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Crypto portfolio: Five Venture Capital firms that are killing it!

Crypto portfolio

 

Venture capital firms have been investing in the blockchain and crypto space for the better part of the last decade, with investments in some startups paying off handsomely.

For example, back in 2011- cryptocurrency exchange Kraken had raised $1.5 million through private investments and as of December 2018 the company was valued at $4 billion. Despite this it’s only in the past 2 years that private investments have really picked up pace, growing more than 100% in total funds raised year-on-year.

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In 2018, private investments in the blockchain and crypto space surged to a staggering $7874 million, which is akin to a 110% increase when compared to the previous year. The year 2015 was a pivotal year as private investments crossed the $1 billion mark, even though the YOY growth was relatively low 23%. But in 2017, private investments mooned to $3.7 billion witnessing over 160% growth year-on-year.

2019 is off to a good start with approximately $500 million already raised, despite the lingering crypto winter. If you’re familiar with the crypto space then it should come as no surprise that the past few months have seen unfavorable market conditions prevailing over the space, hence the term ‘crypto winter’.

 

Institutional Investors in the know?

Are institutional investors taking advantage of the low barrier to entry to increase their exposure in the blockchain and crypto space?

It seems so!

JPMorgan, one of the top multinational investment banks and financial services company in the world, has revealed its own cryptocurrency monikered as JPM coin. The new cryptocurrency indicates that blockchain will likely be an integral part of the investment bank’s financial structure. Ironically though, the company’s CEO-Jamie Dimon is notorious for his critical view of Bitcoin.

What are the ramifications inadvertently caused by the entry of institutional investors? And does the blockchain-crypto space need institutional money? These are questions that will be addressed further along in the article. For now, let’s dive into the topic of this article, which is the 5 Venture Capital firms investing in the blockchain-crypto space you should know about!

Keep in mind that the order of VC firms being mentioned is not an indicative parameter of their performance in their fields.

 

 

#1: Digital Currency Group

 

 

Digital Currency Group, or DCG, is an American Venture Capital firm based out of New York, the firm is one of the most active VCs in the blockchain-crypto space having participated in a whopping 137+ separate funding rounds. 

CEO and Founder of Digital Currency Group- Barry Silbert has audacious plans of building the firm to a level that is on par with industry giants such as Berkshire Hathaway.

Silbert was quoted saying “We are a team who passionately believes bitcoin and blockchain technology will drive global economic and social change”. He also added “Our unique model enables us to deploy our resources to build the bitcoin and blockchain ecosystem over the long term.” This is a perfect summary of the firm’s investment strategy i.e focusing on long-term applications and benefits.

Digital Currency Group has invested in a truly diverse array of blockchain-crypto companies that span across various sectors from Financial Services to Gaming, in over 20 countries and 6 continents. Digital Currency Group also owns the internationally renowned blockchain-crypto media company-Coindesk which it acquired for $500K.

 

Investment strategy

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Digital Currency Group has invested heavily in the leading industry sectors of the blockchain-crypto space such as Financial Services while also investing in offbeat sectors such as Cybersecurity and Technology.

But a majority of their investments are concentrated in 4 sectors, namely Financial Services (20%), Trading and Investing (13%), FinTech (12%) and Payments (8%) which accounts for 53% of their total investment portfolio. This is a robust investment strategy for the company as their investments are diversified across a broad spectrum, which increases the chances of DCG getting a solid return on investment in the future.

 

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Digital Currency Group has also evidently favored investing in companies in their nascent stages, as 51% of their investments were in seed funding rounds in various blockchain-crypto companies. On top of this, almost 29% of their investments were in series A funding rounds. This is proven methodology to rake in huge profits in the future, as even though a large majority of their investments might not become profitable, the ones that do survive will likely become hugely influential in their space. 

For example, Digital Currency Group was an early stage investor in blockchain-crypto companies such as Kraken, Ripple, and Ledger which are currently valued at several billion US dollars each.

As mentioned earlier Venture Capital firms like Digital Currency group are taking the ‘crypto winter’ in stride as it becomes abundantly clear when considering that DCG participated in funding rounds with a cumulative total of $343 million in 2018, which is a 47% increase in comparison to 2017.

 

Investment Portfolio

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#2 Pantera Capital

 

Pantera Capital is an American venture capital firm based out of California that focuses exclusively on ventures, tokens, and projects that are connected to digital & crypto assets, and blockchain technology. With as much as 80 investments, Pantera Capital is a household name in the blockchain-crypto space. 

Founded in 2004, the firm has predominantly worked with global macro hedge-fund investments but later pivoted to focus on the nascent space on blockchain and crypto in 2013. Pantera Capital notably was the first Bitcoin investment firm in American history.

Pantera Capital has notably invested in several high profile companies in the blockchain and crypto space like Ripple, Bakkt and Circle. Despite these commendable investments the firm recently landed in hot water after the US Securities and Exchange Commission (SEC) enforced penalties against some of Pantera Capital’s investments. Ordaining around 25% of their ICO projects to refund the capital raised from investors as they violated regulatory norms.

Pantera’s co-chief investment officers Joey Krug and Dan Morehead were quoted saying “While we believe the vast majority of the projects in our portfolio should not be affected, approximately 25 percent of our fund’s capital is invested in projects with liquid tokens that sold to U.S. investors without using regulation D or regulation S.” As a direct consequence of these developments the firm’s Digital Asset Fund shrunk by a shocking 40%. An unprecedented amount considering the firm’s history.

 

Investment Strategy

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Pantera Capital has invested heavily in blockchain-crypto startups in leading industry sectors like Financial Services while also significantly investing in upcoming sectors such as Gaming.

A majority of Pantera capital’s investment portfolio is concentrated in 5 sectors namely, Financial Services (16%), Technology (11%), Trading and Investing (10%), FinTech (9%) and Blockchain (7%). Notably, upcoming sectors such as gaming accounted for 8% of Pantera Capital’s investment portfolio and this indicates that the firm is not only investing in leading sectors but is also taking risks and investing in sectors which may become hugely successful in the future.

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Quite interestingly, a surprising majority of Pantera Capital’s investments were in Initial Coin Offerings or an ICO. This is fairly unique among Venture Capital firms as they often tend to invest in seed funding or series A stages the most.

Is this a new paradigm in venture capital functioning?

ICOs are when a project offers investors utility tokens in return for capital to fund the project, investors that funded ICO projects could gain access to the future product/services of the projects. ICOs were among the most popular forms of fundraising in the United States.

But lately suffered a deadly blow after the US Securities and Exchange Commission (SEC) started ordaining ICO projects to ‘cease and desist’ their operations as their ICO model violated federal security norms. This unexpected turn of events is likely the reason for Pantera Capital’s 40% shrinkage in Digital Asset Fund. 

As the norm with most Venture Capital firms, Pantera Capital clearly prefers investing in companies in their nascent stages. This is a proven investment strategy as investing relatively small amounts in numerous companies has significantly higher chances of attracting huge returns instead of, investing a huge amount of money in a few companies.

Several of Pantera Capital’s investments like Korbit, Circle, Polychain, and Earn.com are valued at several billion US dollars.

 

Investment Portfolio

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#3 Blockchain Capital

Blockchain capital is an American Venture Capital firm based out of San Francisco that focuses its efforts exclusively on blockchain technology and the crypto ecosystem. The firm is a veteran investor in the blockchain-crypto space having invested in as much as 75 startups in this space. Blockchain Capital notably was responsible for the world’s first security token, namely BCAP, to be sold in an ICO in 2017. (Read more about security token offerings)

Blockchain Capital was founded in 2013 by co-founders Bart Stephens and W Bradford Stephens and the firm aims to be a one-stop-shop for anything an entrepreneur might need, from strategic planning to recruitment.

Banking on increased regulations in the blockchain-crypto space, Blockchain Capital has invested $1.7 million in TRM labs. TRM labs is a startup that aims to streamline the process of regulatory compliance using their token relationship management program that helps startups effortlessly ensure their fundraising program is compliant with regulatory norms.

Why bank on increased regulatory compliance?

The strategic rationale behind such a move becomes obvious when considering the new paradigm in the Initial Coin Offering space, especially in the United States. Last year, the U.S Securities and Exchange Commision started cracking down on ICOs as they violated regulatory norms.

Most ICOs were classified as a ‘security’, as they satisfied they Howey test, which meant these ICOs were subject to federal securities laws. Those found in violation of these norms were ordained to ‘cease and desist’ all operations and most project founders were asked to return funds raised back to investors. With increased pressure to comply with regulatory norms or be shutdown, project founders are spending millions to ensure compliance but the process is still cumbersome and complex. 

Blockchain Capital’s strategic rationale to invest in TRM labs becomes more clear now, as this niche space exhibits great promise for a disruptive player to take root.

 

Investment strategy

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Blockchain Capital has also invested heavily in leading sectors such as Financial Services while also diversifying their portfolio with investments in offbeat sectors such as e-commerce and Healthcare.

But the majority of Blockchain capitals investments are concentrated in four sectors namely Financial Services (16%), FinTech (16%), Blockchain (12%), Trading and Investing (11%) which when combined accounts for 55% of their entire investment portfolio. Notably, approximately 4% of their investment portfolio is made up of blockchain-healthcare startups which is an upcoming field and exhibits great promise.

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Blockchain Capital is undoubtedly favoring investing in companies at their early stages as almost 47% of its investment portfolio is comprised of seed funding round investments.

The firm was an early stage investor in high profile companies like Kraken and Ripple but was arguably a bit late to the game as they invested in companies like Circle and Coinbase at later stages of funding. This move could also be seen as a strategic waiting game.

The startups who survive the unfavorable market conditions and reach later funding stages have undeniably proven that their business model works and is a relatively safe investment, despite the high price tag.

Blockchain Capital also increased its exposure to the crypto space despite the lingering ‘crypto winter’. The firm participated in various funding rounds in 2018, accompanied by other VC firms, that amounted to a whopping $234 million which a staggering 850% increase when compared to the total round value in 2017.

It is important to note that Blockchain Capital was not the only VC firm to participate in these rounds, the total round size is a sum total of the all the funds pooled together by all these VC firms.

 

Investment Portfolio

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#4: Boost VC

Boost VC is an American venture capital firm based out of Silicon Valley, California. The firm’s motto is quite literally, to make sci-fi into a reality. The firm has an unorthodox methodology of incubating startups, twice a year Boost VC invests in more than twenty startups in a three-month accelerator program that includes lodging and office space the team members in Silicon Valley. 

Boost VC recently celebrated an important milestone in its journey towards making sci-fi into a reality and this milestone was four years in the making.

The firm intended on investing in at least a hundred blockchain-crypto startups and it managed to achieve just that, last year.

Although back in 2014 when the firm took the pledge to invest in 100 startups, they had actually meant investing in 100 Bitcoin startups. This seemed like a good idea at the time considering Bitcoin’s popularity at the time but later the company pivoted to include a broad spectrum of startups from various industry sectors from cybersecurity to cryptocurrency exchanges. 

Related Reading: Boost VC fueling Blockchain enterprises

 

Investment strategy

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Boost VC has also gone for the run-of-the-mill investment strategy of investing heavily in startups in the leading industry sectors like Financial Services while at the same time diversifying their portfolio by investing in offbeat sectors like Information Technology. But a majority of Boost VC’s investments are in Financial Services (17%), FinTech (14%), Software (10%) and Trading & Investing (10%), which when combined accounts for 51% of their investment portfolio.

Notably, Boost VC has investments in nascent sectors such as Artificial Intelligence (3.5%) and Copyright services (1.7%).

crypto portfolio of top VC's in the crypto space

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Boost VC has undoubtedly favored seed funding rounds over other rounds as they make up as much as 80% of their entire portfolio. The firm has also invested in the relatively new funding method, Initial Coin Offerings which account for 5% of their investment portfolio. 

From 2016 onwards, Boost VC has steadily increased its exposure to the blockchain-crypto space, which becomes obvious when observing a phenomenal increase in the round size the firm participated in.

From 2016 to 2017, the total round size increased by over 1000% for Boost VC which doesn’t necessarily mean the firm invested more money but it does signify increased exposure to more projects.

 

Investment Portfolio

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#5: Andreessen Horowitz

Andreessen Horowitz is an American venture capital firm based out of Silicon Valley that manages over $2.7 billion dollars in assets under management, investment from seed to growth. The firm prefers investing in social media companies and technology sector companies. The company has invested in several social media giants like Instagram, Reddit and in media companies like Business Insider. 

Andreessen Horowitz is relatively new to the blockchain-crypto investment space as they started only five years ago, while other VC firms started nearly a decade ago. But the firm is in no rush and is investing in projects that might prove beneficial in the long run.

As general partner of the firm, Chris Dixon was quoted saying We’ve been investing in crypto assets for 5+ years,” he also added “We’ve never sold any of those investments, and don’t plan to any time soon. We structured the a16z crypto fund to be able to hold investments for 10+ years.”

The firm plans on aggressively investing in the blockchain-crypto space regardless of the market conditions according to Chris,

On the contrary, the firm will take the low barrier to entry as an opportunity to further increase their exposure. Andreessen Horowitz is notably vocal about their aggressive investment strategy. Chris along with Kathryn Haun is leading a $300 million crypto fund exclusively for blockchain-crypto protocols, an unprecedented amount from a single firm.

 

Investment strategy

crypto portfolio of top VC's in the crypto space

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By analyzing Andreessen Horowitz investment portfolio it becomes clear that the firm has made investments in the leading sectors of the blockchain-crypto space like Financial Services while at the same time also betting on nascent sectors such as data analytics and e-commerce. But a majority of their portfolio comprises of startups in 3 sectors alone namely, Financial Services (20%), Trading & Investing (17%) and Technology (13%), which when combined is exactly 50% of their portfolio.

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It should come as no surprise that Andreessen Horowitz also favors investing in promising startups at their nascent stages, like most other VC’s. As it becomes evident from the various funding rounds they participated in, a majority of which were in Seed (39%) and Venture funding rounds (26%).

The firm has also been steadily increasing its exposure to the blockchain-crypto space, held true to the words of the firm's partner Chris Dixon.

From 2016 onwards the total round size of funding rounds the firm participated in has increased many-fold.

From 2016 to 2017, the total round size of their investments increased by 260% to a total of $102 million and from 2017 to 2018, it grew by over 500%. Notably, 2018 was the year the so-called crypto winter set-in but true to their word, Andreessen Horowitz increased their overall exposure to the market.

 

Investment Portfolio

crypto portfolio of top VC's in the crypto space

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One common strategy

 

An analysis of the investment portfolio of all the 5 firms considered for this article reveals that despite their obvious differences, all 5 firms are following a similar strategy.

A majority of investments by all 5 firms were made in a few select sectors like Financial Services, FinTech and Trading, and Investing. This is not surprising when considering that these industry sectors are also spearheading the blockchain-crypto space in terms of funds raised and the number of ICOs/STOs. Therefore it's logical to invest in startups in these sectors as they could potentially be the breakthrough moonshots that the firms are looking for. 

On top of this, all five firms have also invested in upcoming sectors like Gaming, Cybersecurity, Artificial Intelligence, and Data analytics, likely because they believe these sectors will become highly lucrative in the future. 

All five firms seem to follow one common strategy while investing, which is to invest in many startups in their nascent stages.

This means that even if a majority of their investments fail to become profitable in the future, the few startups that do so will likely grow to be very influential in their sectors. For example, investing in companies such as Ripple, Circle or Kraken at their early stages would have been incredibly beneficial for these firms.

While most VC’s didn’t participate a lot in Initial Coin Offerings, a majority of Pantera Capital’s investments were in ICOs.

Was this a smart idea?

It doesn’t seem so right now, when considering the the U.S Securities and Exchange Commission’s strict stance on ICOs, which has lead to the number of ICOs depreciating in the USA. According to the SEC, most ICO projects were in violation of Federal Securities norms and will likely be asked ‘cease and desist’ operations, which was a deadly blow to Pantera Capital.


You might also want to check out: Top 5 VC's investing in the US.

What are the ramifications of institutional players entering the space?

 

Institutional investors taking advantage of the low entry barrier presented by the ‘crypto winter’ could actually be a good thing for the blockchain-crypto space.

Why?

There are a couple of reasons. 

For starters, this could be incredibly beneficial for startups, especially in the USA, as raising capital from private investors is much more easier than conducting a public sale right now, which requires the startups to ensure regulatory compliance or risk getting shutdown or fined.

Secondly, the entry of institutional players could help boost public trust in technologies such as blockchain and its applications like cryptocurrencies, which have been on the fringes lately.

Global public acceptance of blockchain and cryptocurrencies is widely considered as the holy grail. The logic behind this is simple, once the general comes to know that big-shot institutional players are investing these technologies, it will likely boost their confidence in the tech, which has become notorious for new-age scams and fraudulent players.

Thirdly for blockchain-crypto projects to truly have a global impact these projects need to scale and scale fast!

This step is a difficult one considering the limited resources most startups have, but with institutional investors, startups can leverage their professional connections and knowledge gained through experience to scale much faster.

Blockchain technology by virtue of its decentralized nature requires a vast network to function optimally, blockchains with fewer nodes are easily susceptible to cybercrime like 51% attacks. Also by virtue of the network effect as more people use the blockchain technology, its value also increases proportionately.

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