Outside funding of cryptocurrency and Bitcoin startups

According to CB Insights, VCs spent $74 million across 40 BTC-related deals in 2013,  the two largest rounds were Coinbase ($25m) and Circle ($9m).

Despite the increased media attention, even if these numbers are repeated again this year this may not help boost the poor performance for VC funds as a whole.1 Even with the optimistic outlook many of the VC firms apparently now have, their actual results at ~6% per annum over the past decade have underperformed the Russel 2000.2

Why?  Some VCs not as nimble at feeling out business models with actual revenue generating capabilities as many angel investors are.

Changes over four decades

Consistent with secular theme of ubiquitous adoption of open source software as well as cloud computing that has lowered the cost of developing software and more importantly the costs associated with launching new companies, so too has this trend lowered the threshold for tech investments.  Where previously the funding of start-ups was limited to deep-pocketed professional investors, namely VCs, the deflationary landscape has increasingly enabled greater numbers of individual investors, angels to compete in funding environment.

The new class of angel investors is more astute than the passive and non-tech-savvy high net worth investor of yesteryear.  Increasingly, angel investors today have deep domain experience.  Many have worked in the sector that they are funding, are entrepreneurs and experienced operators themselves and visionary at feeling out new business and innovative trends.  The historical barrier to entry for angel investing is one of risk given the magnitude of investment commitment.  With lower costs of starting businesses, this hurdle is largely gone.  Smart angels with deep operational domain expertise is disruptive to the traditional VC universe.  They may be better attuned and friendlier with terms that are less predatory than the historical VC norm.

This is not to say that VCs will not flourish once again, however as it stands most angels began as entrepreneurs and learned how to generate sales and revenue first hand.  Furthermore, as noted above, over the past decade technological costs that have driven down expenses.  For example, relatively cheap cloud services like github and Compute Engine provide services (CaaS, SaaS and IaaS) that allow many tech start-ups to be leaner than before in terms of what funding they require to cover operating costs.  On top of this are better organized angels who now have an entire ecosystem of choices to fund through such as AngelList, 500 Startups and Y Combinator.  In fact, over the past six months, BitAngels.co have invested $7 million in 12 crypto projects globally.

Another way that cryptocurrency-related startups are being funded through are crowdfunded IPOs.  This includes Mastercoin, which raised $5 million in part by 4,700 bitcoins from “investors.”3  NextCoin (Nxt) and the upcoming Ethereum IPO have also included raising funds through bitcoin transfers.  While I am not necessarily endorsing any of these particular fundraising models, this illustrates how small (and perhaps large) development teams can financially cover costs without seed funding by VCs.

See also: MoneyTree Report from PricewaterhouseCoopers and the every-growing list of funded Bitcoin companies listed on CrunchBase

[Special thanks to DA for his comments and feedback.]

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  1. Kauffman Foundation Bashes VCs For Poor Performance, Urges LPs To Take Charge from The Wall Street Journal and Most venture capital funds lose money from CNN|Fortune []
  2. Venture capital kingpin Kleiner Perkins acknowledges weak results from Reuters []
  3. Backed by $5 Million in Funding (4,700 BTC), Mastercoin Is Building a Flexible, New Layer of Money on Bitcoin from MarketWired []

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