December 26, 2018, 11:23:52 AM EDT By Guest Contributors
By Arul Murugan, Managing Partner of Algo Capital
As the blockchain community is passing through crypto winter, it seems as though we’re leaving 2018 with more questions than when we started it. What was once an industry full of grand ambitions and heightened investor interest has quickly devolved into a wave of uncertainty and doubt. As ICO projects lose anywhere between 70% and 90% of their original market valuation based on their token economics, skeptics and enthusiasts alike are increasingly uncertain about where the market will go given the current climate.
While ICO funding has almost trickled to zero and some seem to be cautiously stepping away from the industry during this persistent bear market, venture capitalists (VCs) are taking their place, making the most of the opportunity to invest in promising blockchain projects before the fold. We may be facing the prospect of a crypto winter, but it’s a renaissance moment for VCs in blockchain.
In 2018, VCs invested an estimated $2.85 billion USD into 119 blockchain projects in just first three quarters — the most ever in the industry’s history. And despite steady decreases in crypto market capitalization, VC investment saw a 316% increase this past year; a value that’s currently showing no signs of slowing down.
Just recently, early blockchain pioneer David Johnson (and a friend of mine) launched the Yeoman’s Growth Capital Fund, looking to raise $200 million for growth capital for emerging blockchain projects and drive adoption. Especially in the United States, where a number of high-profile infringement cases have foreshadowed heightened regulatory specification, VC investment in companies equity has fast become a more compliant alternative to the volatile Initial Coin Offering (ICO). Moreover, majority of the blockchain projects are early stage companies (in seed or series A stage) and are better suited for equity investments rather than token investments.
But what’s in it for the VC? Why venture investments are dramatically improving during this bear market? To answer this question, it’s first important to note that VCs entering the blockchain space aren’t reinventing the wheel here; VCs have been investing in bear markets for years. There’s plenty of evidence to show that startups can flourish during a recession. In fact, many of the corporate giants around today were created during periods of economic decline.
Walt Disney Productions was famously created in 1929, at the beginning of the Great Depression. Microsoft was founded in 1975 when unemployment rate was at its highest point in nearly 30 years. I created my own company Enrich in 2003 at the bottom of the dot com bubble and reached the first $10M mark in less than 4 years and subsequently awarded the Inc. 500/5000 company for 5 consecutive years from 2008 to 2012 during the major recession and built the company to about 500 employees across North America, Europe and Asia during 2 market cycles of bear and bull market and successfully exited to a large private equity in early 2016.
Even in a declining market, a company’s overall value proposition will always remain steadfast. And for VCs in particular, the opportunity to invest in an uncertain market only increases their chances of achieving a low-valuation, high-equity deal — sweetening the pot.
Market losses are a VC’s gain. The canny VC thrives on bear markets: A wise investment in a slumping market can yield significant returns in sunnier days. Now that the dust is settling, VCs are making realistic investments in emerging projects at a reasonable valuation terms. Gone are the days when blockchain projects could set astronomical valuations for projects with little infrastructural backing. As emerging projects look for more compliant investment opportunities, VCs are finding that they have more bargaining power to conduct thorough due diligence on which projects to support.
Not only will this mitigate the risk of project failure (64% of projects in 2017 failed either before or after their ICO), but it will also allow VCs to make accurate appraisals of value. For now, at least, the speculative frenzy of late 2017 is behind us, and what remains are projects with proven potential to weather a fluctuating market.
The results are already materializing. Blockchain and cryptocurrency firm Pantera Capital recently announced that their venture fund, dubbed VFII, is already up 60% despite bitcoin’s 53% drop over the same period, and also the VC fund outperformed both their ICO fund and crypto fund. a16z crypto’s $350M fund is actively investing in many blockchain projects with a long term vision during this downturn.
Large Institutional players like Baakt (ICE), Nasdaq, Fidelity, TD Ameritrade and few others have announced launching their products in Q1 2019. Along with three other partners, recently-launched Algo Capital, a $100 million venture fund , to support promising companies building on top of the Algorand blockchain. Algorand itself announced closing $62M equity round two months ago, in which we were the lead investor along with other reputed VC’s like USV, Pillar VC, Slow Ventures and large financial institutions like CMB International (a wholly-owned subsidiary of China Merchant Bank).
An uncertain market should not hold any bearing on the success of a company. By remaining laser focused on setting achievable objectives, VCs can help promising projects set tangible ROI targets that lay the groundwork for long-term success. VCs look at fundamentals and are not just driven by speculation; they look for products and not just technology , as they believe products with real use cases will drive adoption.
We are witnessing a paradigm shift in the blockchain landscape that will fundamentally change how emerging disruptors, specifically startups, achieve success. All four partners in Algo Capital are ex-entrepreneurs, who are rolling our sleeves and supporting our portfolio companies in shipping the product out, onboarding millions of users, driving adoption and bringing real value.
What is certain is adoption drives value, and the market will eventually catch up to that. Algo Capital is focused with the mission of bringing adoption to the blockchain space, and we believe strong players sustaining this down market with a clear long-term vision will succeed.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.