Growing uncertainty in global financial markets, fueled by loose monetary policies and the consequences of the COVID-19 pandemic, has shown that cryptocurrencies have attracted the most attention from investors and traders in 2021. Web3 startups have raised more than $25 billion in 2021, up from $3.1 billion a year earlier, according to a venture capital investment report. It is easy to calculate that the growth was 713 %. The volume of venture capital funding NFT startups increased to $4.8 billion from $37 million in 2020, which shows the rapid growth of projects somehow related to cryptocurrency. The overall share of web3 funding in the global venture industry has increased from 1 % to 4 %.
For investment companies involved in cryptocurrency trading, 2022 turned out to be more difficult after a total collapse in the prices of decentralized currencies, which have the largest capitalization on the market. However, experts are confident that investments in the booming cryptocurrency business will increase in the next few years.
The standard venture capital funding process goes through the following five stages:
– Pre-seed: At this stage there is a nascent idea. Financial resources are invested by the creators of the project, and also attracted from relatives and friends.
– Seed: at this stage the project is brought to the MVP level. An analysis of the target audience and competitor analysis is carried out. At this stage there is an active search for sponsors
– Stage A: The product is proven and has a trusted community behind it. At this level, investments are less risky for investors, but they are more expensive and focus on advertising and sales marketing.
– Stage B: the product has a large customer base and is growing; The funding focus is on branding, sales, business growth and customer support.
– Stage C: Focus is on expanding product categories and gaining access to foreign markets; the product is commercially viable.
Cryptocurrency venture investments are very different, as some projects never make it past the first two phases. Only a few companies have reached the level of FTX, which raised $32 billion in Series C funding. The cryptocurrency market is still in its infancy, and most businesses lack proven strategic planning.
Most cryptocurrency projects, for example, raise funds using tokens rather than shares. While tokens functionally represent a stake in a business, raising funds through an ICO or IDO instead of stock trading carries a certain element of risk for investors. Purchasing tokens through an ICO allows shareholders to cash out their investment faster, however such products tend to be less reliable and trustworthy than their stock market counterparts.
In addition, it must be taken into account that social networks such as Google and Facebook limit the possibilities of “regular” digital advertising for cryptocurrencies, web3 initiatives require a special marketing style. As a result, cryptocurrencies rely heavily on the support of famous bloggers and celebrities.
As a result, we can say that attracting cryptocurrency investments is faster, but they are more based on tests and are much less regulated from a legal point of view. VCs can help with this by leveraging their industry connections. However, there is also a risk that venture funds will introduce methods from conventional finance that will contradict the decentralized protocols of the cryptocurrency market.
If you've followed any financial news in the last two years, chances are you've seen headlines like this one week after week and month after month. At first glance, it is clear that this type of investment and capital allocation is a signal of value in a new industry and confirms a strong bid for cryptocurrency. However, there is a larger story that is essentially ignored whenever an investment firm has raised and invested capital in projects in this space. By examining the early days of traditional venture capital, comparisons to that era, and understanding the cryptocurrency markets, we can explain the implicit bet that venture capital firms are making on the future of crypto asset prices.
First days
To explore this topic further, we must first look back in time to the earliest days of modern venture investing, as well as the emerging landscape of technology and the Internet. The dot-com era was known for a retail buying frenzy and stock surges in early technology companies, especially in the public markets, but few attribute the craze to the early adopters of these new technologies, venture capitalists.
In the mid-1990s, venture capital was a tiny and relatively new form of investing, with only $7.6 billion in total capital deployed (less than 5 % of the 2021 market size). However, this tiny pool of capital eventually became the lifeblood of the technology revolution, as nearly 70 % of venture capital investments went into tech/internet companies, most often at late stage. The trend continued as venture capital activity only increased in subsequent years, with investment in firms increasing 10-fold from 1995 to 1999.
What happened next was not unexpected. The next 5 years, starting in 1995, saw a sharp rise in prices in public technology companies, as each of the four largest companies of that era generated more than 10 times earnings, most of which matched earnings of the largest enterprise.
It is no coincidence that the most significant growth in technology occurred in an era when private capital flooded the industry; rather, it was this flow of capital that lifted public market stocks to their peaks and helped build much of the US economy.
1) Similarities:
– Emerging Markets: The most obvious similarity is the proximity of both industries and their relative bases. In many ways, cryptocurrency is a continuation of the same core technologies created two decades ago. Likewise, the industries also share a very common group of early adopters, as both had strong zealots driving early expansion and generated a lot of skepticism in terms of their long-term value.
– Speculation: As stated earlier, the early days of the Internet attracted a lot of attention from venture capitalists. Both industries share this similarity as the crypto industry has recently become a leader in venture capital. Compared to their valuations, they also appear to be two sectors in history that (at one time) were high-risk, high-reward bets.
2) Differences:
– Regulatory challenges: Funding mechanisms for crypto assets and related projects have a very different investment profile, as investors are looking not only for equity transactions, but in most cases for token transactions, as is obvious. In addition to this, there is a huge disparity in the ability to invest in the asset class, as only venture capitalists can invest, as opposed to traditional investors such as asset managers, mutual funds and common public stocks. Due to the lack of clarity regarding cryptocurrency investments, there is currently a smaller, broader base of investors who can actively participate in token and stock transactions.
– Shorter liquidity horizon: A faster path to liquidity for founders, projects and investors is also changing the dynamics of funding cycles and the underlying expectations for bets made on crypto projects. Capital moves much more freely, and it is this movement of capital that drives the development of new businesses in the ecosystem.
References:
- https://cointelegraph.com/
- https://www.coindesk.com/
- https://coinmarketcap.com/
