VCs tread cautiously around blockchain craze

The perceived gold-rush effect attached to cryptocurrencies, amid Bitcoin's precipitous decline in value in recent weeks, has been a key fixture of news headlines during the start of 2018. More generally, the themes of blockchain and cryptocurrency have gained a significant amount of traction with the investment community and the general public over recent months.

In the European venture space, January saw two funding rounds offering interesting insight as to how investors are trying to harness the technology's popularity and potential.

US-based venture capital firm Goodwater Capital first led a $5.7m funding round for UK-based SweatCo, the developer of fitness app Sweatcoin, which rewards users in its own cryptocurrency for going for walks. Other backers included Greylock Partners, Rubylight, Seedcamp and SmartHub. Angel investors Justin Kan and Rain Lohmus also contributed to the funding round.

Big appetite
But it was the $75m round for Paris-based Ledger announced a few days later that revealed the breadth of funding appetite for some of the startups operating in the space. Draper Esprit led the series-B for the cryptocurrency and blockchain security hardware company, and the round also saw participation from funds from the Draper Venture Network, FirstMark Capital, Cathay Innovation, Korelya Capital and existing investors.

The series-B is a massive step-up from the €7m series-A secured by the French business less than a year ago. That round was led by Maif Avenir and featured a total of 10 investors contributing to Ledger's second round of funding, bringing the total raised by the startup as of March 2017 to €8.5m.

Draper Esprit CEO Simon Cook noted that security would be paramount to the ongoing success of blockchain, hence the firm's interest in Ledger. Meanwhile, FirstMark managing director Matt Turck said that, unlike the price of individual digital currencies and tokens, which are subject to volatility, the general cryptocurrency and blockchain space has emerged as a "fundamental new paradigm".

Looking back a bit further, Berlin-based Neufund is another example of VCs finding opportunities in startups looking to further broaden the application of cryptocurrency into the mainstream. Neufund acts as an intermediary between companies that want to raise money through an initial coin offering (ICO) and institutional investors that want to back them but have concerns about the legality and security of ICOs. Again, the pace at which the company has scaled up is significant. VC firm Atlantic Labs took part in an $11.6m funding round in November last year – it had led a $2m seed round for the company to use toward development costs barely 10 months prior.

Blockchain deals to look out for

Company	Backers	Country	Round date	Round value
BlockChain	Lakestar et al.	Luxembourg	Jun-17	$40m
Breadwallet	DAS Capital et al.	Switzerland	Aug-17	$7m
Shapeshift	Earlybird et al.	Switzerland	Mar-17	$10.5m
Verse	Spark Capital et al.	Spain	May-17	$20m
Neufund	Atlantic Labs et al.	Germany	Oct-17	$11.6m

Source: unquote" data

Getting picky
Venture activity in startups involved in the cryptocurrency ecosystem has predictably increased for the past year – but despite some eye-catching figures, the volume of funding rounds coming through is perhaps not as high as the wider enthusiasm for blockchain would suggest, with unquote" data recording just a handful for 2017.

On the one hand, it is worth noting that the volume of traditional venture investments is a flawed way to look at the appetite for startups active in the sector. As unquote" recently explored, a number of these are practising what they preach and raising funds through ICOs – it is estimated that around $3.5bn was raised globally through ICOs last year. Some startups, like Switzerland's Sirin Labs and US-based Filecoin, comfortably raised in the hundreds of millions of dollars. Some VCs are exploring ways to harness this phenomenon, but much like with crowdfunding in the very early-stage space, the traditional model of venture capital is being increasingly challenged.

The relative scarcity of investments and the fact that they tend to focus on companies offering services related to, but not directly involved in, cryptocurrency trading also indicate that tech- and financial-services-focused growth funds are still looking to sort the wheat from the chaff in the effervescent ecosystem. Venture investors tend to be picky by nature, and the reservations around the ultimate viability of cryptocurrencies is likely to result in a slightly cooler approach for some time. KnCMiner – the Swedish bitcoin-mining business that raised double-digit rounds in quick succession but faced lawsuits from disgruntled clients and eventually declared bankruptcy – still serves as a cautionary tale.

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