A data-driven deep dive on the evolution of the blockchain landscape — and how VCs, token sales, and consortia are shaping its future.
In 2008, at the height of the Great Recession, Bitcoin’s anonymous creator(s) proposed a “peer-to-peer transfer of virtual cash that would allow online payments to be sent directly from one party to another without going through a financial institution.” One year later, the first Bitcoin block was mined.
Fast-forward to today: the total market capitalization of cryptocurrencies hovers around $150B (with a single bitcoin trading for upwards of $5,000), Walmart and Pfizer have completed successful blockchain pilots in food safety and medicine tracking, and initial coin offerings (ICOs) have exploded in popularity, closing on $2B+ in funding in 2017 alone.
Politically, blockchain technology has fostered a renewed examination of today’s highly centralized web, and reignited conversations around currency and value, digital governance, and the fundamental structures and rails of our modern internet.
But how did we get here?
This report will explore how various forces have shaped the current blockchain landscape. Specifically, we’ll take a data-driven look at venture, corporate, and initial coin offering investment trends, and offer some insights into blockchain’s immediate future. (Note that blockchain is the term we’ll use as a catch-all encompassing this ecosystem.)
TABLE OF CONTENTS
- Initial Coin Offerings
- Venture & Equity Investment Trends
- VC funding trends
- VC investor trends
- Investments by category
- Corporate Investment Trends
- Corporate investment trends
- Financial services activity
- Looking Ahead
INITIAL COIN OFFERINGS
- Initial coin offerings have raised more than $2B in 2017 YTD. More than 250 ICOs have taken place since January 2016, with total ICO deals and funding increasing at a faster clip than traditional equity deals and dollars.
- ICOs look to remain the financing method of choice for blockchain startups. On a quarterly basis, total funds raised by ICOs surpassed total funds raised via traditional equity financing for the first time in Q2’17. This trend shows no signs of slowing, especially if regulatory measures prove favorable.
- Over-capitalization is a continuing concern. Teams holding ICOs might be receiving too much money too quickly. When compared to traditional equity financing in the sector, ICOs raise well above the historical average of $3M for early-stage (seed / angel and Series A) blockchain deals.
VENTURE & EQUITY INVESTMENT
- Mega-deals push equity funding up, but growth slows as ICOs take hold. Traditional equity deals and funding could see their highest annual totals ever, although the number of teams raising via ICOs is increasing more quickly. At the current run rate, 2017 is on pace for 188 equity deals worth $830M+, up from 138 and $545M in 2016. Mega-deals have substantially boosted this year’s numbers, with R3’s $107M Series A and Coinbase’s $100M Series D leading the pack.
- More VC firms are investing in cryptocurrency hedge funds, ICOs, and tokens directly. Brand-name investors placing bets on top ICOs could signal institutional interest in this most recent wave of blockchain innovation.
- Corporate investment is set to rise in 2017. The number of unique active corporate investors has hit a high of 91 in 2017 YTD, and is closing in on the number of active venture capital investors participating in equity financings.
- Consortia continue aggressive vertical and geographic expansion. Building on successful pilots and trials, consortia have expanded to verticals well beyond financial services and continue to bolster their ranks with geographically diverse members. Although there have been a number of high-profile members exiting consortia, successful trials and expanding member bases could bode well for the future of blockchain consortia, which are fundamentally tied to the quantity and quality of their respective members.
Initial Coin Offerings
We define initial coin offerings as sales of tokens or coins offered by blockchain companies looking to raise funds, typically denominated in major “gateway coins” bitcoin and ethereum. Tokens are subsequently traded on cryptocurrency exchanges, and rise or fall in value nominally based on the company’s projected product, consumer traction, and/or speculation.
“Political idealists project visions of liberation and revolution onto it; establishment elites heap contempt and scorn on it. On the other hand, technologists — nerds — are transfixed by it. They see within it enormous potential and spend their nights and weekends tinkering with it.”
– Marc Andreessen, Andreessen Horowitz
Investors in ICOs hope to turn a profit by buying early access to potentially foundational blockchain protocols and applications, just as early investors into bitcoin and ethereum did. For reference, a $100 investment into bitcoin on January 1, 2011 would now be worth nearly $1.5M.
Indeed, ICOs appear to be locked in something of a feedback loop with major cryptocurrencies — most notably, bitcoin and ethereum.
A run-up in cryptocurrency prices this year has created paper gains for investors, many of whom have looked to diversify into ICOs. More available capital has also contributed to an increasing number of blockchain entrepreneurs opting to raise funds via ICOs as opposed to traditional equity financing, in turn fostering higher demand for cryptocurrencies broadly, and so on.
Since January 2016, Ethereum’s market capitalization has increased from $78M in January 2016 to near $30B today, while total ICOs are increasing at a faster rate than their equity-backed counterparts.
Over 250 blockchain teams have completed ICOs since January 2016, with more than 55% of them raising during or after July 2017. Cumulatively (since January 2016), the number of ICOs should surpass the number of equity deals in October 2017, underscoring hype around the financing mechanism.
On a quarterly basis, total funding raised by ICOs surpassed total funding raised via traditional equity financing for the first time in Q2’17. This trend continued in Q3’17, with total equity funding to blockchain companies staying more or less stagnant quarter-over-quarter as their ICO counterparts grew 75% over the same period.
Year-to-date, ICOs have closed more than $2B in funding, with many ICOs still ongoing and hundreds more scheduled.
Teams holding ICOs are building decentralized blockchain applications across verticals, ranging from asset management to social networks to prediction markets.
The majority of funds have gone to core infrastructure and development projects, such as Tezos ($230M raised in Q3’17) and Bancor ($153M in Q2’17). Computing and storage companies (themselves often considered key blockchain infrastructure) also saw substantial investor interest, with notable raises by Filecoin ($200M+ in Q3’17), SONM ($35M in Q2’17), and Golem ($9M in Q4’16).
Importantly, teams holding ICOs are adamant that they do not represent securities offerings — which would put them on the wrong side of the law — and instead market their coins or tokens as part of an entirely new asset class altogether.
For example, bitcoin is a token that provides ownership of a unit of account on the Bitcoin ledger. It is impossible to participate in the Bitcoin ledger without owning bitcoin; bitcoin is the network’s exclusive means of exchange. In this sense, bitcoin isn’t a security, but utility within a network.
In the same vein, companies justify large pre-product ICOs by arguing that scarce tokens provide future utility within decentralized networks. ICOs regularly raise upwards of $10M, with teams often presenting a white paper in lieu of an investment memorandum, product, or roadmap.
Token logic notwithstanding, many of these companies could run the risk of mismanagement after receiving such large sums in such a short time.
When compared to traditional venture financing in the sector, ICOs raise well above the historical average of $3M for early-stage (angel / seed, and Series A) blockchain deals.
In Q3’17, all tech angel and seed deals totaled $1.4B, while ICOs totaled roughly $1.3B. In the same quarter, tech angel and seed deals hit 1,600+, while the number of ICOs rose to about 150.
Venture & Equity Investment Trends
Venture investing has shifted over time, with VCs first backing companies exploring bitcoin as currency, then focusing on private blockchain providers catering to financial services and other verticals, and today investing in the token economy.
Continuing roadblocks in the sector include cryptocurrency price volatility, regulatory setbacks — such as New York’s 2015 BitLicense — and scaling issues.
VC FUNDING TRENDS
The recent boom in cryptocurrencies and ICOs has had a material effect on the number of blockchain teams looking for financing, with traditional equity deals on track to set a new record of 188 in 2017, up from 138 in 2016.
VC-backed deals specifically should grow at a similar rate, to a run-rated 77 in 2017. Since 2012, over 650 equity deals to blockchain companies have totaled more than $2.1B.
The growth rate for equity deals and VC-backed deals is slower than the growth rate of ICOs. The highest annual growth for total VC-backed deals came in 2014, when deals grew 180% year-over-year.
Taking a closer look at deal share by stage, traditional equity investment to the sector seems to be maturing, with seed / angel equity deals decreasing to 50% of the total in 2017 YTD, down from 57% in 2016 and 72% in 2015. Meanwhile the proportion of later-stage deals (Series D and later) this year is staying consistent with 2016 figures.
At the same time, given that ICOs currently account for the vast majority of blockchain seed deals, the sector is seeing a substantial uptick in seed-stage companies that are not represented in equity financing data.
Notable later-stage equity deals in 2017 include Coinbase’s $100M Series D, Blockchain’s $40M Series B (with participation from Digital Currency Group, Google Ventures, Lightspeed Ventures, and Mosaic Group, among others), and Bitfury’s $30M Series C, backed by China Credit Limited Holdings.
The steady decline of early-stage equity deals may indicate that blockchain, like other emerging technologies, is undergoing the evolution from creation, to crowding, to consolidation.
However, according to CB Insights data, blockchain’s consolidation may be tight, with blockchain companies failing at a higher rate than tech startups in other areas. Of 103 blockchain companies that received initial seed or angel funding in 2013 – 2014, only 28% managed to raise additional funding, and just one company made it to Series D: Japan-based cryptocurrency exchange, bitFlyer, with a small $1.8M round.
In comparison, of 1,098 tech companies we tracked that raised seed rounds in the US in 2008 – 2010, 46% raised a second round of funding. An additional 14% went on to raise a fourth round of funding, versus blockchain’s 2%.
Looking at VCs and investments, the number of active VCs with at least one blockchain investment in a given year has hit 95 in 2017 YTD, setting them on pace to hit 120 by the end of the year. This suggests VCs are showing renewed interest in the sector, after dropping steeply in 2016.
Digital Currency Group leads the list of top VCs by total blockchain portfolio companies, making well over 100 investments to 75+ blockchain companies. This includes investments in 3 of the 5 most well-funded companies in the space: Coinbase, Circle, and Ripple.
Other blockchain companies on the most well-funded list are Bitmain and Canaan, which focus on cryptocurrency mining, and 21 Inc. and BitFury, which have pivoted away from mining to offer other services.
Cryptocurrency exchange Coinbase has received the most equity funding in the sector, with over $200M in funding from a bevy of brand-name investors.
INVESTMENTS BY CATEGORY
VC investment in blockchain can be loosely categorized into 5 areas:
- Investments in the recent wave of cryptocurrencies and ICOs, most immediately via cryptocurrency hedge funds
- Investments in companies directly correlated with bitcoin speculation, such as exchanges, trading platforms, and mining companies
- Investments in companies exploring bitcoin as a currency, primarily for peer-to-peer payments and remittance
- Investments in farther-ranging blockchain use-cases, like media, e-commerce, and identification
- Investments in private blockchain firms building enterprise-facing software.
1. Cryptocurrencies & ICOs
Cryptocurrency returns have proven both difficult for VCs to ignore and difficult to capitalize on, as typical venture investment mandates require equity investments and the regulatory climate around ICOs remains uneven.
As a result, brand-name VCs have invested into ICO cottage industries, most prominently cryptocurrency hedge funds. Over 70 of these funds have sprung up since the start of 2017, many with venture funds as investors.
Polychain Capital and MetaStable Capital are two such funds that have received lots of attention from venture investors. MetaStable has received investments from Sequoia Capital, Union Square Ventures, and Founders Fund, while Polychain has received investments from Andreessen Horowitz and Union Square Ventures, among others.
Still, ICOs are beginning to see direct venture investments, typically via SAFT (Simple Agreement for Future Tokens) agreements. Filecoin sold tokens to accredited investors and VCs in its $52M August 2017 pre-sale, which saw participation from Sequoia Capital, Andreessen Horowitz and Union Square Ventures.
2. Bitcoin-Correlated Investments
VCs have often looked to gain exposure to cryptocurrencies by investing in startups correlated with cryptocurrency prices and trading volume, such as exchanges or mining companies.
Investments by brand-name VCs into Coinbase (USV, Andreessen Horowitz), BTC China (Lightspeed), Bitmain (Sequoia Capital China), and a number of other exchanges and mining companies emphasize this sustained trend. Bets on exchanges have paid off as cryptocurrencies have seen higher trading volume, with Coinbase’s most recent $100M Series D valuing the firm at $1.5B.
3. Payments & Remittance
VCs have also bet heavily on Bitcoin’s whitepaper-outlined use-case as a decentralized currency, seeing immediate applications in payments and remittances.
However, companies focusing on bitcoin as a means of exchange have often been stymied by the cryptocurrency’s volatility.
Fred Wilson of Union Square Ventures highlighted this volatility in a recent blog post, writing: “This was a Bitcoin t-shirt I bought in the summer of 2013 [for .18 BTC]. At today’s prices, that t-shirt cost me $830 […] You can’t keep spending something that goes up as much as Bitcoin has.”
Indeed, many portfolio companies that focused on payments have pivoted.
Coinbase initially promised “instant payments [and] widespread [bitcoin] adoption” in addition to its exchange, but, after years of minimal consumer traction, now focuses most of its resources on its successful exchange and trading platforms.
Circle closed its $9M seed round in 2013 promoting peer-to-peer bitcoin payments, but no longer mentions bitcoin on its site.
BitPay, a notable exception, received January 2013 seed funding and has stayed true to payments processing, allowing merchants to transact in bitcoin. It recently saw its volume surge 328% and predicts $1B in 2017 turnover.
4. Alternative Use Cases
Farther-ranging blockchain applications have also seen venture backing, especially as the conversation has shifted from Bitcoin to blockchain at large.
USV and Andreessen Horowitz have frequently bet together on alternative blockchain use cases, including investments to Mediachain (which focuses on blockchain-based digital rights management and was acquired by Spotify) and OpenBazaar (which focuses on decentralized e-commerce).
Corporates have also co-invested alongside venture investors in this subcategory, with Filament, a blockchain-based IoT platform, raising a $15M Series C in Q1’17, with participation from Intel Ventures, JetBlue Ventures, and Verizon Ventures, among others.
5. Private Blockchains
Private blockchains — as opposed to public blockchains, like Bitcoin and Ethereum — are often run by centralized administrators and customized for internal organizational use cases, making them more palatable to corporate interests concerned with privacy and security.
However, private blockchains have been criticized for diminishing blockchain’s implied network effects and likened to intranets (as opposed to internets).
Key private blockchain providers include Digital Asset, which has raised $67M in total disclosed funding, and Axoni, which raised a $2.8M seed in Q3’14. Additionally, Chain raised a $4.2M seed round in Q3’13 from Thrive Capital, RRE Ventures, and SV Angel, among others, to build out its “blockchain API,” pointing to virtual currency as just one of many blockchain applications.
Corporate Investment Trends
Corporate investors have traditionally invested into private blockchains and joined consortia, but they are increasingly starting to experiment with public blockchains like Ethereum.
More corporates are starting to invest in the sector, with the number of active corporate investors rising to a new high of 91 in 2017 YTD. This number had fallen in 2016, following a 2015 high of 89 (which was largely due to R3’s Q4’15 consortium-building round, which saw participation from 35+ financial institutions). Notably, the number of active corporate investors is closing in on the same metric for VCs, which has seen 95 active investors in 2017 YTD.
CORPORATE INVESTMENT TRENDS
Since 2012, corporates have participated in 140+ equity investments totaling nearly $1.2B. Corporates have been active investors in the sector’s most well-funded companies, participating in multiple rounds to companies including Coinbase, 21, and Circle.
Corporates have focused specifically on private blockchain development, investing in Digital Asset’s $60M Series A in Q1’16, Chain’s $30M Series B in Q3’15, Axoni’s $18M Series A in Q4’16, and LedgerX’s $11M Series B in Q2’17, among others.
Japan-based SBI Holdings is the top corporate investor, with investments into 8 unique blockchain companies. Google comes in second, with 6 investments that span private enterprise services (LedgerX), and merchant services (Veem).
Overstock.com CEO Patrick Byrne is an outspoken blockchain advocate and has built out an internal blockchain venture and development team, Medici Ventures, to explore the technology. The firm — which is the third most active corporate investor — recently announced the launch of T Zero (t0), a blockchain-based trading platform for capital markets.
FINANCIAL SERVICES ACTIVITY
Big banks and financial services firms were the first corporate players to make direct blockchain investments en masse — unsurprising, given how Bitcoin’s underlying technology lends itself (both technically and in popular thought) to financial services.
Since mid-2014, more than 50 of the world’s major financial services institutions have invested in the sector.
Since June 2014, the 10 largest US banks by assets have participated in 9 rounds totaling $267M in disclosed funding to 6 blockchain companies (including one consortium, R3).
In addition to investing, banks have also partnered with blockchain companies and other corporates on blockchain trials and projects.
Citi has partnered with Nasdaq and used its portfolio company Chain’s blockchain technology to address liquidity challenges in private securities transactions, while JP Morgan Chase is partnering with SWIFT on a blockchain proof-of-concept for cross-border payments (which is also seeing participation from Wells Fargo). JP Morgan Chase is also working with blockchain developer AMIS to expand its own in-house blockchain, Quorum.
Consortia fall somewhere between private enterprise blockchains and public blockchains. In practice, consortia bring select organizations from the same vertical onto a distributed database with less centralized control than a private blockchain — a cooperative neutral ground for traditionally competitive companies.
This creates a middle option, offering both the security of private blockchains (a requirement by many corporations) and the network effects of public blockchains.
Historically, fostering cooperation between participants has been a challenge for consortia — a challenge also faced by their public blockchain counterparts, as evidenced by vicious public governance debates. Collaboration is definitely not a given, especially in the highly competitive fields (such as financial services) that blockchain is immediately targeting.
Four major consortia exist today: Hyperledger, the Enterprise Ethereum Alliance, Ripple, and R3.
The Linux Foundation’s Hyperledger launched in 2015, with notable early members including IBM, Intel, and Wells Fargo. Digital Asset (a private blockchain) and Blockstream (a bitcoin-focused engineering outfit) have since contributed codebases to Hyperledger, implying continued cooperation between private blockchains, public blockchains, and consortia.
In July 2017, Hyperledger announced a production-ready blockchain, Fabric 1.0, and in August announced an expanded food safety trial with Walmart, Unilever, Nestlé, and Dole, among others.
The consortium has engaged in well over 300 projects and currently has about 150 members, with most focusing on software or financial services and hailing from the US or China.
Hyperledger is currently working on 5 blockchain projects, including Sawtooth Lake (supported by Intel) and Burrow, which is exploring interoperability with Ethereum’s smart contracts.
Enterprise Ethereum Alliance
Where Bitcoin’s Satoshi Nakamoto has remained in the shadows, Ethereum founders formed a Swiss foundation and extended a hand to corporates interested in the public blockchain space.
JP Morgan Chase and Microsoft announced early on that they would be utilizing Ethereum to develop their own blockchain offerings — JP Morgan with its in-house private blockchain, Quorum, and Microsoft with its blockchain-as-a-service module for Azure.
In March 2017, the Enterprise Ethereum Alliance (EEA) launched with major support from Microsoft, JP Morgan Chase, and Ethereum-development outfit Consensys, among a bevy of other top-tier corporate players. Importantly, Microsoft’s sponsorship of the EEA places it in direct competition with Hyperledger, which had been spearheaded in no small measure by IBM and the Linux Foundation.
The EEA diverges from Hyperledger in its governance. Microsoft and the EEA plan to utilize the public Ethereum blockchain, and have little say in its technical development. IBM, Linux, and other members of Hyperledger’s steering committee, on the other hand, exert direct control over Hyperledger.
The EEA has added several cross-vertical and cross-sector players looking to experiment with Ethereum, with over 120 new members joining the consortium since its launch — making it the largest open-source blockchain alliance.
Members cut across sectors and geographies, with nearly 50% based in North America, 27% in Europe, and 21% in Asia, according to notes from a recent EEA town hall meeting. The consortium has also announced the creation of seven working groups, including healthcare, supply chain, and insurance, though trials and proofs-of-concept have yet to seriously materialize.
Although not technically a consortium, Ripple administers a number of consortia that use its enterprise software, including a Japanese banking consortium with 60+ members. Ripple has also partnered with a number of major global banks on successful cross-border payments pilots.
Ripple differs drastically from other consortia and private blockchains in that it is largely self-funded by its free-floating cryptocurrency (XRP), which currently holds a market capitalization by total supply of around $20B. The company, which allows global banks make transfers between each other without moving funds, competes most directly with SWIFT.
With high-profile members Goldman Sachs, Morgan Stanley, JP Morgan Chase, and Banco Santander all leaving the consortium in 2016 and early 2017, R3 has faced adversity. The consortium also sued Ripple in September of this year, accusing the company of reneging on an options agreement for XRP now worth more than $1B.
However, R3 still counts more than 100 member banks and financial services firms, and is forging ahead on a number of projects and partnerships. THe company recently announced plans to release a production-ready version of its enterprise software, Corda, within the next few months.
As a whole, blockchain is still in its nascent stages.
Teams holding ICOs have yet to collaborate with regulators to develop strong legal frameworks, and state bodies continue to grapple with the question of how to regulate inherently decentralized protocols. And, given that major cryptocurrencies (like bitcoin) have often been used for illicit black-market transactions, regulatory clarity could be an uphill battle.
Meanwhile corporate players have shifted between private blockchains, public blockchains, and consortia. With recent successful pilots thrusting the technology back into the spotlight, corporate investors will have to take a hard look at their blockchain bets and consortia memberships to find concrete solutions in this developing sector.
Venture investors are still looking for real blockchain usage beyond speculation, as most teams exploring blockchain use-cases have been hard pressed to find users. This is an immediate requirement for the sector to mature.
Judging from the data presented in this report, though, the future seems bright, as investment in blockchain technology evolves in new and innovative ways. As the landscape evolves, the future of investment in the space will likely take on forms yet to be imagined.