VC Investment trends: Blockchain & Crypto companies, new business models for creators and DeFi?
Blockchain and crypto businesses raised a total of $4.5Bn across all financing types in 2019 (one major outlier — Bitfinex’s $1Bn token issuance). According to Messari and ICOdata, 309 crypto-asset sales took place, raising $1.8bn. It is unclear which investors were partaking in these funding activities but we are to believe that the majority are still retail investors.
Meanwhile, equity funding grew in importance. In 2019 it accounted for 678 funding rounds, raising a total of $2.7Bn, with participation from 997 accredited investors — according to CrunchBase.
Traditional venture capital is now the dominant source of finance for early and growth-stage crypto businesses, accounting for >70% of early-stage funding across all financing types when one removes Bitfinex’s $1Bn crypto-asset sale from the data.
Venture Capital firm Andreesen Horowitz, for instance, recently announced its brand new 515 million fund that will be used to invest in crypto networks and businesses. These are some of the industries they are excited about:
Next Generation Payments: The payments system we use today was designed more than a half-century ago, and the way we transfer and distribute value has lots of room for improvement. Transferring actual value quickly and cheaply without a third party, in much the same way we currently transfer data like emails or photos, will soon be technologically possible at scale.
Modern store of value: Consumers, particularly digitally native users and those in places where the currency isn’t stable, want a modern store of value that is scarce, secure, durable, portable, and censorship-resistant. Gold has long played the role of a fiat substitute, but Bitcoin is a digital alternative that is gaining acceptance and adoption around the world.
Decentralized finance: DeFi is a new stack of financial services — lending, derivatives, insurance, trading, crowdfunding, and more — built on top of blockchains that embraces the core values of the open internet, including 1) open access to anyone in the world; 2) commitment to open source code; 3) permissionless extensibility by third-party developers; 4) minimal-to-no fees; and 5) encryption-backed security and privacy. DeFi has been rapidly adopted by early users and developers: they have deployed hundreds of millions of dollars in leading DeFi protocols, while developers have embraced DeFi’s open and rich design space.
New ways of creators to monetize: Over the internet’s history, many new business models have been invented, including banner ads, search ads, video ads, in-app payments, and digital subscriptions. Each new business model helped fund a new set of digital services and a new source of income for creators. A16Z thinks the next wave of internet business models will come from crypto. Rather than engaging audiences through centralized gatekeepers that charge high rents and create self-serving rules, creators can use token models that bypass gatekeepers and give their fans a direct stake in their success. Today the video game industry is on the leading edge of this trend, experimenting with things like digital goods that can be traded on secondary markets and transferred between games. In the near future, they expect crypto monetization models to be applied to other creative activities — including writing, music, podcasting, programming, design, and more.
Web 3: One of the key reasons the internet is such a powerful invention is that, because it is primarily software-based, new networks can be created on top of it. Companies that own networks have unilateral power over important questions like who gets network access, how revenue is divided up, what features are supported, how user data is secured, and so on. This creates tension as corporate interests often diverge from the interests of those who depend on the network, including users, developers, businesses, and creators. Blockchains enable the creation of decentralized networks that make strong commitments — baked into the architecture of the network itself — as to how control and money will be distributed among network participants. We are still early in this Web 3 build-out. High-performance programmable blockchains will make decentralized network development much more accessible. After years of R&D, a number of next-gen programmable blockchains will begin rolling out in the near future.
Investment trends in crypto: The rise of venture capital
This is the first in a series of articles, where we break down the crypto venture capital market. The series has been…
What are your thoughts on these upcoming investment trends for VCs? Please let us know in your comments below!