockchain space has been steadily increasing year on year – going from a mere €14.43 million in 2013 to €723.13 million last year. The number of funds closed has increased, too (17 in 2013 and 106 in 2018).
Back in 2017, a TNW contributor argued that Initial Coin Offerings (ICOs) would render traditional VCs a thing of the past, but a different story has played out all-together.
At Hard Fork, we want to know what piques investors‘ interest, what drives them to back certain companies, what they’re uninspired by, and why.
With this in mind, we reached out to notable figures to find out what’s driving investment in the space.
Octopus Ventures Zihao Xu’s first encounter with Bitcoin took place when a friend emailed him the cryptocurrency‘s whitepaper in 2012. At that time, a coin’s price oscillated between $5 and $13 throughout the year.
“I found it really intriguing as I’d been interested in the idea of denationalized money since my university days,” Xu told Hard Fork.
Xu believes those interested in Bitcoin‘s underlying blockchain technology before the asset price took off fall into three categories. First, the tech enthusiasts who were interested in the code element. Then, those in finance who figured out they could trade Bitcoin and potentially make money. Finally, the libertarians who saw the potential of censorship-resistance, decentralization, and a free market for money.
Initially, Xu fell into the latter camp, but fast forward seven years and his vision for blockchain technology has altered significantly.
I no longer think blockchains are the most elegant or suited type of database. In fact, the idea of using a blockchain to distribute a database is probably the most crude one conceptually – giving every node a full copy of the entire database is old-fashioned.
Xu wants to find viable blockchain solutions which could help the technology achieve mainstream adoption.
He’s trying to avoid companies that use blockchain for the sake of it, or because it’s a buzzword that’s likely to entice investors.
“We look for companies or projects building something with the core value that comes from a set of functions native to [decentralized ledger technology] (DLT), and cannot be attained in the absence of DLT.”
“Right now, only a small handful of projects fits this criterion, but cryptocurrency functionality is improving and expanding all the time,” he added.
Jamie Burke came across Bitcoin entirely by chance.
He became so enamored with the technology that he set up Outlier Ventures – credited with being Europe’s first dedicated blockchain VC and venture platform – in 2014.
At the time, Bitcoin hovered around the $300-$400 mark and there seemed to be little, or no, interest outside of the academic and developer community.
But things changed quickly. A year later, in the Summer of 2015, Ethereum – the brainchild of Vitalik Buterin, Gavin Wood, and Joseph Lubin – burst on the scene.
“When Ethereum came along and introduced their vision for a virtual machine as well as the way they financed the project through what was only the second ICO at the time, it became clear this promised to be as transformational as The Web was in the 1990s and [it] was something we had to be part of,” Burke told Hard Fork over email.
It was then that academics’ and developers’ interest in the technology started to transcend into the commercial arena, with Microsoft sponsoring Ethereum’s DevCon One conference that same year.
Burkey says he’s been bullish about the underlying potential of decentralized ledgers from the very beginning.
What’s been surprising to me is how quickly startups in this space have rushed to codify assumptions into their design decisions before testing and validating them. Equally, I have started to realize just how much cultural baggage ‘crypto’ owes to the field of cybernetics, the new communalism of the 60s, and its merging with the libertarian right of the 90s.
Burke thinks the current cryptocurrency winter, which has resulted in some companies making significant layoffs, will be hugely positive for the space in the long-run.
The perceived scarcity of funds in the blockchain and cryptocurrency space, Burke believes, will force founders to concentrate on what really matters: building usable products to solve real-world problems, and in turn, achieve adoption. It’s basically the survival of the fittest.
“We speak to over 100 inbound projects a month and have met over 1500 blockchain startups since our founding. Many don’t go beyond the first round of due diligence because they have no experience or understanding of the industries they want to touch or are too dogmatic,” Burke noted.
He believes the real value will be found where, and when, blockchain helps enable other technologies such as artificial intelligence, internet-of-things, as well as augmented and virtual realities.
It will be then that blockchain will serve as a viable solution to store the increasing abundance of data required to power advancements in these fields.
“We definitely don’t look at blockchain and cryptocurrency in isolation,” he explained.
Staying close to the problem
Burke is not the only investor to think that blockchain technology’s success – and therefore its potential viability as an investment – will rely on its convergence with other technologies.
Sherman Lee, a partner at early stage accelerator program Zeroth AI, agrees.
Lee discovered Bitcoin in 2014. Three years later he began to look at blockchain technology as a solution to a problem he’d encountered with AI training.
“During the great bull run of 2017, the euphoria was incredible. Hundreds of teams kept popping up with whitepapers with amazing visions. As an engineer, I was quite skeptical on the ability of all these teams to deliver on their promises of 1 million transactions per second. As an investor, well, it didn’t matter because we started seeing parabolic gains on our investments.”
A year later, everything changed. The bear market of 2018 brought everyone back to reality. Token prices crashed, leading to projects and companies running out of cash, with many ceasing operations completely.
“Many thought cryptocurrency was dead, but not me. As an engineer, I saw real technology being built by incredibly talented people. All the scammers and speculators have mostly disappeared. All the noise is gone. We now have left only the strongest teams. These are the ones that will survive,” he said.
Lee wants founders who are “super close” to the problem they’re solving and understand that to be a sustainable blockchain company, you have to have a path to revenue.
“The ability to self reflect is also valuable. Many companies got caught up in the ICO hype and now they have to clean up the mess,” Lee added.
Data, data, data
Will Orde, a technology investor at Oxford Capital, discovered cryptocurrencies in 2015, when Bitcoin‘s value moved between $200 and $500. Two years later, in 2017, Oxford Capital began to seriously explore applied uses of blockchain technology.
“When I started looking at cryptocurrencies in 2015, the core premise was focused on digital currencies – Bitcoin being the most famous. But over time I think the more interesting applications (in the immediate future) are using distributed ledger technology in more practical situations, particularly around data.”
As a fund, Oxford Capital wants to back companies at the point where products first hit the market – and blockchain is no different.
“Recently I’ve been focusing on use-cases revolving around the creation, sharing and management of data in multi-party situations. You can find situations like this in many sectors, from insurance to personal identity.”
Importantly, though, Orde is quick to point out that, like many others in the market, he’s not interested in blockchain companies looking for a problem to solve.
He wants “someone with a clear vision for what they’re building, a balanced skill set, and an ability to get stuff done”.
Alicia Garabedian also discovered Bitcoin in 2015 when she was working at Morgan Stanley.
Real exposure to the blockchain ecosystem, though, came in 2017 when she joined Samsung Next, where she’s an investor.
When she first came into the space, Garabedian thought cryptocurrencies were about speculation, and admits she didn’t really understand the underlying blockchain technology.
“As I learned more, I became captivated by the speed of industry, the growth of the ecosystem and intrigued by the influx of ambitious entrepreneurs,” she shared with Hard Fork.
Today, Garabedian is looking for real applications, actual enterprise implementation, and consumer adoption.
“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 with blockchain, as opposed to leveraging it as, say, a data store. In this sense, we are less interested in companies that are trying to put something on the blockchain, or creating a token, without clear justification or end game.”
In her experience, blockchain technology proves to be useful when there’s an issue that lacks distribution, not only geographically, but organizationally.
But, will investment in cryptocurrency and blockchain startups continue to rise or stagnate? Well, it’s highly likely the number companies that raise considerable amounts via ICOs will stagnate, and those building a solution without a problem will struggle (or even cease to) exist.
It seems that, somewhat predictably, the future looks bright for blockchain businesses which fundraise reasonably with a clear path to monetization. A clear value proposition and a solid market strategy are also a must. This is what’s really attracting investors and that’s unlikely to change.
Welcome to Hard Fork Basics, a collection of tips, tricks, guides, and advice to keep you up to date in the cryptocurrency and blockchain world.
It might seem like the initial coin offering (ICO) boom is over, but there have been whispers of a new kid on the block. The security token offering or STO. Some believe that ICOs are a thing of the past and all future blockchain-based fundraising will be issued as a form of security.
It’s probably high time that we get our heads around what securities are and how STOs are different from ICOs. This episode of Hard Fork Basics is going to try to answer those questions, but first, a bit of background.
What even is a security?
Before we go looking into what a security token might be, let’s take a look at what a financial security is in its own right.
Put simply, a security is a financial contract that can be traded. More specifically in the US, an asset is considered a security if money is invested, the investor expects profit, the investment is made into a business (common enterprise), and the profit generated is not directly influenced by the company’s actions.
But here’s the thing, many financial instruments can be classed as “securities,” and specifically what is classed as a security depends on where you are in the world. It can get very confusing.
Generally speaking, in the US securities are either debt securities, like bonds, equity securities, like stocks, or derivatives, like futures contracts. In the UK though, the list is even more extensive and includes pensions, warrants, government securities, and debentures.
Despite the varied definitions of what a security is, there are some basic similarities. should have monetary value, and they should be tradable. It’s common for securities to have contractual rights attached, like shares in a company. Most of all, they should be registered with a financial authority in the country they are issued.
Decentralization is a headache
These contextual rules don’t exactly fit with the nature of cryptographic tokens and ICOs. Digital assets can be offered all over the world without formal registration, aren’t always tradable, and do not come with any legal rights for token holders attached.
But STOs promise something a little different. The “S” in STO suggests that the token follows a strict legal framework designed to protect investors and ensure complete clarity over what is being offered.
In principle, STOs should follow the legal framework that other securities have to follow, but there is still huge ambiguity over whether digital assets and tokens should be considered securities. Financial regulators still have some catching up to do.
In some cases though, like in Beijing, security tokens have already been deemed illegal. In Beijing all financial fundraising must be approved by the government, so you’re likely to get caught short if you try to run an STO as it’s basically no different from an ICO.
Not all STOs will be alike
Perhaps most importantly to note, is that not every STO will be created equally. Depending on where it is being offered and the legislation it has been subject to, it will be dramatically different in terms of risk as an investment.
In Europe, the “small offering exemption” means any security offering looking to raise less than €8 million doesn’t have to issue an approved prospectus. The prospectus is where the offering company discloses key financial details about the fundraising efforts, how they will be done, and investors liabilities.
In the US securities also can only be offered to accredited investors. In short, to be an accredited investor you must either earn over $200,000 per annum, or your net worth must exceed one million dollars. So in the US at least, properly regulated STOs will be out of most people’s reach.
Before you go diving into the – still yet to be truly regulated – world of STOs ask yourself if what you’re looking at really is any different from an ICO.
We’ve all heard the trope cryptocurrencers use to push their utopian dream on us; having the ability to buy your morning coffee with Bitcoin or some other cryptocurrency.
But I’ve been wondering where this incessant need to “caffeinate by cryptocurrency” came from? Is it really a good thing? I don’t even drink coffee, so what am I supposed to buy every morning with my cryptocurrency? Why is everyone so keen on buying coffee with cryptocurrency?
Hard Fork asked some leading industry names to get the skinny latte on this obnoxious meme that won’t go away.
It’s a metaphor
Let’s be honest, buying coffee is mundane, but it’s also quite an individual thing. Apparently, you can tell a lot about a person based on their coffee order. Not to mention lots of people seem incapable of functioning until they’ve had their morning cup.
Creator of Litecoin, Charlie Lee, made a very direct argument. The more pervasive cryptocurrency is, the more use we have for it. The more daily opportunities we have to spend it, the closer we are to mass adoption.
“Cryptocurrency is censorship-resistant global sound money. So being able to pay someone on the other side of the world with no one being [able] to block you has tremendous value.” According to Lee, “once you have your money stored in crypto [sic], it’s important to be able to spend it everywhere.”
In other words, being able to pay for your coffee with cryptocurrency isn’t actually about purchasing the coffee. It’s about the political opportunity of having a true global currency, free from government control. But to get there, to truly obtain that social power, we have to be able to buy coffee (and any other everyday item for that matter) with cryptocurrency.
If we get to a point where we can buy coffee with Bitcoin, it’s logical to assume that most other things could also be bought with cryptocurrency. A world where anything could be bought with cryptocurrency, is a world that, by proxy, supports many of its other values such as pseudonymous online payments, privacy, and transparency.
How to make the coffee worth the grind
The issue is, buying coffee with crypto isn’t strictly the intended purpose of Bitcoin or cryptocurrency, so it’s not without its challenges.
“It’s true that buying coffee doesn’t really need to be done with crypto,” Lee told Hard Fork. “Bitcoin was invented to be cash for the internet – and buying cups of coffee in the real world is a deviation from the purpose,” added Frisby.
Indeed, Bitcoin was created to create a medium of web-based peer-to-peer value transaction. Taking it offline – and spending it at physical locations – is always going to be contradictory to its original purpose. After all, we have an anonymous payment system already… cash. So what’s wrong with that?
Hileman makes the point that our days of using cash might be numbered. As more payments are digitized, we may find ourselves in cashless societies, like those developing in Sweden, South Korea, and China.
Perhaps then, buying coffee with cryptocurrency is about so much more than the simple act it describes. Buying coffee with cryptocurrency is about preserving choice and freedom.
This is all before we even start thinking about how to scale the damn thing.
The news was shared in a wordy statement from the NEM Foundation, a non-profit. Unsurprisingly, it held the cryptocurrency market downturn responsible, even while describing its shoddy spending practices.
“The XEM exchange rate has suffered catastrophic drops from this time a year ago, just as many other ambitious cryptocurrency projects have suffered, now the NEM Foundation is facing challenging budget decisions,” stated the Foundation.
“We are in a tough spot like many others in this space. It is our duty to act quickly to ensure the longevity of the NEM Foundation ecosystem and development.”
According to NEM, when its recently-elected council looked at the books and studied the results of 2018, it saw “very little accountability for funds,” leading to a whopping 9 million XEM being sold per month, which it called its ‘burn rate.’
Nine million XEM is currently valued at over $360,000.
The entire organization hierarchy will shift as a result, with regional teams eliminated and replaced with “newly created, product-focused teams” in a bid to encourage return on investment.
“In terms of running an effective organization, the existing structure failed,” NEM noted, expressing the burn rate would be reduced by 60 percent to streamline extraneous spending.
First, the dollar–value gained by selling 9 million XEM per month would have varied widely. For instance, in the heat of last January’s bull market, the price of XEM rarely dropped below $1, so the possibility of making close to $9 million in a single month isn’t unreasonable.
Let’s take this to the extreme. This month, the price of XEM didn’t actually fall below $0.04. Hypothetically, if the NEM Foundation sold 9 million XEM for an average token price of $0.04, that’s still $360,000 worth of revenue to power just 30 days worth of operations.
But curiously, the newly-elected president of the NEM Foundation, Alex Tinsman, told CoinDesk the team had spent roughly 80 million XEM on marketing between December 2017 and January 2019 (from peak bull market until now).
Over 14 months, that’s an average monthly marketing budget of 5.7 million XEM. This is over 60 percent of the disclosed 9-million-XEM-per-month burn rate.
If we use January’s $0.04 token price as a rough guide for calculating the NEM Foundation marketing budget, it could have placed advertisements on 800 busses each week. That’s without a potential discount for plastering so many goddamn busses.
Hard Fork reached out to the NEM Foundation for a statement on exactly how much dollar value was generated by selling its cryptocurrency each month, as well as the conditions of the sales, and will update this piece should we hear back.
The Bitcoin bears are the new boogeyman
NEM devs are yet to release an exact date for the launch of its first product, Catapult, which is supposed to enable support for deploying smart contracts and decentralized apps.
This makes news of NEM having funnelled so much money into marketing all the more confronting, especially when its ecosystem is yet to be fully realized.
More irritating is the repeated rehashing of the “Crypto Winter” meme for use as a scapegoat, as if the structural problems of a business are solved by a simple upswing in price.
“In terms of running an effective organization, the existing structure failed. Maybe that didn’t seem like a big problem when the XEM price was high, but it’s a very big problem as we seek to sustain a viable organization in the ‘Crypto Winter,’” the statement pleads.
Granted, the Foundation (at least, its new leader) says it understands the dangers of such disproportionate “marketing” budgets, albeit after announcing staff layoffs.
If cryptocurrency startups are so keen on rebuilding trust in their projects, they can start by being honest: the bear market didn’t force you spend so much on “marketing,” and blaming the “Crypto Winter” is now officially cliche.