Blockchain investing is in. According to a report from Outlier Ventures, $23.7 billion has been raised by blockchain startups since 2013, in early stage funding rounds.
Blockchain startups have raised finance in multiple forms including ICOs, debt, direct investments and crowd-funding. There is a lot of competition among investors too. It would seem they are so keen to climb over each other to get a slice of the market, that a large number of investors provide nothing more than capital.
“Investments in equity are considered a hedge against liquid tokens” said Joel John, Research Analyst at Outlier Ventures. He explained: “In addition to a lack of much-needed guidance during the early stages, this also brings along expectations of quick exits from investors that are used to typically being in liquid assets like ICO tokens.”
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And that is where the concern with blockchain investing sets in. With the exception of a small number of exchanges and wallets, “there hasn’t been an application that has broken through to mainstream adoption, yet. This definitely isn’t for lack of capital” stated the report.
In fact, despite blockchain investing increasing nine-fold since 2013, pre-seed, seed and angel rounds account for 75% of all the deals in the ecosystem.
The report stated: “The number of early-stage backers has increased substantially due to the massive returns from early investments in Bitcoin and Ethereum. However, this financing has not converted to follow-on rounds, and indicates that while early-stage funding is relatively easy, many traditional VCs are waiting for evidence of product-market fit and clearer signs of revenue before making further investments.”
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Indeed, if you speak to experts in blockchain, many would argue that Bitcoin has given the technology a bad name. It has become associated with hype, some have even drawn parallels with pyramid schemes.
Investors are looking for evidence of a real revenue model. To some, it is deja vu, investors who have been around for a couple of decades can’t help but draw an analogy with the dotcom boom — when hype seemed to triumph over reason.
But the lesson of the dotcom boom and crash, is that lurking among the hype were some exceptional businesses — many of which did go on to change the world.
And so it is with blockchain.
The Outlier Ventures report stated: “There is a shift from focusing purely on cryptocurrency to convergence applications. AI leads the pack, with Fintech and data analytics starting to close the gap. A growing area of focus is data ownership, along with increasing new interest in self-sovereign identity following the recent data exploitation scandals.”
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The market is cyclical
The report also argued that fund raising can be heavily dependent on the price of bitcoin.
“Founders are dependent on Bitcoin’s price to raise capital for what may not necessarily be a token dependent project,” it states. “The heavy exposure of institutional players in the ecosystem to token prices swing risk appetites on the basis of how tokens perform. This means there’s greater competition to raise capital from a handful of backers during bear markets, and also competition against a number of other equally well-funded projects during bull markets.”
The report said that “expertise and value-added services are the only key differentiators that teams can rely upon.”
The rise of London
Blockchain investing tends to focus on hubs, and it helps blockchain startups trying to raise money if they are based in one of these regional hubs.
“The United States leads globally when considered at a national level. However, regional FinTech hubs such as London are catching up with former favorites such
as San Francisco. London has evolved to be a hub for early-stage companies looking to raise seed stage rounds, roughly $1 billion has been raised by blockchain companies in London since 2013” stated the report.”