By Mohit Shrivastava, ICT Chief Analyst at Future Market Insights
Blockchain technology is becoming more popular owing to the various benefits businesses get from it- supply chain management, decentralized finance, data usage, control, and encryption. To ensure the smooth functioning of the technology, various companies require investments.
Venture capital (VC) investment is one of the main ways blockchain entrepreneurs finance their enterprises. Initial coin offerings (ICOs) used to be the main financing source for most blockchain projects, but strict regulatory oversight of ICOs has changed the dynamic. Hence, venture funding is essential to entrepreneurial as well as intrapreneurial blockchain enterprises, even when valuations are modest.
According to Future Market Insights, the global blockchain technology market is expected to grow with 44.3% CAGR from 2023 to 2033, providing ample opportunities for data decentralization in the future. And this is what the VCs are aimed at. Venture capitalists play the long game and invest their money patiently. They support innovation and are aware of the dangers involved. They support these firms knowing that there is a good chance that cryptocurrencies will play a significant role in the future of trade and commerce. As a result, it is a risky industry with wide tails and uneven rewards. In this situation, the winner takes it all. VCs are always seeking 100x prospects, which carry extremely high risks. They keep investing in blockchain and cryptocurrency firms because they are aware that the rewards will eventually outweigh the dangers.
Simultaneously, the venture capital sector might be drastically altered by blockchain technology in a variety of ways. For starters, it could be simpler for entrepreneurs to raise capital without using the conventional VC procedure. The amount of money VCs spend in businesses and the fees they charge may decline as a result of this.
In this blog, we will discuss what is drawing the attention of VC firms toward blockchain technology, how large-scale flocking of the VC firms will take place in the third quarter of 2022 towards blockchain start-ups, and why the VC firms supporting these crypto companies.
Benefits of venture capital funding for blockchain firms Several venture capital firms are continually investing in blockchain businesses since they see great promise in the field. As a result, VC companies are forging strategic partnerships with blockchain entrepreneurs and investing in the market to make money. In turn, this has made this an advantageous sector for venture capital companies due to the excitement around blockchain technology and the growing usage of cryptocurrencies.
There is now a high potential for growth and increasing demand for investments in blockchain firms. As a result, blockchain venture capital companies are making investments in the sector to make money. Several factors make the sector profitable for investors, including the ones listed below:
- The potential for blockchain to expand is enormous. For instance, in 2013, Coinbase received $20 million from renowned VC firm Andreessen Horowitz. The same is currently valued at $12B in 2023. Investors are seeking growth prospects like this. This demonstrates that the sector is rapidly expanding and has a lot of room for growth.
- The advent of blockchain technology has changed the internet as people know it, and Web3 is the wave of the future. Several firms are now using blockchain to create decentralized apps. This future is getting closer because of the industry’s development and expansion. Venture capital firms have invested in this technology due to the industry buzz.
- Blockchain investment is a desirable investment choice due to its flexibility. Blockchain venture capital financing is particularly attractive since a crucial component of the fundraising process involves the exchange of NFT tokens rather than shares. Venture investors thus perceive the blockchain business as having possibilities for investment.
The third quarter of 2022 saw large-scale flocking of VCs toward this technology.
Decentralized finance (DeFi) along with Web3 were the principal targets of the early-stage startup capital from some of the most prominent private investors in the third quarter of 2022, despite a drop in total venture capital investments.
Web3 – a phrase used to characterize a hypothetical future phase of the internet – enterprises working on decentralized software projects in addition to blockchain-based products and services attracted the most capital during the quarter, with $879 million invested across 24 agreements. Some of the largest transactions in the industry have been funded, including a $300 million Series B funding for Mysten Labs and a $200 million Series A funding for Aptos Labs, two innovative blockchain networks that could challenge existing giants such as Solana and Ethereum.
And these investments continue to eye for various start-ups, considering their growth potential in the long run. Such developments are expected to bring in more opportunities for blockchain firms, aid them to take up risks, and aim for high gains in the future.
Blockchain offers investors better security.
The blockchain is a digital ledger that keeps track of all online transactions. This public information is dispersed over a computer network, making it nearly hard to hack or alter. In light of this, the blockchain is frequently hailed as being the most secure method of data storage.
The blockchain provides more transparency and security in the context of venture capital funding. The specifics of an agreement, such as when a venture capital company invests in a business, are documented on the blockchain network. All participants in the transaction then have access to this information, making sure that each individual is on the same page.
Additionally, the usage of smart contracts allows for automating some elements of the transaction, such as the distribution of payments. This increases process efficiency and lowers the possibility of human mistakes.
In the end, the venture capital sector may undergo a transformation owing to the blockchain. It may assist VC firms in establishing confidence with their investors and portfolio companies by making agreements more safe and transparent. This may then result in increased funding entering the VC ecosystem, spurring development and expansion.
Investors get a faster transaction
Blockchain technology is shaping the future of venture capital funding. The way startups solicit money and investors trade and monitor their portfolios might both be fundamentally changed by distributed ledger technology. The fact that blockchain permits quicker transaction times is one of its key advantages. This is so that a third party’s verification or approval of the transaction is not required. Particularly when compared to the conventional banking system, this may save a tonne of time.
Blockchain technology also has the benefit of being more secure. This is so that every transaction can be validated before being published on a public ledger. Due to this, it is highly challenging for someone to fraudulently change the transaction history. The possibility for blockchain to upend the conventional VC model is arguably its most fascinating feature. VCs now frequently make early investments in firms before pulling out when they are sold or go public VCs may now invest in vouchers that represent shares in startups thanks to blockchain technology. This enables them to benefit more directly and liquidly from the company’s success. Additionally, it more closely matches their interests with those of other stakeholders in the firm.
In conclusion, blockchain technology has the potential to revolutionize the venture capital sector. It claims to speed up, secure, and increase transparency in transactions. Investors may have more influence over their portfolios and raising funding may be simpler for startups as a result. This might ultimately result in greater innovation and better results for all parties concerned.
Investments are made to support the crypto-ecosystem
Venture investors have placed more bets on cryptocurrency start-ups in 2023 than they did in the last ten years altogether. The venture capital divisions of cryptocurrency firms, whose continuing growth will be dependent on the ecosystem’s expansion, made a significant portion of the investments in the last few years.
For instance, the investment arm of the Coinbase cryptocurrency exchange, Coinbase Ventures, supports businesses developing infrastructure like Solana, a blockchain network; companies providing crypto financial products like BlockFi; projects for decentralized finance, also known as DeFi projects, where automated transactions are managed by code; and organizations working on the metaverse’s digital economy, where users trade digital goods for their virtual lives.
Coinbase Ventures closed more deals than any other venture capital company in the third quarter of 2021. The major objective of the investing arm is to promote the crypto ecosystem. The VC company doesn’t use return as its key criteria to assess Coinbase Ventures’ performance. Blockchain technology as well as the open-source database architecture that powers cryptocurrencies are projected to progress the internet and eventually replace the incumbent IT behemoths, according to Coinbase and other cryptocurrency startups.
UNICEF’s Venture Fund
The UNICEF Venture Fund welcomed eight fresh firms in 2021 that are creating blockchain-based, open-source solutions for enhanced financial inclusion. This was the debut cohort with over 50% of the firms being created or headed by women, the first cohort to extend the Fund’s investment portfolio to Rwanda, and even the first cohort to acquire both USD and cryptocurrency in initial financing.
To connect the businesses to UNICEF’s activities in their countries throughout the investment term, UNICEF made use of its extensive network. As part of the professional assistance program, UNICEF also offered technical as well as strategic support. Just two years have passed since they started working with this cohort, and in that time, the companies have identified strategic methods to support and expand their efforts, including methods for UNICEF to have access to the created digital infrastructure. Each firm in this cohort was chosen by UNICEF solely because it is paving the way for financial inclusion but also because it offers a solution to problems that have been identified as cross-cutting by UNICEF’s program divisions, such as growing access to resources, community engagement, accountability, and the effectiveness of funding flows.
For instance, another Portfolio Company was bought in 2022, proving sustainability as well as scalability. IDT Corporation, a leading supplier of cloud communications, fintech, and traditional communications services, purchased Leaf Global Fintech, which created a virtual bank for refugees as well as vulnerable groups to enable asset storage and exchange across borders even without the requirement for a smartphone. This acquisition will enable Leaf to grow its effect and assist even more migrants, merchants, and unbanked individuals.
Leaf expanded its solution across three African countries during its period with the Fund, initiated an NFT collection of artwork created by refugees, and is currently pilot-testing a digital microlending platform. As a result, they influenced over 40,000 beneficiaries and increased direct financial services access for 7,000 refugees and members of vulnerable populations. As a result, several governmental and non-governmental organizations are eager to celebrate their continued growth with such blockchain start-ups and VC investment.
Conclusion
The venture capital sector may even be drastically altered by blockchain technology in a variety of ways. For starters, it could be simpler for entrepreneurs to raise capital without using the conventional VC procedure. The amount of money VCs spend in businesses and the fees they charge may decline as a result of this.
The emergence of token sales, which are a type of cryptocurrency-based crowdfunding, might potentially have an impact on VCs. Startups can generate money through token sales by offering digital tokens that can be utilized to access the company’s goods or services. This could make it possible for entrepreneurs to completely avoid VCs.
Finally, blockchain technology may make it simpler for entrepreneurs to monitor their development and convince investors of their value. This may result in VCs needing to perform less due diligence and ease the process of selling their investments.
All of these adjustments would have a significant effect on the venture capital and blockchain startup industries. However, it’s crucial to keep in mind that blockchain technology is still in its infancy, so it’s unclear how any of these developments will turn out just yet. Therefore, while it’s possible that blockchain technology could disrupt the VC sector, it’s yet too early to predict how.
About the Author
Mohit Shrivastava, Chief Analyst ICT at Future Market Insights. Mohit Shrivastava has more than 10 years of experience in market research and intelligence in developing and delivering more than 100+ Syndicate and consulting engagements across ICT, Electronics, and Semiconductor industries. His core expertise is in consulting engagements and custom projects, especially in the domains of Cybersecurity, Big Data & Analytics, Artificial Intelligence, and Cloud. He is an avid business data analyst with a keen eye on business modeling and helping in intelligence-driven decision-making for clients.
Mohit holds an MBA in Marketing and Finance. He is also a Graduate in Engineering in Electronics & Communication.
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