Cryptocurrencies and Venture Capital

Funding companies with cryptocurrencies (Bitcoin and its kin) is becoming a thing. Venture capital firms are taking notice and bringing with them a new level of rigor to the process. What is happening and what does this mean for VC?

In terms of introducing rigor, Union Square Ventures, AngelList, and others brought their weight to bear by launching Coinlist, a platform for pre-launch coin offerings. Fred Wilson from USV wrote about it in his blog post, Funding Friday: Coinlist.

In a more recent post, Fred talked about the impact ICOs will have on venture capital and recommends this post for a primer on tokens (tokens are sold during an ICO).

These posts have some major take aways for fellow VCs:

  • Coinlist introduced a legal framework for “coinsales” called SAFT. This is similar in some regard to when Y Combinator introduced SAFE, but for cryptocurrency based fundraising.
  • Coinlist will be like AngelList in some regard but for coinsales.
  • In 2017 so far, coin offerings have raise more than $100 million in 15 deals (source)
  • Filecoin will be the coin offering to watch on Coinlist as a test of the platform.

Fred is not the only VC interested in ICOs. Boris Wertz from VersionOne asks “Will Initial Coin Offerings Fund the Future?

No matter how you slice it, there is momentum in cryptocurrencies, coinsales, and ICOs. Some proof:

  • Ethereum went from a price of $1 to $200 in 18 months. It’s highly liquid with a market cap of $20B and a trailing 24 hour trade volume of roughly $400m (source). Ethereum is powering many of the ICOs.
  • “The best venture investment of the last three years wasn’t a venture deal. Ethereum — 750x, liquid, and open to all.” - Naval Ravikant, founder of AngelList, tweet
  • Brave, founded by former Mozilla CEO Brendan Eich, raised $35 million from its ICO — and it did it in less than 30 seconds (source).
  • Filecoin will be the ICO to watch on Coinlist which will set the tone for future Coinlist ICOs.
  • “Union Square Ventures has a number of portfolio companies that will do ICOs.” (source)

Much of this is probably speculation. If the fervor implodes it will create a massive pile of rubble. That said, as someone who understands the technology, there are great innovations amid all of the speculation. Some amount of value is being created.

In my humble opinion, if you are a VC, you owe it to your investors to be informed. Regardless of whether or not this is a bubble, people are spending a lot of time and energy to bring innovation to the process of fundraising.

People are eager for new approaches that fix the inefficiencies of classic venture investing. This eagerness and willingness by the general public to invest via the blockchain should be a wake up call. This is uncharted territory in the grand scheme of investing, and yet we still see $100m in ICOs in 2017 alone. This indicates either pent up demand from under-serviced segments of investors or a desire to cut out the high fee, high carry middlemen (venture capitalists). Perhaps both.

Blockchain might stumble a few times along the way, but make no mistake, change is happening. Venture capitalists, take notice.