The current state and future of blockchain investments
Blockchain companies choosing how to raise fundings are faced with a lot of options. Since they are mostly startups, the primary funding is Private Equity or ICO, either public and private.
Speaking about going public (IPO) in the traditional sense or seeking acquisition, both types of financing are employed mostly on the expansion stage of a positive business life cycle (seed → startup → startup (growth) → expansion → cap).
Fundamentally, a blockchain startup seeking investment has two paths (often combined) – to raise capital through traditional financial instruments (in most cases – Venture Capital, as a traditional source of financing for businesses at the seed and startup stages), or through the issuance of crypto-assets (coins or tokens → ICO).
Nowadays a new hybrid instrument is becoming prevalent. The STO, which combines the characteristics and legal status of traditional instruments and technically is based on the technology that stands behind ICOs.
Basically, if a blockchain startup needs a token (another important topic – the company REALLY should need this token and blockchain for its business model) – it may attract traditional VC money via selling equity and attract institutional investors via selling tokens and be private. In addition to or instead of the above-mentioned options, it can offer tokens through a public ICO – and be public. STOs have the potential to unlock the opportunity to freely offer equity and debt to the public.
And if the company is an established blockchain business, it can go IPO (Bitmain case) or seek larger a company to acquire your company.
In the case that the company is an established traditional business, and it intends to pivot its business model into a tokenized one, the ICO option is still great for it.
1. Private funding rounds
Crypto saw a large volume of private rounds in 2018. Private placements give companies the chance to share investors’ non-monetary resources including networks and related experience, as they have an interest in making sure that the project succeeds.
However, an equity sale entails that the company loses ownership of part of the company to investor. Companies have to pay attention to their cap tables – they need to be ordered so that there is no concentration of power in undesired hands.
According to the Kepler Finance database, one of the most prominent deals of 2018 was TaTaTu being sold for $575 million worth of digital coins in a private sale in June 2018. Orbs raised $118 million in their private round to fund the development and launch of the Orbs platform in May.
2. ICOs and tokenization
There have been thousands of ICOs over the past years. According to Kepler Finance data, $14.37 billion was raised through this method in this year alone, but only a small portion of them were with trustworthy companies that deserved investments. For example, tZERO, closed the STO in the form of an Initial Coin Offering backed by real assets, with a lot of crypto and traditional institutional interest.
This main issues of ICO investments are caused by the speculative nature of the market. Performing an ICO also means making significant trade-offs, so the company should consider carefully it if it is really the best option.
There is no ownership dilution with an ICO, so the cost of capital is pretty low. However, the token issuer should acknowledge the potential legal risks in the future and be prepared for any such circumstances.
Unless otherwise specified, an investor does not have voting rights, is excluded from receiving any company profits and won’t be gaining any equity, either. Instead, he gets tokens that are used within the project as defined by the token economy.
An ICO is certainly the fastest liquidity in general. But that liquidity is a two-edged sword as investors can dump their tokens equally fast.
With all this taken into account, consider an ICO if your project plan foresees early adopters forming a world-wide community and the founder have the risk appetite to deal with an emerging industry.
3. Mergers and acquisitions
There have also been quite a few crypto M&A deals over the past year: Binance acquired Trust Wallet – a secured mobile crypto wallet; Stellar acquired Chain – a company that builds private blockchains for enterprise clients; Coinbase acquired Earn.com, a company which lets users send paid emails, among others, and Circle acquired the crypto-exchange Poloniex.
M&A can be a help in terms of intellectual property and human resources, as these can accelerate growth. Acquirers also get to reach out to potentially new user bases and groups.
While M&A is chiefly valuable in terms of new data and tech, personnel, and clientele, there are no firm models yet from which to base the valuation of a firm that raised its capital via ICO.
However, looking at the increasing growth rate of M&A deals in 2018, we can say that the bear market did not affect this area and companies are ready to go for it, despite the disadvantages.
Moreover, there have been several prominent deals of crypto companies acquired by non-crypto parent companies. A year ago, the Korean crypto exchange Korbit was sold to Nexon’s parent for $80 million at a valuation of over $120 million, according to Kepler Finance. In April, Coincheck was acquired by Japanese financial services provider Monex Group for $33.5 million, followed by the acquisition of Everybody’s Bitcoin by Rakuten in August for $2.4 million.
This fundraising practice is not very popular in the crypto community as it comes with significant risks and hurdles.
However crypto giants Coinbase (a regulated crypto exchange) and Bitmain (the world’s largest mining pool operator and mining device manufacturer) are both preparing for IPOs.
The advantages of IPO include the ability to raise capital by reaching a large number of investors, plus, by issuing shares, the company generates publicity and increases its brand-awareness.
IPOs do have disadvantages in that they take half a year longer or more than an ICO, and they are considerably more expensive. A company going public must also prepare for the transparency and shareholder oversight that comes with the territory.
Argo Mining, the first crypto company to go the IPO route, raised £25 million ($32.5 million) in August 2018 on the London Stock Exchange. In November 2018, Blockchain Tech Ltd (BTL) was successfully listed on the VentureBoard of the Toronto Stock Exchange, thus becoming the first blockchain-based company to engage in an IPO.
5. 2019 Blockchain investment trends
We are at the end of the 2018, sitting deep in the bear market, observing the decline of the ICOs – the hottest thing in crypto of 2017 and early 2018. According to Kepler Finance data, $14.37 billion was raised through this method in this year alone.
However, what we are seeing now is that the vast majority of ICO projects are struggling to make any further use of their tokens and to deliver on their promises to investors about the token price appreciating. Putting aside speculative pumps on the crypto market, we rarely see token appreciation as the result of real usage – the conflict of incentives between investors and actual users still holds.
A lot of investors have high hopes for STOs. However, the same fundraising craze as in the last year is the last thing we should expect from tokenized securities – history often rhymes but not repeats. We are moving into the old waters regulated by the SEC and FINRA, on an old ship, covered with a new wrapper. If ICOs, performed the right way, gave us an innovative method for funding open-sourced projects, networks and the protocols, then security tokens provide us with anew way of managing the records on ownership. Not a disruption, just a slightly more efficient system, mainly due to the better liquidity.
Looking into 2019, we have to prepare ourselves for increasing regulation and the higher cost of capital for ICOs and STOs as one of the consequences.
One more thing that will be interesting to observe is that there are still billions of dollars locked up in tokens that are not tradable yet, and the market will need to digest them! We see the projects of the past months delaying their market entries – remember the TON private sale that raised $1.7 billion, according to Kepler Finance data? It was 9 months ago.
Because of the postponing of the liquidity event of the project, investors can avoid taking a hit on portfolio value. But in 2019, large drawdowns of many projects compared to their inflated initial valuations of 2017/2018 are inevitable. It might sound scary, but in fact, we should let the market bleed as much as needed – it will clear the place from the fraudsters and fast-money lovers, and adequate valuations will definitely benefit the whole industry.