Crypto Venture Capital – Everything you need to know
In this article, we shall look at what VC investment in crypto is, the different stages of such funding, how does VC work in crypto companies, and more.
Ever wonder what the future holds for cryptocurrency? The increasing popularity of cryptocurrencies and the enormous amount of time and money being poured into the industry are clear indications that crypto is certainly a large part of the future. Well, in recent years, venture capital investors have been loading up their money in the crypto space to support startups. It is reported that the funding provided to crypto startups has reached $30 billion by 2021. In this article, we shall look at what VC investment in crypto is, the different stages of such funding, how does VC work in crypto companies, and more.
Crypto Venture Capital
Basically, venture capital firms are long-term investors that provide funding to startups in return for equity or tokens, in the case of a crypto startup. Venture capital firms are usually global in scale and are well-versed at providing funding to industries, markets, and products they perceive as promising. VCs that invest in crypto startups can be referred to as crypto venture capital.
The trend of funding crypto startups with venture capital has been rising recently. Essentially, the main target of VC investment in crypto is to make large gains from high-growth crypto startups. As a result, crypto financing is generally aimed at backing long-term endeavors that require sustained support and funding.
Understanding venture capital
Venture capital refers to the funds that are provided by venture capitalists to early-stage startups, generally in exchange for equity shares. These funds are primarily used to accelerate and develop the company and acquire new talents. VCs are interested in startups that have a long-term vision, are able to produce a positive return on investment, and have the potential to grow into large businesses.
While in regard to crypto startups, crypto venture capital can be used to propel development, initiate the project, acquire talents, or prepare for an initial coin offering (ICO). Thus, venture capital can play different roles in the progress and growth of a startup depending on the needs of the startup at that point in time.
How does venture capital funding work in the crypto/blockchain industry?
To understand why cryptocurrency startups are seeking VC funding, it is important to understand how crypto financing works. Essentially, when an investor approaches a startup, it first requires a detailed business plan with a roadmap explaining the milestones and timelines. As such, to ascertain whether a crypto startup is really capable of delivering on its promises, venture capitalists will evaluate, analyze and assess the feasibility of the crypto project.
In crypto and blockchain, the evaluation process is guided by the same standards and best practices that have been employed in typically venture capital investments. However, what sets crypto apart from other industries is the use of blockchains and tokenization as a way of generating funds for the startup. The future value of the crypto coin, the projected user base, the team behind the venture, etc., are all important considerations for the crypto venture capitalists. Therefore, to better understand the process of crypto venture capital, below mentioned are the different stages and considerations of VC funding:
Types of VC funding
Venture capital funding can be categorized into the following types:
- Pre Seed – The pre-seed stage is the earliest funding stage. This funding is generally used for idea development before the actual business plan is drafted. In this stage, startups require support to identify and develop viable ideas, test the same and build the business plan. It also allows startups to run a proof-of-concept on the project and validate their idea.
- Seed – The seed stage is generally used to accelerate the development of a business plan. During the seed stage, startups are encouraged to hire key individuals, develop a project or product and begin providing value to the market. As such, the market potential is analyzed and validated in this stage.
- Series A – During the series A funding round, the startup continues with its operations after exhibiting a convincing track record that suggests that it is sustainable in the long term. Typically, in this stage, equity or tokens of crypto startups are exchanged as part of the funding. This funding is aimed at providing the startup with enough capital to push and focus on customer acquisition.
- Series B – The series B round of funding is normally used to boost growth, provide the right marketing tools, and hence increase customer acquisition. This funding is provided when the startup has demonstrated a high market potential, a clear path to profitability, and a competitive edge.
- Series C – The startup often uses this round of funding to diversify into new market segments, build new features, and further expand. In this round, the startup is expected to have approached the market with a clear understanding of target customers and market potential. As a result, the funding is used to reach the long-term goals of the startup.
Venture capital financing in crypto
Crypto venture capital firms constantly provide funding to crypto startups as they see good potential in the industry. As such, VC firms are forming strategic alliances with crypto startups and are making investments in the sector to generate returns. As a result, the hype around blockchain and the increasing adoption of cryptocurrencies have made this a lucrative industry for venture capital firms.
Why are venture capital firms more interested in the crypto/blockchain industry?
At present, there is great potential and growing demand for investment in crypto/blockchain startups. As a result, crypto venture capital firms are investing in the industry to generate returns. While following are a few things that make the industry a lucrative one for investors:
- The growth potential of crypto/blockchain is immense. For instance, a leading VC firm Andreessen Horowitz invested $20M in Coinbase in 2013. Today, in 2022, the same is valued at $11B. This is the kind of growth potential investors are looking for. This shows that the industry is fast growing and has a great potential to expand.
- Web3 is the future, and the introduction of blockchain and crypto has transformed the web as we know it. Currently, blockchain is being used by various startups to develop decentralized apps. With the advancement and growth of the industry, this future is closer. The hype around the industry has made crypto venture capital firms invest in this technology.
- The flexibility in the nature of crypto/blockchain investment makes it an attractive investment option. At the time of funding, the exchange of tokens rather than shares is a key feature of crypto financing, which makes it even more appealing. Hence, venture capitalists see the potential of crypto/blockchain as an industry to be invested in.
How do VC firms work in the crypto industry?
Crypto venture capital firms investing in crypto startups are no different than typical venture capital funding, as the process is quite similar. However, the adoption of blockchain and the corresponding increase in the value of crypto coins has made this a lucrative sector for investors. Even though the market is volatile, the popularity and hype around the crypto/blockchain have put it into the public eye. As a result, investors are looking forward to getting into the act and making profits from crypto financing. While it can be a high-risk investment option, thereby, properly calculated and informed decisions must be taken.
How is web3 dominating the interest of VC firms?
Well, web3 is an integral part of the blockchain and is playing a key role in the industry’s growth. With the introduction of blockchain providing a means of digital transaction, the exchanges of crypto coins have further transformed the industry. According to research, 7 out of 10 VCs are looking to invest in the web3 industry, which further emphasizes the importance of this sector.
But what dominates the interest of the VCs? Probably it is the Metaverse that is pushing and driving this new concept, and many companies are pursuing the concept of Metaverse. Therefore, the web3 concept is emerging as a powerful force in the industry, and this is, in turn, attracting the attention of venture capitalists.
Top 5 crypto VC firms
Let us have a look at the top 5 crypto venture capital, which are funding crypto startups and blockchain initiatives across the world.
- Andreessen Horowitz -a16z – Andreessen Horowitz is one of the most reputable VC firms in the world, and it specializes in funding emerging tech companies. This VC firm was founded by Marc Andreessen and Ben Horowitz in 2009. Based out of Menlo Park, California, this high-worth venture capital firm is an investor in some of the most popular companies in the world, including Coinbase, Celo, MakerDAO, and others.
- 3AC-Three Arrows Capital – Three Arrows Capital is a leading Singapore-based VC firm that specializes in funding crypto startups. Founded in 2012, the years of experience in the sector have allowed the founders, Su Zhu and Kyle Davies, to build an extensive network of crypto professionals and blockchain experts. DeFi and GameFi initiatives, including Axie Infinity, Aave, and plenty of others, are funded by Three Arrows Capital.
- Coinbase Ventures – Coinbase is a reputed crypto exchange platform, while the investing department at coinbase is known as Coinbase Ventures. Coinbase, which is based in San Francisco, is investing in BlockFi, Compound, and Starkware in order to help build and grow the blockchain ecosystem. Brian Armstrong founded the company in 2012, and it is now one of the leading crypto exchange platforms.
- Alameda Research – Sam Bankman-Fried, a founder of FTX trading, is leading the firm Alameda Research. Based in Hong Kong, the firm has invested in successful crypto projects, blockchain platforms, and many others. Owning stakes in Uniswap, Bitcoin, Solana, Ethereum, and Binance, the firm has a good reputation in the industry.
- Binance Labs – Binance Labs is a division of Binance, the leading crypto exchange platform based in China. Binance Labs’ aim is to support and promote the growth of the blockchain ecosystem by investing in Binance DEX, Terra, Moonbeam, and Coin98. This crypto investment firm is led by Changpeng Zhao, CEO of Binance.
How can crypto/blockchain prepare themselves for crypto VC financing?
A founder of a crypto/blockchain startup, who wants to attract venture capitalists and secure funding, must be prepared to pitch their business idea in the most impressive way. From the overall outlook of the business to the details of the crypto project, the founders should be completely well-versed with the business, its objectives, and its plan of action to achieve success.
In addition to this, preparing valuation reports of the business and crypto assets is essential in order to have successful funding. It is important to note that choosing the right investor is crucial due to the fact that the mentorship, support, and guidance provided by the investor will be equally beneficial to the growth of the crypto/blockchain startup. Therefore, choosing a well-reputed investor is paramount to the success of the startup.
Company valuation or crypto asset valuation
In financial terms, valuation can be described as the process of determining the worth of a company or any other asset. VCs will want to know the fundamental value of the company and the crypto asset in order to determine whether the project is worth investing in. This helps the VC firm in making an informed decision and provides them with the right investment recommendation.
A cryptocurrency’s true worth is established during the valuation process, not its market price. This is helpful in judging whether or not a token’s price is fair. Equivalent concepts can be found in the analysis of more conventional financial assets like stocks. Traditional basic research uses financial reports to determine the worth of a stock. New valuation methods are needed to estimate the monetary value of crypto assets because this no longer pertains to the market.
Performing a valuation for crypto assets is crucial for three main reasons: taxation, financial reporting, and investment planning. As a founder, you might be wondering how to determine the value of the crypto asset or the startup. Well, don’t worry; Eqvista has got you covered. Accurate crypto asset and company valuation can be done by using Eqvista’s sophisticated software.
How can Eqvista help?
With years of experience in the financial sector and crypto space, the team at Eqvista has developed powerful tools and solutions that help provide a fair valuation report. With our in-depth knowledge of both global financial markets and the crypto industry, be assured that all our valuation reports are accurate and transparent. This enables you to make the best possible business decisions, attract suitable investors, and achieve your business goals. Know more about crypto asset valuation and get assistance when needed. By applying the right method, we’ll fetch the appropriate value for your business.
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