Venture funding is a special type of funding that institutional investors provide to businesses and start-up entrepreneurs, primarily during the development phase of a project. The word "venture" means - risky, adventurous, which fully describes the main feature of this type of financing - high risks.
However, this type of funding can be provided during any other phase.
It is usually handled by specialized firms, investment banks, high net worth individuals and other financial institutions.
It also sometimes happens that it is not direct funding that is offered, but technical or management innovations.
For start-ups and small businesses, venture funding is provided only when high returns are expected in the future due to an exceptional business idea, unique product, or some revolutionary technology.
An important point is that venture capitalists invest their funds in enterprises in the early stages not for free, but in exchange for shares or a share in the property, which allows them to influence on the further development of the project through the received voting rights.
However, most start-ups are willing to use this kind of funding because they don't have the skills, time, or ability to look for retail investors on their own. But the investors themselves consider this activity rather risky - it is far from the fact that the "promising idea" will turn into a successful enterprise. Therefore, most of these investors are actively diversifying their portfolio by investing in several different startups, of which at least one will be able to bring profit or even super-profit. And in general, it will increase the total value of the investment portfolio.
How does this relate to cryptocurrencies?
Directly. Venture funding in the world of cryptocurrencies is no different from usual, except that startups in which they invest money will directly relate to blockchain-based technologies.
However, due to the fact that this whole area is young - there has not been even 10 years of active development, the risks are especially high here. And venture capitalists are well aware of this. Because they have an excellent analogy before them - the beginning of the era of the development of the Internet, the so-called "era of the dot-com". A lot of newly created sites promised to develop into something useful and profitable, but only a few have survived to this day. True, it was they who became the basis of the modern Internet, and in addition, they brought their investors full-fledged superprofits.
The world of cryptocurrencies is now going through its "dot-com era", so many startups really have a chance to grow into something profitable. Therefore, investments in crypto and blockchain technologies are now the most attractive. Some modern large investors are now purposefully working with just such projects.
However, there is one significant difference between dot-coms and blockchain-oriented projects - the attraction of venture capital using the "Simple Agreement for Future Tokens".
How are venture investments different from ICO/IEO?
In short, ICO/IEO is mostly for the retail investors, and venture capital is provided by institutional investors and HNWI (High-net-worth individual).
Initial Coin Offering (ICO) and Initial Exchange Offering (IEO) are crowdfunding techniques that allow startups to ignore any equity liabilities as investors are not buying them, but the issued digital tokens. These can be both highly profitable individuals and ordinary retail investors. And it is them, on who ICO/IEO that it is mainly focused on.
On the other hand, venture funding orders quite high requirements from startups that are difficult to reach. Yet institutional investors and large financial institutions are extremely reluctant to take unnecessary risks.
Besides the main contingent of investors, there are other differences. They are as follows:
- If a crypto startup is looking for venture funding, then it must be ready to demonstrate a working product. As a last resort, a correct, logical and well thought out presentation, covering the main aspects of the product's operation and its further implementation. The startup team must be sufficiently experienced and well-motivated. And most importantly, the developers must be ready to give some of their shares to venture investors so that they have the opportunity to control the further development of the project. As for startups with ICO / IEO, they only need a well-thought-out "white paper" and an approximate "roadmap" for further development - this is already enough to attract retail investment.
- Crypto startups looking for venture funding need to be reliable. They will be checked for a long time and thoroughly to exclude the possibility of fraud. With ICO, the situation is exactly the opposite - every year more and more scammers use this fundraising technique, without providing anything to their investors in the future. Actually, this is why decent startups are trying to use a more reliable and not yet discredited version of IEO.
- Venture investments are a huge amount from one investor and ICO/IEO are many small deposits from many different individuals.
Venture funding rounds
Almost all startups go through 4 major rounds of venture funding. Each round represents a certain stage in the development of the project, and not too many reach the end.
- Initial (seed) round. At this stage, the main sources of funding are the personal capital of the developers, their friends and relatives. Plus the so-called "angel investors". Wealthy people who invest in startups they like. It is they who are usually called venture capitalists at a later stage.
- Series A. Usually - the first institutional funding of a startup. At this stage, the company is already required to demonstrate a viable product. Venture capitalists investing at this stage typically acquire 50 percent of the company's shares. And the funds received are used for further development and attraction of specialists.
- Series B. A bigger cash injection than during Round A. The startup begins to look for opportunities to expand and further develop. Almost all technological risks have already been eliminated and the idea is starting to bring real income.
- Series C. Late stage. It comes when a project wants to further improve its financial balance and provide capital to increase further profits. And in some situations, even go to the public market and place your shares on the stock exchange. This is exactly what is happening now with many projects related to cryptocurrency and blockchain.
In addition to these major rounds, companies can raise bridge financing and repeat, but on a smaller scale, series A, B or C.
The main benefits of such funding for crypto startups
Raising large venture capital is at least extremely beneficial for a startup's reputation. And besides reputation, the benefits will be as follows:
- Raising this kind of funding builds credibility and gives confidence to developers and other investors.
- Large investors are less cruel to failing startups - in fact, there is no particular obligation to pay off the debt if they fail. With an ICO, the developer's reputation will be destroyed, and he will be branded as a fraud.
- In addition to funding, the startup will be able to get expert advice throughout the cooperation. Many of these tips can make a difference in a growing company.
- In the United States and most European countries, venture capitalists are regulated, so there is no need to fear that they will unfairly “squeeze the business out”.
What motivates big investors?
Two main points are high (if possible - ultra-high) profit and an introduction to blockchain technologies.
It is no secret that many early cryptocurrency projects are now showing impressive growth in capitalization, and with it - not only return, but also multiple coverage of the initial investment. The bitcoin market, for example, already outperforms the UK stock market, local markets for gold, oil and other assets.
But still, the cryptocurrency industry is yet in its infancy and has tremendous opportunities for growth and development. And venture capital firms understand this, so they don't want to stand aside. Even with the high volatility of this new market. However, as we remember, “venture most common meaning is risky, adventurous”, so investors are no stranger to additional risks.
Examples of an effective union of capital and startups
Institutional investors are very reluctant to miss out on potential super profits, so many have already begun to specialize exclusively in crypto and blockchain startups. Some of the most active and well-known companies that carry out such activities include the following:
- A16z Crypto is a subsidiary of Andreessen Horowitz.
- Pantera Capital is an American bitcoin investment firm and hedge fund.
- Galaxy Digital is a cryptocurrency trading bank founded by billionaire Michael Novogratz.
- Winklevoss Capital is a fund managed by Tyler and Cameron Winklevoss. Famous for their early investments in Bitcoin.
- Digital Currency Group (DCG) is a firm headed by Barry Silbert.
- Coinbase Ventures-VC is the investment arm of the Coinbase crypto exchange.
- ConsenSys Ventures is the investment department of ConsenSys, a project based on Ethereum technology.
- Fenbushi Capital. Chinese blockchain-oriented investment company.
- Blockchain Capital is the oldest project in this segment of the industry.
- Yeoman's Capital is an active early stage investment project.
There are dozens of other companies that are also actively investing in crypto and blockchain projects related to various segments of the economy, such as retail, finance, real estate, healthcare, supply chain management, etc.
Also not to be forgotten is the Crypto Finance Conference, an event dedicated to crypto finance and blockchain technology attended by many well-known venture capitalists, including the Winklevoss twins, David Johnston of Yeoman's Capital, Ken Seiff of Blockchange Ventures, and Beanstalk Ventures and Michael Bucella of BlockTower Capital and many others.
As for the startups that were able to be realized thanks to venture capital investments, we can name the following: Securitize, Coinmine, Matic Network, Etherscan, BitPay, Bitwala, blockchain.com, BlockFi, Chainalysis, Layer1 Capital, Civic DCG, Wave Financial.
Even some well-known cryptocurrency exchanges owe their success to big capital, such as Circle and Coinbase.
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