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The current crypto and blockchain funding environment consist of initial Coin Offerings (ICOs), Initial Exchange Offerings (IEOs), and private funding rounds.
In the last few years, the growing and maturing blockchain/crypto landscape have attracted private equity funds to the market. Numerous benefits provided by the emerging blockchain and crypto tech have incentivized businesses and individuals to explore and invest in it.
2017 was when cryptocurrencies, blockchain, and ICOs really began to take off, with most funding raised by blockchain companies at this period coming through ICOs. Bancor protocol’s innovative token sale of $153 million set a standard for a new generation of funding into the sector.
However, a surprising turn of events in 2019 regarding the amount invested into blockchain/crypto technology and companies behind them.
After the incoming funds peaked in 2018 with $5.5 billion in capital raised, the last year saw a sharp decline — with less than $3 billion of capital flowing into the ecosystem.
Given the COVID-19 crisis, the big question is what this year holds for enterprise blockchain and crypto investment. Let’s look at what the trends look like in the funding of crypto and blockchain projects.
Venture Capitalist Firms Replace ICOs
Back in 2017, some blockchain evangelists speculated that ICOs would render traditional venture capitalists (VCs) a thing of the past, but an entirely different story has played out.
For the promising potential ICOs had shown at one point in time, they effectively became obsolete last year, mainly due to a high entry barrier in the fundraising process and the high risk of investment funds being siphoned from hacked websites.
A good instance of this is the Etherparty hack, where hackers subtly altered the Ethereum address exhibited on the ICO site to redirect incoming funds to the hackers’ address.
On the other hand, VCs were still interested in offering equity funding to the new blockchain and crypto ecosystem. Again, mostly only advanced-stage funding rounds saw a large influx of funds coming in.
Many venture capital firms have emerged in the past few years, often funding startups and investing in innovative projects worldwide.
Today, more funds are concentrated in investment pools than ever before, representing a great opportunity for blockchain and crypto companies big and small.
For instance, Robinhood, a consumer investment app, has continued raising funds for a fourth consecutive year, this time clutching $280 million in a Series F funding. A figure, a leading fintech company in both home equity and the blockchain space, raised two rounds of funds that totaled close to $175 million.
In many ways, 2019 was the year of enterprise-level funding in crypto and blockchain, with the deal structure increasing in complexity by having more investors per deal.
More money is being invested per project, indicating the maturity of the blockchain/crypto investment market. Fidelity’s Global Institutional Investor survey recently found that 80% of investors think that blockchain and similar technologies will fundamentally change the industry by 2025.
Digital Currency Group currently tops the list with about 95 blockchain-based portfolio corporations such as Coinbase, Circle, and Figure under it.
Meanwhile, Pantera Capital comes in second with around 55 portfolio corporations, while BlockchainCapital has 47.
IBM has also invested more than $200M in a blockchain-powered data-sharing solutions project, while Google has apparently been investing in the blockchain/crypto market since 2016.
The Rise of IEOs
In just over a year since they became popular, IEOs have replaced ICOs as the fundraising system of choice for most blockchain and crypto enterprises.
Essentially, IEOs are a token sale that operates via a partner crypto exchange. It’s identical to an ICO in almost every way except that investors who can participate in the sale are typically limited to users on the associated exchange.
The IEO process kicks off with an agreement between a cryptocurrency project and an exchange. The exchange typically requires potential investors to complete (and pass) an application process before being allowed to join the IEO.
Binance Launchpad was arguably the best IEO launch platform on the market in 2019. The exchange has had many successful IEOs, including Matic Network (MATIC), BitTorrent (BTT), Celer Network (CELR), Fetch AI (FET), Bread (BRD), and others.
Despite some poor performance cases on the open market, IEOs have proven to be an easy and low-risk way for blockchain and crypto projects to raise capital without offering up a large portion of the total token supply, with the typical IEO bringing in around $3-8 million.
Investment Deals Are Moving to China
In March of this year, research company CB Insights recently released The Blockchain Report 2020, reviewing the blockchain and crypto landscape in 2019 and providing an outlook for 2020.
According to the report, four years ago, 51% of investment deals for crypto and blockchain companies were for US-based companies, while only 2% of investment went to China-based companies. However, in 2019, US deals dropped by 20%, while China’s grew by the same percentage to 22%.
This is a clear indication that crypto and blockchain investment deals are rapidly moving towards emerging markets in China.
The report findings also indicate that funding amounts for cryptocurrency and blockchain startups fell over 30% in 2019, but the deal volume only decreased 2% yearly.
According to the report, Fenbushi Capital and Blockchain Capital topped the charts as the most active VCs between 2015 and 2018, while Neo Global Capital and Coinbase Ventures were the most active VCs 2019.
Moreover, equity funding to crypto and blockchain companies overtook ICO funding in 2019 as the ICO boom of 2018 buckled under stringent regulatory scrutiny.
The ICO boom, which raised $7.8 billion in total, was largely unregulated. In 2019, total funding through ICOs fell to $371 million as regulations tightened to reduce scams. In comparison, crypto and blockchain companies raised $2.8 billion in equity funding from venture capitalists in 2019.
Crypto, Not Blockchain, Is Winning
Between 2015 and 2019, annual VC-backed deals and financing into enterprise blockchain have been surpassed by funding to crypto companies.
In 2019, cryptocurrency companies received $2.3 billion in VC-backed funding, while enterprise blockchain received $434 million.
Furthermore, almost half of the enterprise blockchain funding came from one deal; Ripple, a $10 billion company that uses crypto to transfer money across borders, announced the closing of a $200 million fundraise in December last year.
In conclusion, every blockchain/crypto venture needs a capital injection to develop further and contribute to the tech’s progression.
In 2019, the amount of cash investment in blockchain technology and cryptocurrency startups was almost 30% lower than 2018’s high of $4.3bn.
Without a doubt, IEOs have emerged as a dominant platform for token sales and fundraising via crowd sales, as they have mitigated risks and dire consequences associated with ICOs.
On the one hand, there’s no question that cryptocurrency is attracting more venture capital funding than pure blockchain projects.
Now that we are in 2020, we have to wait and see how other blockchain and crypto firms will perform in sourcing funding and what the future holds for them.