Study Suggest that Venture Capital is Replacing ICOs, Signalling a New Age for the Blockchain Ecosystem

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This is the latest post by regular guest writer, Eddie Mitchell. Eddie is a seasoned writer on all things Blockchain and crypto and we’re delighted that he has become a regular contributor to Rhetoriq.

Initial coin offerings (ICOs) have been the go-to capital fundraising choice for blockchain startups ever since the Ethereum ERC20 standard protocol hit the industry in late 2015; though as governments and industry experts wrangle with the digital currency crowdfunding phenomena through an enduring bear market, venture capitalists (VCs) are actively entering the space.

Transition Period

What may appear as another industry crushing, gains destroying crypto winter for retail investors (individuals), the VC world has caught a whiff of something rather spectacular in the air. That said, so have hedge funds and other large institutional investors.

Albert Wenger, Managing Partner at Union Square Ventures spoke to CNBC in late June 2018 and aptly described why CV funding is hitting blockchain, “…I think people are seeing the winning blockchain here might be worth a trillion, or a couple of trillion”. With regards to ICOs, he criticizes the typical cycle that occurs when discounted ICO tokens are immediately sold once that particular token goes to trade, he says, “…investors cash out, they make a handsome return, and someone else is left to hold the bag,”.

The cryptocurrency markets may have seen better days, but it appears there are stirrings within the industry that may be skewing the figures, such as startups seeking a mixture of funding options outside of the typical token sale process.

Latest Study

The latest report to display swathes of institutional financers entering the blockchain industry has come from Outlier Ventures, a VC firm with a penchant for fourth industrial revolution (4IR) technologies such as robotics, artificial intelligence (AI) and Internet of Things (IoT).

Affectionately titled “The State of Blockchains Q3 2018: The Empire Strikes Back”, the study carefully examines the “all-time high” of VC investments into the blockchain industry; as the bear market conditions worsen, so do retail investor returns on ICOs. It should be noted that a report from ICORating provides a broader spectrum of factors that are contributing to the declining figures such as ICO value disparity, regulations and, “an overall market downtrend, lack of new ideas from project teams and the not-so-fast pace of actual blockchain implementation in the traditional market.”

The report from Outlier Ventures offers critical additional viewpoints; the first key takeaway is the parallels between ICO decline and VC increase. According to the report ICOs managed to raise an estimated $1 billion in Q3 2018, a sharp decline when compared to the estimated $3.8 billion in Q1; these figures are backed by ICOdata.io findings. Alongside this decline, the study estimates that VC funding is up 316% percent from 2017, sitting at almost $3 billion in 2018.

Bitmain’s Billions

It notes that one of the highest VC raises “in terms of equity”, was the $422 million raised by crypto-mining rig manufacturer Bitmain in Q3, upping their total to $872 million. Debatably, this figure sits somewhere around $764.7 million according to CrunchBase, regardless, it accounts for a substantial portion of this year’s total, which had been gathered across 3 funding rounds involving twelve VC firms. Furthermore, the company is looking to take the company public and will be launching a traditional initial public offering (IPO) in Q4 2018 or Q1 2019, whenever it lands on the Hong Kong stock exchange.

After a successful pre-IPO funding round completed, Bitmain is shooting for an $18 billion IPO, signalling the swing of the paradigm from ICO, to traditional funding methods.

In what it describes as the “professionalization” of the industry, Outlier Ventures Founding Partner Aron Van Ammers said:

“As we see the focus of early stage investment into tokens shift away from tech-savvy retail investors toward VCs, hedge funds and ultimately larger institutional investors, we’re seeing a large growth in new businesses and services enabling the larger institutional investors to enter the space.”

Market Maturity

If anything, the study from Outlier Ventures indicates a new state of market maturity, one where the technology no longer dwells on the fringes of society but instead finds itself faithfully placed center stage by intuitions who built financial empires spotting the best horse in the race.

Outlier Ventures describes the early struggles of the blockchain ecosystem as one fraught denial from traditional financial services, but as domestic startups began moving their operations abroad in search of greener pastures, governments became “increasingly sensitive” to such departures, ones that “forward-looking countries” have benefited from by “engaging with regional banking entities to foster a regulatory environment to capture the vast economic gains”.

CEO of cryptocurrency exchange Binance, Changpeng Zhao, had previously argued that ICOs are highly beneficial to startups in the space and furthermore, beat VCs out of the game by being less time-consuming, tedious and allow startups to retain total control over their projects.

A recent move by the world’s largest cryptocurrency derivative exchange BitMEX shows that Zhao’s comments may have been overtly bullish at the time. The exchange with a daily volume of around USD 1 billion announced that it will be launching its own VC arm called BitMEX Ventures.

This role-reversing move has already seen action with BitMEX Ventures having their first investment placed into cryptocurrency portfolio app, Blockfolio, and a second investment planned for FRST, a cryptocurrency data technology company. Others such as Coinbase are also tapping this avenue of potential.

Time for Change

ICOs appear to have had their golden hour and are likely to continue to remain a staple within the industry, but there is a good chance that they will cease to be the primary funding method for startups.

The findings from Outlier Ventures show that private tokens sales are replacing public sales at the start of a company’s funding cycle; it describes this as a “positive signal” that reflects how the “equity markets developed over time”. Outlier Ventures anticipates the dominance of VCs during the earliest and riskiest stages of a projects funding cycle, and as a consequence, public token offerings will be issued at later stages when their respective companies have reduced risk for retail investors.

Both crypto-related and external VC funding options are entering the industry at a rapid pace; for better or worse, ‘real money’ will be backing exponential growth throughout 2019.

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