Blockchain
Venture Capital
ReportResearch Partners

We thank our research partners for their support of this report

Authors

Demelza Hays

Dmitry Elkov

Demelza Hays,

Dmitry Elkov

Ph.D. is the director

is an analyst at Coin-

Helen
Rosenberg

Natalie
Malkhasyan

Igor
Kravchenko

Helen Rosenberg

Natalie Malkhasyan

Igor Kravchenko

of research at Coin-telegraph and has

is a research analyst

is a senior research

is a research analyst

telegraph, former

over five years

at Cointelegraph,analyst at Cointele-at Cointelegraph.

Forbes 30 Underof experience in tra-holds a bachelors’

graph, has over six

He is currently pur-30, U.S. Department

ditional and crypto

degree in economics

years of experiencesuing a master’s de-of State Fulbright

corporate finance.

and finance and has

in strategic consult-gree in quantitative

co-authored three

ing at Big Three andfinance at the Vienna

manager of two reg-reports at Cointele-

Big Four companies.

University of Eco-ulated crypto funds.

graph Research.

Scholar and fund

Cointelegraph Research Venture Capital Report

nomics and Finance.

2

Contents
Section 1: The Financial Landscape 5

1.1 The Stakeholders 8

1.2 2020’s Largest Blockchain VC Deals 

10

1.3 North America is Still the Leading Blockchain VC 

11

1.4 COVID-19’s Toll on Blockchain Private Equity 

12

1.5 Evolution of the Economy 

13

1.6 Where Venture Capital Is Forecasted to Flow in 2021 

14

Section 2: Startups 17

2.1 Types of Private Equity Investors 

17

2.2 From the Startup’s Perspective: Using Tokens to Raise Capital 21

		2.2.1 Token Fundraising Options 21

		2.2.2 Token Sale Advantages 22

		2.2.3 Token Sale Downsides 25

2.3 Determinants of Fundraising Success 26

2.4 Venture Capitalists Are Funding Decentralized Technologies 29

		2.4.1 Most Popular DeFi Companies For VCs 

31

		2.4.2 DeFi VC in 2021 and Beyond 

33

Section 3: Limited Partners 35

3.1 Blockchain VC Investment Thesis 35

		3.1.1 Buying Digital Assets Directly 36

		3.1.2 Buying Security Tokens 37

		3.1.3 Buying VC funds 38

3.2 Do Asian Blockchain Companies Offer Higher Returns with Lower Risk? 

41

3.3 Venture Capital Taxes for Investors 

43Section 4: General Partners 46

4.1 Valuation Methods for Blockchain Companies 

46

4.2 Regulation on VC Funds 50

4.3 From the Sell side’s Perspective: Tokenizing a Fund 

52

4.4 The Exit Strategies 

55

Section 5: Conclusion 

59

Cointelegraph Research Venture Capital Report

3

Highlights
8 There are very few blockchain VC funds for retail in-vestors, even though there is high demand. A possible
workaround to regulations that stop retailers from investing in blockchain VC funds is to mimic the coin/token holdings of professional investors. Similar to copying Berkshire Hathaway’s trades, investors can watch
what investments blockchain VC funds make and then
add tokens to their own privately managed portfolio
if the blockchain company has a token. For example,
Messari tracks Polychain’s portfolio containing Bitcoin(BTC), Ether (ETH), Polkadot (DOT), Tezos (XTZ), Filecoin (FIL), Cosmos (ATOM), Yearn.finance’s YFI, Maker(MKR), Compound’s COMP, Zilliqa (ZIL), 0x (ZRK), Celo,
Orchid (OXT), Avalanche (AVAX) and Nervos Network(CKB).1 You can also see Digital Currency Group’s token
holdings here: https://dcg.co/portfolio/.
8

Dedicated blockchain VC funds have significantly
outperformed the market and regular VC funds overthe past seven years. While traditional funds have theirRate of Return in the low double digits, several blockchain venture capital funds have managed to match
those returns 10 times over including Blockchain
Capital and CoinFund. As the market matures, those
returns are likely to taper off, however, we are still very
early. Blockchain venture capital amounts to less than
1% of the entire VC market.

8

Blockchain venture capital funds exhibit low correlation with traditional markets, which is a sought-after
quality for alternative asset classes. For the most part,
correlations between blockchain VC and stocks, bonds,
and commodities have been in the 0.00 – 0.14 range.
Although VC funds normally have a quarterly net
asset value, or NAV, the tradable shares of Blockchain
Capital’s third fund, Fund III, have a weekly NAV. When
comparing the correlations of the weekly log-returnsof the fund since inception in April 2017 to December
2020, the diversification potential for investors interested in venture capital is loud and clear.

8

VC investments in the blockchain industry are underserious economic pressure from COVID-19. Blockchain
VC investments decreased by 13% between 2019 and2020, while traditional VC investment increased by 18%.
The total amount invested in blockchain VC dropped
from $3.17 billion in 2019 to $2.77 billion in 2020.

8

Decentralized Finance was the 2020 hot trend in blockchain Venture Capital (and more particularly, DeFi
on Ethereum, since over 90% of the total value lockedin those protocols resides there). Out of 676 registered
blockchain VC deals in 2020, over 100 of the projects
were related to DeFi.
1

8 The Asian blockchain VC market may be the equiva-

lent of emerging market stocks. While Asia is currently
in the third position in terms of blockchain VC investment at 25.08% compared to 56.29% in North
America, the trend may be reversing. Mass adoptionof blockchain networks may happen in Asia faster thanin the rest of the world because of the sheer number of possible users. For example, Klaytn and Link
(by Line) already have 50 million and 165 million users,
respectively, while Facebook’s Diem, formerly referred
to as Libra, and Telegram’s TON have been stopped
by regulators in the West. Nervos Network is one of thedarling investments stemming from Asia that is heldby several blockchain VCs.
8

For firms that are in their Series A funding round andbeyond, price to sales (P/S), price to book (P/B) andprice to earnings per share (P/E) are common comparative analysis multiples used to value blockchain
private equity. The valuations of some private crypto
companies are astronomically higher than the FANG
stocks. For example, one crypto company raised capital with a P/E ratio of 110. To put this into comparison,Apple’s P/E ratio after the coronavirus was hovering
around 24 but reached a maximum of 41.93 in December 2020. However, this is comparing apples to oranges to some degree.

8 Tokenizing a VC fund is similar to equity crowdfund-ing, a growing industry that emerged after deregulation of the sector by the 2012 Jobs Act in the UnitedStates and similar acts in Europe and Asia. In a typical
VC structure, it is challenging for both Limited Partners and General Partners to exit their investments
as they are locked in for five to seven years. Tokenizing
a VC fund and investing in tokenized equity enables
LPs, GPs, and other qualified investors to exit theirinvestment faster by liquidating it on the secondary
market if the contract with the startup allows early exit.
8

While historically, most of the investments in the crypto
space happened with little to no VC involvement (82%of all investments to date), 2020 saw a significant shift
in those numbers. Last year, only 22% of investments
had no VC involvement at all, and the remaining 78%
were equally split between crypto VC firms, regular
VC firms and joint ventures between the two. The
majority of those investments happened at the seedround (which also offers the highest potential returns)
and were focused toward blockchain infrastructure.

https://messari.io/screener/polychain-capital-portfolio-6E2FF33B

Cointelegraph Research Venture Capital Report

4

The Financial Landscape
Welcome to the Blockchain Venture Capital Reportment of the global private equity market for one simple

by Cointelegraph Research. In five chapters and overreason: outsized return. In the dataset prepared for

59 pages, this report highlights key trends in the block-

this report, we discovered that 942 venture capital-

chain private equity market.

ists have invested in over 2,700 private equity deals

Global private equity investments are a key driverof innovation, job creation and economic growth because they put dormant capital and expertise toward
research, development and innovation. Blockchain
venture capital has been an increasing important seg-

involving startups and companies in the blockchain
space since 2012.2 The proof is in the numbers. Not
only has the crème de la crème of blockchain VC funds
consistently outperformed traditional VC funds, thetop blockchain VC funds have also outperformed thetechnology sector as a whole.

Figure 1

Blockchain Private Equity Has Outperformed Traditional Private Equity
Since Inception of the Fund IRR 2013 – 2020
2503%

2500%

332%
300%

25%

12%

18%

18%

0%

14%

24%

24%
12%

4%

10%

14%

Fund II

50%
Fund I

1

11%
−5%

−25%
2015
CA US Private Equity Index

2016
CA US Venture Capital Index

2017
CA Ex-US PE & VC Index

2018
CoinFund Funds

Source: Cambridge Associates LLC 3, CoinFund LLC 4, Cointelegraph Research

2

Contact research@cointelegraph.com to gain access to the dataset

3

As of June 30, 2020, based on data compiled from 1,529 U.S. venture capital funds, including fully liquidated partnerships, formed between 1995 and2018, internal rates of returns are net of fees, expenses and carried interest.
https://www.cambridgeassociates.com/.../WEB-2020-Q2-USPE-legacy-Benchmark-Book.pdf
https://www.cambridgeassociates.com/.../WEB-2020-Q2-USVC-Benchmark-Book.pdf
https://www.cambridgeassociates.com/.../WEB-2020-Q2-ExUS-Dev-EM-Selected-Book.pdf

4

As of Dec. 31, 2020. CoinFund LLC’s net IRR figures account for performance and management fees

Cointelegraph Research Venture Capital Report

5

Figure 2

Blockchain Private Equity Has Outperformed Traditional
Private Equity Across 1-, 3-, and 5-Year Horizons

93%

80%

60%

40%
26%
20%

20%
13%

19% 17%16%

21%

15% 16%18%

23.4%
12% 12%

8.3%
0.4%1.9%

0%
CA US Venture
Capital Index

CA US Private
Equity Index

CA Ex-USDeveloped Markets
Private Equity & VC

CA Empering
Markets Private
Equity & VC

Source: Cambridge Associates LLC 5, Wave Financial LLC, CoinFund LLC, Cointelegraph Research

An increasing number of traditional venture capital

Russell 2000® Index

1-Year

7.4%

Wave Financial
Early Stage Fund

2-Year

3-Yearof blockchain venture capital may be one explanation

firms are investing into this space; however, block-for its slow but steady growth in market share over the

chain private equity still amounts for less than 1%

past decade.

of the global venture capital market. This signals
the high level of risk associated with blockchain private
equity, but this also signals just how early we all arein this space and that there is still room for significant
growth in the future. During the 2017 crypto bull run,blockchain venture capital almost reached 2% of the
VC market. We suspect 2021 may be similar due
to market momentum surrounding the Bitcoin halving
and the stimulus action of governments.
In comparison with the trajectory of “internet-specif-

There might be a few other reasons why blockchain
VC is attracting so much attention from limited partners and buy-side investors. In addition to the returnrewarding early movers, the return has been uncorrelated with traditional asset classes. To calculate log
return correlations, we took the weekly net asset valueof the tokenized shares of Blockchain Capital’s third
fund, Fund III.7 When comparing the correlations of theweekly log returns of the fund since inception in April
2017 to December 2020, the diversification potentialic” VC investments, this puts the blockchain industry

for investors interested in venture capital is loudin a period similar to the early 1990s, about a decadeand clear. Blockchain private equity appears to have

before the dot-com bubble. Between 1990 and 1994,

the highest correlation with hedge fund returns in theinternet-related deal flow grew from 0% to 5%, peaked

US; however, even that correlation is low. Similar to tra-at over 45% in 2000 and has since corrected to a sta-ditional private equity, blockchain private equity also

ble 10% – 20%.6 Similar to cryptocurrencies and otherhas the potential to weather bad storms. In 2018,

digital assets, private equity is considered to be an al-when the crypto market was tanking along with crypto

ternative asset class compared to traditional asset

funds, BCAP tokens returned 264%.

classes, such as stocks and bonds. The exotic nature

5

As of Sept. 30, 2020. The index is a horizon calculation based on data compiled from 1,980 U.S. venture capital funds, including fully liquidated partnerships, formed between 1981 and 2020. The calculations for the CA U.S. Venture Capital Index, CA U.S. Private Equity Index, CA EX U.S. Developed
Markets Private Equity & VC, and CA Emerging Markets Private Equity & VC are pooled horizon return, net of fees, expenses, and carried interest. The
calculation for the Russell 2000 horizon is CA’s Modified Public Market Equivalent (mPME), which replicates private investment performance underpublic market conditions. The public index’s shares are purchased and sold according to the private fund cash flow schedule, with distributions calculated in the same proportion as the private fund, and mPME NAV is a function of mPME cash flows and public index returns. Refer to the methodology page of each CA report linked below for details.
https://www.cambridgeassociates.com/.../WEB-2020-Q3-USVC-Benchmark-Book.pdf
https://www.cambridgeassociates.com/.../WEB-2020-Q3-USPE-Benchmark-Book.pdf
https://www.cambridgeassociates.com/.../WEB-2020-Q3-ExUS-Developed-PEVC-Benchmark-Book.pdf
https://www.cambridgeassociates.com/.../WEB-2020-Q3-Emerging-Markets-PEVC-Benchmark-Book.pdf

6

https://www.pnnl.gov/.../PNNL-19617.pdf

7https://loop.blockchain.capital/weekly-nav/

Cointelegraph Research Venture Capital Report

6

Figure 3

Blockchain VC Still Makes Up Less Than 1% of Global VC Market
2.0%
1.8%

$300B

1.6%

$250B

1.4%
1.2%

$200B

1.0%
$150B

0.8%
0.6%

$100B

0.4%

$50B

0.2%

$0B

Markets Share of Blockchain Private Equity

Total Invested Per Year Globally

$350B

0%
2012

2013

2014

2015

2016

Source: Crunchbase News 8, Blockchain Capital, Cointelegraph Research

2017

2018

Traditional VCs

2019

2020

Blockchain VC

Market Share

Blockchain Private Equity Is Uncorrelated Traditional
Private Equity, Stocks and Commodities
Log return
NAV BCAP

Horizons Morningstar
Hedge Fund Index

Bloomberg Barclays
High Yield Bond ETF

MSCI Emerging
Market Index

NAV BCAP

1

Horizons Morningstar
Hedge Fund Index

0.197340947

1

Bloomberg Barclays
High Yield Bond ETF

0.162562351

0.533313803

1

MSCI Emerging Market Index

0.238501215

0.614986054

0.612366046

1

S&P 500

0.195424767

0.77433241

0.818020026

0.776651227

S&P 500

1

Source: Data covers the period from June 17, 2017 – December 31, 2020. Yahoo Finance, Blockchain Capital LLC, Cointelegraph Research

Finally, the allure of increased liquidity has also beenwith blockchain technology. Therefore, if small firms

touted as a potential driver for the increasing de-

tokenize their private equity, then investors would

mand for blockchain private equity. The theory goes

hypothetically be able to open and close positions a lot

something like this: If tokenizing assets lowers theeasier than in the current VC model involving 10-year

cost of raising capital, then small and medium-sized

lock up periods. However, there are caveats to thisenterprises that are too small to go public on a tra-potential benefit, and we discuss them in Chapter 4.3.

ditional stock market will now be able to raise capital

8

https://news.crunchbase.com/news/the-q4-eoy-2019-global-vc-report-a-strong-end-to-a-good-but-not-fantastic-year/
https://news.crunchbase.com/news/global-2020-funding-and-exit/

Cointelegraph Research Venture Capital Report

7

Figure 4

One Year Rolling Correlation of Blockchain Capital’s BCAP Token’s Weekly Log Returns
0.4

Correlation Coefficient

0.3
0.2
0.1
0
−0.1
−0.2
−0.3
Jan ‘20Feb ‘20Mar ‘20

Apr ‘20May ‘20Jun ‘20Jul ‘20Aug ‘20

Sep ‘20

Oct ‘20

Nov ‘20

Dec ‘20

1-year correlation Nv BCAP — MSCI Emerging Market Index

1-year correlation Nv BCAP — Bloomberg Barclays High Yield Bond

1-year correlation Nv BCAP — S&P 500

1-year correlation Nv BCAP — Horizons Morningstar Hedge Fund

Source: Data covers the period from December 18, 2018 – December 31, 2020. Yahoo Finance, Blockchain Capital LLC, Cointelegraph Research

Learn VC: Limited Partner
Limited partners (LPs) are investors that buy shares of VC funds that invest capital in the private equityof startups and companies.

1.1

The Stakeholders
This overview highlights the ecosystem’s investment

The blockchain VC ecosystem
involves 3 main parties

patterns over the past decade, top performers, investors, locations and industries, and most importantly

Entrepreneurs

tries to answer why these charts look the way they do.

who need funding tofinance their business

The financial landscape of blockchain venture capital
involves three main stakeholders, entrepreneurs, private investors and venture capital. Being a subcategoryof the global VC industry, blockchain VC shares many
similarities but also introduces a host of new risks
and opportunities.
Blockchain impacts three key areas of the venture
capital industry, including how startups raise capital,
how buy-side investors can diversify their portfolios,and how sell-side asset management companies cangenerate new streams of revenue.

Cointelegraph Research Venture Capital ReportPrivate investors
who seek high returns for thecapital they are providing

Venture capitalists
sources start-ups with high potential
and provides mentorship to enhance
success rate

8

Learn VC: General Partner
A venture capitalist, also referred to as a general partner (GP), is a financial intermediary that matches theLP’s capital with private companies seeking funding.

Blockchain Technology Disrupts the VC Industry
Startups

Buy-Side Investors (LPs)

Sell-Side Investors (GPs)

Larger Pool of Investors: Startups can selltokens online to a global pool of both retailand accredited investors instead of only
to accredited investors.

Investment Opportunities: Distributed
ledger technologies offer new investment
opportunities to investors. Traditional VCs
are gradually diversifying their portfolios
to invest in crypto assets and blockchain
technology projects.

New Revenue Streams: On the sell side, VCs
are launching crypto-centric private equity
funds and fund of funds (FOF).

Lower Costs: By removing intermediaries
such as underwriters and contract lawyers,
startups can save money and speed up theprocess.

Exiting Positions: By tokenizing positions
in early-stage and growth-stage venture
capital investments, limited partners canexit their positions before the company
goes to IPO or is acquired if the originalcontract with the startup allows early exits.
Blockchain enables trading of this once upona time illiquid investment by tokenizing theinvestor’s rights.

Inclusive and Transparent Funding: Several
blockchain VC funds have claimed ownershipof their Ethereum wallet address, thereby
enabling the whole world to watch the investments they make in real time.
Rebalancing Made Easier: Adjustment of positions can be done by trading the tokenizedequity of the companies they are invested
in that form the underlying assets for thefund. Tokenized VC funds also enable GPs
to buy back tokens from investors off of theopen market similar to a share buy-back.

Source: Cointelegraph Research

The remaining sections in the report target

VC and summarize the regulations and taxes thateach shareholder.

impact investors in select locations.

Section 2 focuses on entrepreneurs who are inter-

Finally, Section 4 is for the VCs themselves. In thisested in raising capital for their blockchain startup

chapter, we discuss the ins and outs of tokenizingor company. We explore the factors that impact how

a fund and exit strategies for blockchain startups thatmuch a startup raises and discuss key questions, suchare nonprofits or decentralized. We also cover strat-

as how VCs view startups that have done initial coinegies for valuing blockchain startups and explain why

offerings or token sales in the past.

some are better suited for this industry than others.

Section 3 targets private investors from the traditional

The report concludes with our outlook for blockchain

finance realm that are curious about blockchain andventure capital in 2021, including non fungible tokens

cryptocurrencies. We compare the average returns

and the proliferation of decentralized finance.

and lockup periods for traditional vs. blockchain

Cointelegraph Research Venture Capital Report

9

1.2

2020’s Largest Blockchain VC Deals
In the U.S., three companies stole the show: Bakkt, Paxos, and Chainalysis. Together, they accounted for 42% of the total money
raised by companies in the U.S. and for 21% of the global blockchain private equity market. They attracted $542 million.

Top 5 companies in blockchain industry by money raised in 2020

$300M

In 2020$142M

In 2020$113M

In 2020$60M$482,5M

Total

$240M

Total

$167M

Total

$158,7M

In 2020
Total

BlockFi is a digital platform$62M

In 2020$66,4M

Total

Bakkt is a financial services

Paxos is a financial technology

Chainalysis is a blockchain

Bitso is a Bitcoin exchange

company which focusescompany that delivers

analysis firm whichthat provides crypto savings

that is pioneering in Mexican

on digital currency andblockchain solutions for global

provides data and analytics

accounts and crypto-backed

market. It offers a digitalspecializes in concurrency,

financial institutions. The main

to government agencies,

loans in addition to supporting

platform for trading Bitcoin

rewards, and loyalty.

product is Bankchain, a cloud-exchanges, and financial

crypto trading. A secured

with Mexican Peso. The

Bakkt has raised overbased platform as a service

institutions. During 2020 the

non-bank lender, it offers

company has raised$482.5 million, $182.5 million(PaaS) blockchain settlementcompany raised $113 million

USD loans to crypto-asset$66.4 million in funding,in Series A in 2018 andsolution for capital markets.

in Series B and Series C. Total

owners which collateralize$1.9 million in seed round and$300 million in 2020. In 2020

The main product is Bankchain,money raised is $167 million,

the loan with their crypto-$2.5million in Series A in 2016,

cryptocurrency derivatives

a cloud-based platform$1.6 million in seed roundassets. Their products deliver$62 million in Series B in 2020.

exchange Bakkt partnered

as a service (PaaS) blockchain

in 2016, $16 million in Series

additional liquidity to thewith Starbucks to offer

settlement solution for capital

A in 2018, $30 million in Series

blockchain asset sector anda new payment opportunity

markets. With the funding,

B in 2019. Chainalysis is valued

satisfy the needs of individuals

for Starbucks application

Paxos will continue investingat $1 billion which is quite rare

and organizations that holdusers. In the near future thein developing corporate

for a blockchain data analytics

blockchain assets.

service firm.

Starbucks mobile app will offer

infrastructure solutions“Bakkt Cash” as an alternative

while improving security,

payment solution.

regulation, reliability.

Cointelegraph Research Venture Capital Report

10North America is Still the
Leading Blockchain VC
Blockchain companies from North America,

In 2020, North America led the way in the average

Asia, and Europe have led funding for the lastamount of money raised per deal ($8.3 million) fol-eight years. Investors put more than $2.75 billion

lowed by Asia (5.9 million) and Europe ($4.4 million).

in 622 blockchain deals in 2020, doubling 2017’s num-

Although Asia’s major economies recovered frombers of $1.28 billion USD across 322 deals, but far

government imposed economic shutdowns morebehind 2018’s impressive $7.75 billion USD acrossrapidly than the rest of the world, the fastest rebound

833 deals. To put things into perspective, block-in dealflow following COVID-19 was Europe.

chain-related deals made up 0.92% of all VC deals

At the country level, the United States, United Kingdom

in 2020. This is down from 1.25% in 2019, and 1.87%

and China account for 68% of the capital raised be-in 2018.

tween 2012 – 2020. Other countries with a significant
share are Switzerland with 5% and Singapore with 3%.

Figure 5

North America, Asia, and Europe Have the Most Blockchain VC Deals (2012 – 2020)
$10B

1400

$9B

1200

$8B

1000

$7B
$6B

800

$5B
600

$4B
$3B

400

Total Amount Raised

Number of Deals

1.3

$2B

200

$1B

0

$0
AfricaAsia

EuropeNorth America

Oceania

Source: Cointelegraph Research

South America

Number of Deals

Total Amount Raised

Figure 6

North America, Asia, and Europe Have the Most Blockchain VC Deals
$3.0B
$2.48

$2.5B

$2.03

$2.0B

$1.94

$1.5B

$1.16
$0.88

$1.0B
$0.5B
$0
2012

2013

Source: Cointelegraph Research

2014

2015

North America

Cointelegraph Research Venture Capital Report

2016
Asia

2017
Europe2018
Africa

$0.54

$0.44

$0.33

$0.52

2019

2020

South America

Oceania11

Figure 7

Capital Raised by Blockchain Companies by Country of Company Headquarters$2,500$2,000$1,500$1,000
$500
$0
2012

2013

2014

2015

Source: Cointelegraph Research

US

2017

2018

China

Switzerland

2019

2020

Singapore

UK

COVID-19’s Toll on Blockchain
Private Equity
Overall, blockchain VC investments decreased

cautious to invest further resources in blockchain

by 13% between 2019 and 2020, while traditional

companies. Although the number of deals decreased

VC investment increased by 18%. This is a perplexing

from a maximum of 661 in 2018 to 423 in 2019 (a 36%

result. We can only explain this result as a responsedrop), the number of deals rebounded by 25% in 2020,

to the 2018 and 2019 downturn in the digital asset

up to 609. The higher number of deals and lower total

market, while traditional stock markets continued

capital raised reduced the average blockchain deal

to perform well. This may have made some investors

from $7.1 million in 2019 to $4.2 million in 2020.

Figure 8

Blockchain Private Equity Funding Per Year and Number of Deals
800

$7B

700

678

600
Number of Deals

1.4

2016

$6B
$5B

500

$4B

400
$2.78

300

$3B
$2B

200
100

$1B

0

$0
2012

2013

2014

2015

Source: Cointelegraph Research

Cointelegraph Research Venture Capital Report

2016

2017

2018

2019
Blockchain Private

2020
Equity Funding

12

COVID-19 wrecked two quarters of blockchain VC in-

Overall, we expect both the number of deals and thevestment across the globe, but Q4 2020 saw a strong

amount of capital invested in blockchain companies

recovery. In Q4 2020, the amount of money raised

to increase in 2021 due to macroeconomic conditions,increased 37% in comparison to Q3 2020. This positive

such as increased government stimulus and microeco-

trend indicates a possible recovery in VC investments

nomic conditions, for example, the market’s responsein the near future.

to Bitcoin’s 2020 reduction in block rewards.

Figure 9

Global Capital Raised by Blockchain Companies in 2020 in Millions$845.29$763.33$770.70$762.93$756.30$652.64

Q1

Q2

Q3

Q4

Q1

2019

$561.20$549.14

Q2

Q3

Q4

2020

Source: Cointelegraph Research

1.5

Evolution of the Economy
Over the past few decades, we have seen a gradualIn the examples above, we still have a mostly central-

shift from fully centralized economies to platform

ized model where the success of the venture depends

economies. This process is characterized by the reali-

on a single entity: the company acting as an interme-zation of large companies that they cannot effectively

diary in the process. In a decentralized protocol-based

compete with crowd-sourced contributions. Someeconomy, the protocol is the intermediary and the pro-examples of this are social networks, such as Facebook

tocol itself is maintained by community contributors.

or YouTube, where content is exclusively produced

There can still be centralized services offering interfac-

by the platform users (both with and without external

es to the protocol, but the success of the protocol itself

incentives). Similar examples are Airbnb and Uber,no longer relies on any individual company.

where the company does not possess the infrastructure for the offered services but, rather, just facilitatestransactions via its platform.

Learn VC: Protocol Economy#Hashed has coined the term “Protocol Economy” to refer to the process of removing unnecessaryintermediaries and their associated costs by directly connecting contributors with consumers.

Cointelegraph Research Venture Capital Report

13

Economic Model Evolution
1850

Future1850 – Mid 1990

Description

Value

Data

Mid 1990 – Present

FutureCentralized Economy

Platform Economy

Protocol Economy

Corporate Model

Marketplace Model

Permissionless Model

Employees within companies
provide goods and services

Employees and contributors
form outside companies
generate value

Any and all participants areenabled and incentivized
to contributeShareholder Value

Shareholder Value

Community Value

Corporates focus on growth
and wealth generation forshareholders

Markets generate value forstakeholders, i.e. contributors
and end consumers

Networks, with internal focus,
provides value to all contributors and users

Low Data Sophistication

Increasing Data Usage

Data Sovereighty

Lack of infrastructure andtechnology for proper data
usage and analytics

Industry, market, andconsumer data are used
to enhance operations

Data is key to the economy,
and is hence prioritized andprotected

Examples

Source: #Hashed

1.6

Where Venture Capital Is
Forecasted to Flow in 2021
With the fundamental blockchain infrastructureWith the growth of the space, we are also seeing

already built, we expect upcoming venture capitalan increase in mergers and acquisitions as opposed

to focus on higher layers of the tech stack: (1) func-

to traditional ways of fundraising. Since the infrastruc-tionality and (2) apps. For example, if TCP/IP and HTTP

ture around cryptocurrencies is starting to mature,

are the foundational protocols for the internet, Ethere-

while the overall complexity remains high and talentum and other smart contract platforms are becoming

is scarce, it often makes more sense to acquire rather

the foundational infrastructure layer on top of whichthan to build from the ground-up. Acquisitions happen

various blockchain applications are built.

both within the space (crypto companies acquiring

As each layer develops, it becomes the foundation for
the next one. The currently thriving world of decentralized finance would not have been possible without
Ethereum as a base layer. For example, Aave, withcrypto companies) and outside of it (crypto companies
acquiring non-crypto companies and vice versa). Some
prominent examples in this regard are:ý

Binance (one of the largest cryptocurrency ex-nearly $6 billion in Total Value Locked is sitting on top

changes) acquiring CoinMarketCap (one of theof Ethereum. Then the lending protocol aggregatorlargest data aggregators).9

Yearn.finance was built upon both Ethereum and Aaveand many other lending decentralized applications.

ý

The company behind Tron (the 11th largest cryptocurrency at the time) acquiring one of the largest
torrent software providers — BitTorrent.10

9https://cointelegraph.com/news/binance-announces-coinmarketcap-acquisition-cz-gives-the-scoop

10

https://cointelegraph.com/news/confirmed-tron-acquires-major-p2p-platform-operator-bittorrent

Cointelegraph Research Venture Capital Report

14ý

Facebook acquiring Chainspace (a research compa-

cess, bootstrap adoption, and create value globallyny focusing on smart contracts).

through the Algorand borderless economy.12

11

On the other hand, there are also a plethora of funds

ý

The Dash Investment Foundation, which supports

set up to facilitate the expansion of specific blockchain

the network’s growth by enabling enforceable legal

networks. They are usually created by developers

and financial arrangements between the Dash DAO

or large investors involved in the cryptocurrency pro-and traditional businesses seeking funding from theject itself. For example:

network.13

ýBorderless capital (previously Algo Capital),ýa VC fund focusing on products that accelerate ac-

Gitcoin, which is a hybrid funding group for the
Ethereum ecosystem.14

Internet

Blockchain

Equipment

Browsers

Wallets & Browsers

Channels

Portals, App Stores

Dapp Stores

Applications

Decentralized Applications

Picks & Shovels

Picks & Shovels

Servers

Scalability Enhancers

Web Protocol

Blockchain Protocol

Service

AccessComparative Technology Stack

Public Gateways

Apps

Infrastructure

Functionality

Scalability & Privacy

Protocols
Source: #Hashed

Key Enablers“ The mode through which capital is allocated is being
decentralized as the blockchain technology democratizes
access to investment opportunities.”
Lin & Nestarcova (2019)11https://medium.com/cheddar/facebook-makes-first-blockchain-acquisition-with-chainspace-e35a559e5d36

12https://borderlesscapital.io/

13

https://www.dashinvests.org/

14

https://gitcoin.co/wiki/grants/

Cointelegraph Research Venture Capital Report

15

A digital asset fund focused on investment opportunities
that will spark the internet’s next paradigm shift.

About TRGC

Our Team

Digital assets are revolutionizing the way we create,transact, and transfer value and ownership. Blockchain
protocols and DeFi applications are eliminating existing friction points, creating borderless and inclusive
opportunities through new peer-to-peer interactions and,as value becomes programmable for the first time, thisnext architectural shift of the internet represents a generational investment opportunity.

Led by Managing Partner Etiënne vantKruys, TRGC
comprises a team with a wealth of experience in both
emerging blockchain technologies and traditional
finance spanning several years.

We have spent over four years creating and nurturing
an extensive network of reputable industry contacts,
resulting in unrivalled access to a wealth of vantage
points in the blockchain investment landscape. At thesame time, we have demonstrated a consistent andbattle-tested ability to source high quality project teams,
investing in their vision with conviction.
TRGC leverages deep knowledge of the blockchain
technology ecosystem to assess future potential, adding
exceptional value at the earliest stages of development
and enabling innovation to blossom. Our investment
portfolio highlights a verifiable track record of fostering
cutting-edge technologies at their point of inception.

Etiënne,an active angel investor and advisor, has a strong network of partners that spans every continent. Etiënne
assists trailblazing project teams reach their funding
goals, with some reaching up to $1bn in market capitalisation as a direct result of his navigational skills
with go-to-market strategies.

Yoon
previously built and led Tremblant Capital’s digital
sector investments, helping grow its AUM from$200 million to $5 billion in less than five years. Yoon
also launched Vestry Capital, a global TMT longand short equity fund seeded by Citadel Alternative
Asset Management.

Damian,
who also actively invested in various early-stage
technologies, was previously a Partner and Managing
Director at several New York-based Hedge Funds.
With a focus ranging from Healthcare, Real Estate andTechnology, previous positions were held at SAC Capital, Welch Capital Partners and Newgrange Partners.

Our Approach
TRGC invests across a wide spectrum of distributed
technologies; our level of involvement ranges from seed
investments in blockchain protocols and infrastructures
to deployment of capital in established blue-chip digitalassets that will continue to shape and advance the
DeFi ecosystem.
Our ability to put capital to work efficiently and generate
asymmetric risk-adjusted returns comes as a resultof applying a rigorous, research-driven investment process. We place a high focus on long-term partnerships
with exceptional project teams and founders.
We are able to tap into strong industry connections that
help companies navigate today’s regulatory uncertainties, enabling teams to forge partnerships, build
communities and construct flourishing ecosystems. Allof the aforementioned results in tremendous value being
captured in a way that was not previously possible.

trgc.io

hello@trgc.io

Combined, the cumulative knowledge, value-add andforesight behind TRGC as a fund has made it well-positioned to make a considerable mark on the blockchain
and digital asset economy.

Investing in tomorrow’s
innovations, today
After working in a closed capacity for nearly half a decade, TRGC is now opening it’s fund to outside investors
from Q2 2021 onwards. With emerging trends in theecosystem rising globally and exponentially, we are able
to help exceptional project teams unlock value in ways
never seen before.
Whilst we see maturity in some areas of the market,
other emerging trends are still in their infancy andinvesting undoubtedly comes with a degree of risk thatis not immune to any extreme market forces. This being
said, when presented with a generational opportunity,
partnering with reputable funds that leverage substantial
expertise and valuable market insights allows investors
to play a central role in shaping an exciting future.

2

Startups

2.1

Types of Private Equity Investors
What are your startup’s needs?
CASH

SUPPORT
BOTH

Competitions(grants)

Which do you need more right now?
Give me cash!

Reward-based Crowdfunding(Initial Coin Offering)
Equity-based Crowdfunding(Security Token Offering)

A bit

I needmore support...

A lot

Angel
Investment

VC Funding

Incubators

Co-working

Accelerators

Source: Adaptation from Diane Perlman’s blog on Gust.com, Cointelegraph Research

Traditionally, startups have turned to venture capital

Overall, the lack of regulatory and geographical con-firms to raise money for their growing businesses.

straints inherent to blockchain enables a more efficient

However, today there are many types of investors thatuse of capital across the world, as venture capital can

are willing to fund entrepreneurs, including acceler-chase good ideas and flow from capital rich areas

ators and angel investors. Furthermore, blockchain

to capital poor ideas. Due to the increase in capital

technology has created new channels for collecting

flowing from unbacked fiat money printing and thecapital, including the potential of selling to retail inves-increase in ways to funnel capital into startups withtors for the first time since the development of secu-

blockchain technology, we feel that good ideas andrities laws over the past 70 years (not to mention thecapable teams are the scarce assets, not capital.

borderless nature of this technology increasing the tar-

Over the next few years, we expect to see increasing

get addressable market of retail investors even further).

nominal valuations of startups as fiat currencies con-

Raising capital with security tokens, SAFT agreements

tinue to be debased, and we also expect to see govern-or variants of ICOs all offer different benefits and dis-ments cracking down on SAFT agreements and similaradvantages compared to traditional VC funding.

contracts, such as secondary forward contracts.

Cointelegraph Research Venture Capital Report

17Notable Examples of Blockchain Accelerators Include

ConsenSys Labs is focused

Binance Labs looks for new

Tribe Accelerator is supported by the Singapo-

on developing Ethere-

projects that support BNB andrean government, giving it unique advantages

um-based projects.

Binance Smart Chain.

for new projects from that region.

Accelerators

Incubators

Accelerators are not as common in the blockchain

Incubators can offer strategic support, networking

world as they are in traditional startup communities.

and even physical office space to promising projects.

This is mainly due to the ease of access to fundraising

While incubators and accelerators offer similar services,via initial exchange offerings and ICOs, as well as the

traditionally, incubators don’t offer funding like acceler-

support of online communities and DAOs. However,ators do. Many governments, universities and corpo-

many large blockchain accelerators exist, particularly

rations offer incubators, including JPMorgan, Thomson

when a secondary motive is present, such as the devel-

Reuters, and Cambridge University.

opment of an ecosystem. Many blockchain protocols
will also offer grants, technical advice and networking
support in exchange for building on their protocol.

Competitions
Incubators can offer strategic support, networking

Crowdfunding

and even physical office space to promising projects.
While incubators and accelerators offer similar services,

A public token sale that does not give investors a secu-

traditionally, incubators don’t offer funding like acceler-rity or investment contract is considered to be a typeators do. Many governments, universities and corpo-of crowdfunding. From a strategic point of view, theyrations offer incubators, including JPMorgan, Thomson

provide immediate access to funds and don’t attach

Reuters, and Cambridge University.16

any legal or fiduciary responsibility to investors. The
main drawback is that investors tend to hold very
short-term investment horizons and offer very lit-

VC Funding

tle in the way of strategic, technical or promotion-

VC Funds in the blockchain space are known for in-al support.

vesting in a range of assets, such as equity, convertible
notes, SAFTs, and non-equity tokens. Notable exam-

Angel Funding
In addition to venture capitalists that invest on the be-ples of blockchain VC funds include Draper Goren
Holm, #Hashed, TRGC, PNYX, Polychain, A16z, IDG
Capital, Blockchain Capital, Delphi Digital and Pantera.

half of others, there are also angel investors that invest
their own money into private equity deals.15 The token“private sale” method has somewhat “decentralized”

Corporate Funding

the need for angel investors, with projects targeting

The final group of potential investors in blockchain

high-profile influencers and key opinion leaders for dis-

venture capital are strategic investors, such as corpo-

counted allocation in exchange for future strategic andrations. Corporate investors do not follow the samepromotional support. Many prominent solo investors,

strategy as angels and VCs because they can often

such as the Winklevoss twins or Barry Silbert, havefind ways to profit from the private equity investment

gone on to organize venture capital funds.

without exiting via an acquisition or IPO.

15

https://gitcoin.co/results

16

http://ict-industry-reports.com.au/.../2011-Book-Venture-Capital-and-Finance-of-Innovation-Metrick-Yasuda-Dec-2011.pdf

Cointelegraph Research Venture Capital Report

18

Figure 7

Percentage of Deals by Investor Type in 2020
3.1%

2.9%

5.7%
25.5%

7.7%

11.1%

18.0%

24.5%

25.5% Traditional VCs

7.7% Established corporate

24.5% Crypto focused VCs

5.7% Crypto company

18.0% Not specified

3.1% Other

11.1% Family offices

2.9% Accelerator/Incubator

Source: Cointelegraph Research

In terms of where the money is coming from, tradi-run by Etiënne vantKruys. TRGC made a staggering

tional and crypto-focused venture capitalists account

22 deals during 2020. Runner-up is a tie with Coinbase

for half of all the investments made during 2020. Over

Ventures and Dragonfly Capital both with 13 deals.

80% of VCs engaged in one deal or less; however,An interesting question is which companies sparked

there were five VCs that engaged in at least 10 deals

the curiosity of these VCs, and are there any compa-

during 2020. The award for most active VC in 2020

nies that multiple VCs made long-term bets on?

goes to a Netherlands-based crypto VC called TRGC

Figure 10

Majority of VCs made One Deal in 2020
1.8%
3.2%

1.4% 1.7%

0.2%

10.4%
81.2% 1

1.4% 5

10.4% 2

1.7% 10

3.2% 3

0.2% 15

1.8% 4

81.2%

Cointelegraph Research Venture Capital Report

Source: Cointelegraph Research

19

Most Active Blockchain VC Investors in 2020
VC

Number of Deals

Blockchain Investments

TRGC

22

Avalanche (AVAX), Centaur, Kira Core, StakerDAO, Vesper, finance.
vote, Plasm Network, seascape, Akash Network, HydraDX, StaFi Protocol, E-money, Jarvis Network, Gather, Fuse, Persistence, Covalent,Reef, SIFchain, Unilend, WooTrade, Frontier

Coinbase Ventures

13

Amber, Arweave, Audius, Bitso, CoFix, CoinMetrics, CoinDCX, Curv
(CRV), Dapper Labs, DerivaDEX (DDX), Dune Analytics, FalconX,
MultisDragonfly Capital

13

Opyn, Avalanche (AVAX), TaxBit, 1inch Exchange, CoFix, CoinMetrics, Paradigm, Dune Analytics, Cozy finance, Sia Tech, Babel
Finance, DerivaDEX (DDX), Numerai

Draper Goren Holm

12

Totle, Ownera, Giftz, LunarCRUSH, Casper Labs, Degens. Open
Relay / Rivet, Return Network, PrimeDAO, Simetria, Tezos Stable
Technologies, AlphaFin

Polychain Capital

12

CoinDCX, Avalanche (AVAX), Compound, Yellow Card, River Financial, Gauntlet Network, Amber, Liquity, Horizon Blockchain Games,
DerivaDEX (DDX), Alpha5, StakerDAO

Digital Currency Group11

Circle, CoinMetrics, Curv (CRV), Dune Analytics, Figure, Fireblocks,
Horizon Blockchain Games, Lolli, Paradigm, Skew, Zabo

Alameda Research

11

Paradigm, Covalent, 3 commas, Folkvang, APY.Finance, Mask
Network, MathWallet, Balancer, ParaSwap, Mantra DAO, PerpetualProtocolInsider Insight with Founder of TRGC, Etiënne vantKruys:
As we continue to witness an accelerated shift into the digital age, the worldis starting to get a glimpse of the asymmetric opportunities that blockchain
presents. With real use cases, blockchain is at the forefront of innovation. Take
emerging trends like DeFi, it has demonstrated how banking can be driverless withno human intervention and lending can be non-discriminatory. Today, exceptionalfounders are laying the groundwork for future growth and maturity of the ecosystem. Projects like AAVE, Covalent, Avalanche, Plasm are recent examples of that.

Insider Insight withEtiënne vantKruys,
founder of TRGC

However, this is only for 2020. One of the mostdown aspects of the market in an easy to understandactive firms over the entire dataset is Pantera Capital.

manner.18 Even as the older funds continue to be very

Based in the US, Pantera Capital focuses exclusively

active, 2020 also saw the emergence of strong activi-

on projects related to blockchain technologies. The

ties from highly focused and fast growing funds. In par-company has had 113 investments since 2014 andticular, TRGC stands out with its 23 investments acrossis the lead investor of 31 organizations.17 We especiallythe layer 1 and 2 DeFi project category.

enjoy Pantera’s recorded conference calls that break17

https://www.crunchbase.com/organization/pantera-capital

18

https://info.panteracapital.com/conference-calls

Cointelegraph Research Venture Capital Report

20

2.2

From the Startup’s Perspective:
Using Tokens to Raise Capital
Token sales remain a fraction of the traditional fundraising market for startups. According to the annual Venture Monitor report by PitchBook and NVCA, traditional VCs invested $156.2 billion in 2020 in companies in the US alone.19 Thisis compared to approximately $13 billion raised via all of the ICOs that occurred between 2017 and 2019 across theglobe.20

2.2.1

Token Fundraising Options
Initial Coin Offering
The first wave of token fundraising came via initial coinofferings. This began as a form of crowdfunding for
new blockchain-based projects, and they quickly grew
into a way for any company to raise funds themselvesand distribute their tokens to a wide user base. However, ICOs are still unregulated and fall into a legal
grey area, which should make startups cautious whenit comes to using this fundraising method.

regulation during the sale process. In an STO, it’s notjust tokens that are sold but also voting rights andrevenue distribution as well. These tokens are backed
by a company’s assets and are treated as securities.
A study done by Blockstate found that STOs grewfrom 35 total offerings in 2018 to 55 in 2019, totalling$452 million in funding.

Simple Agreement for Future Tokens
SAFTs are considered securities and, therefore, adhere

Security Token Offering
The lack of regulation on ICOs has given many companies hesitation when it comes to token offerings.
As a result, blockchain startup Polymath createdan idea for token offerings that actually gave investors
an investment contract and were regulated securities.
Security token offerings (STOs) were created to reduce
fraudulent token sales and increase transparency andto regulations and legal standards. With a SAFT, investors provide immediate capital in exchange for theright to purchase tokens in the future at a discounted
rate. The SAFT contract acts as a security, while thefuture tokens are, in theory, not securities but, rather,usable tokens on a decentralized network. However,
SAFTs may no longer be an advisable way for raisingfunds for blockchain startups.

Learn VC: Simple Agreement for Future Tokens (SAFT)
SAFT agreements were a type of investment contract used to raise funds from sophisticated investors prior
to the development of the actual product or technology. The SAFT was popularized by American lawyer Marco
Santori and was inspired by the Simple Agreement for Future Equity contract that is used in private equity
deals. Although many blockchain projects between 2017 and 2019 used SAFT contracts, the trend is on the
decline. In 2020, financial regulators in the U.S. started cracking down on startups using SAFT contracts.

19

https://pitchbook.com/news/reports/q4-2020-pitchbook-nvca-venture-monitor

20

A paper compiled by the National Bureau of Economic Research last revised in September 2019 found that more than 1,500 ICOs raised a collective$12.9 billion

Cointelegraph Research Venture Capital Report

21

Company

Token

SAFT Fundraising Amount

Total Investors

Orchid Labs

Orchid$36.1 million

42

Protocol Labs

Filecoin$205 million

2,100Intantible Labs

Basecoin$125 million

225

Source: https://www.sec.gov/Archives/edgar/data/1734381/000173438118000001/xslFormDX01/primary_doc.xml
https://protocol.ai/blog/filecoin-sale-completed/https://www.sec.gov/Archives/edgar/data/1721086/000172108618000001/xslFormDX01/primary_doc.xml

2.2.2

Token Sale Advantages
Community building and grassroots marketing
When a VC firm invests in a startup, it may warrantof distribution than traditional VC backing. Brave’s Basica headline or news story that fades quickly. The buzz

Attention Token sold $35 million in tokens in justsurrounding the fundraising round doesn’t generate

30 seconds to 130 people.21 When a startup uses

any additional benefit for the startup other than thetokens to fund its operations through retail investors,

capital that was raised. Using a token sale, on the otherit automatically comes into a new set of support-

hand, allows the startup to get a wide range of people

ers who are more engaged with the company itself.

invested and involved in its success. For instance,

It’s in the best interest of these investors to promote

in just the first few weeks of the Ethereum token

and spread the company’s product. This aligns thesale, 6,670 people purchased tokens, thus creating

investors and startup in a way that becomes mutuallyan already established foundational user base that

beneficial: Investors tout the startup’s product, whichis involved with the project from day one. Even token

leads to new investors and/or users, causing the value

sales that sell out quickly still generate a wider rangeof the token to appreciate.

New Crypto Business Model — Governance Token
In 2020, we saw the emergence of a new type of token and crypto business modelthat has arguably reignited the excitement and hysteria in cryptocurrency.
It all started when the lending and borrowing protocol running on the Ethereum
blockchain — Compound — launched a token that took the crypto world by storm.
Compound was among the few crypto projects that never conducted an initial coinoffering at the beginning of its life cycle based on a white paper promise. Instead,the company opted to take the traditional venture capital financing route, raising

Insider Insight withapproximately $33 million from several titans in the crypto space, including An-

Camron Miraftab,

dreessen Horowitz, Polychain Capital, Paradigm and Dragonfly Capital. The money

co-founder of

was used to develop the product, find product-market fit, and attain network

Rarestone Capitaleffects — achieving all this without using a token. From the outside, the VC backing
may not look like a purchase of a token, however, the VCs buying equity in Compound did so with the full intention of attaining a portion of future-issued governance tokens.

21

https://techcrunch.com/2017/06/01/brave-ico-35-million-30-seconds-brendan-eich/

Cointelegraph Research Venture Capital Report

22

Since Compound, we’ve been witnessing more of the founding teams behind layer-two protocols (mainly
on Ethereum) offering their VC backers either equity-to-governance token conversions or, alternatively, a directpurchase of governance tokens.
For many traditional as well as passive crypto investors, the concept of investing in a “token” is met with distaste following the aftermath of the 2017–18 hype cycle, where it became apparent that the majority of utility
tokens demonstrated no concrete value-accruing properties.
So, what are governance tokens, and how are they different from the ICO mania tokens?
Background
Just like traditional businesses, applications, such as Compound, that are hosted on a blockchain still attaintheir competitive advantage through network effects. Despite the fact that although these applications run
their logic on a secure decentralized IT infrastructure (Ethereum), the code that governs the application canstill be tweaked by those in control of the smart contract admin keys, meaning that “power” is still centralized.
Therefore, it is easily achievable to have a for-profit business behind the scenes with the power to tweak thecode to increase their share of the transaction fees and scalp from their users. As these applications start
to mature and attain stronger network effects, there will be a greater tendency for the shareholders of thecompany behind the application to leverage their negotiation power and extract more and more value fromthe network for the betterment of the shareholders. This takes us back to the same problem that plagues thebanking and web industry today: monopolization.
Value extraction aside, history has shown us that the centralized management of network-orientated services
either end up restricting access to a select group of users (limiting growth) or unjustifiable censorship.
The Solution: Governance Tokens
The introduction of the governance token allows us for the first time to introduce a business model that is able
to maintain fairness — post-mass adoption — between the groups of individuals and organizations that typically make up network-orientated services.
Governance tokens give holders the power to influence decisions concerning the protocol and changes
to governance parameters. Changes to the protocol may include introducing a transaction fee and distributing
those cash flows to the governance token holders at a later date once the network is sufficiently decentralized.
It is this expectation of future cash flows that instil confidence in the value-accruing properties of the token
among the VC and the broader investment community.
Governance tokens are not classified as a security via regulatory arbitrage
In 2018, a member of the SEC unofficially announced that ETH is not a security, as it is considered “sufficiently decentralized”. By that, it meant that according to the Howey Test, there was no evidence that the profits
investors hope for are “dependent upon the work of a third party.”In the crypto industry, it is generally understood that layer-two protocol builders — i.e., founding teams forthese new types of applications running on blockchains, such as Ethereum — have the power to follow Ethereum’s lead by progressively giving executive-level decision making power to the wider community over time
and thereby arbitrage the regulatory risk associated with having a single, easily targeted entity with governing
power over the protocol. As it is known, decentralization means that there is no longer a centralized authoritythat has the power to change the rules. Even if the regulatory authorities were to intervene following a votein favor of cash flows, they would not be able to do anything about it. There would be no “CEO” to go after,
similar to how there is no CEO of Ethereum or Bitcoin.

Cointelegraph Research Venture Capital Report

23

Why is this model better than the legacy business model?
Unlike the legacy model, the critical decision-makers behind a protocol do not consist solely of profit-seeking
capital providers. With the introduction and distribution of protocol-specific governance tokens, they encourage the actual users of the service to hold a stake in the application thereby better aligning the interestsof everyone involved.
As a result, when the time comes for token holders to vote on whether or not the protocol should introduce
transaction fees, the real users now have a voice that holds weight. We start to see market forces trend toward a fairer equilibrium price point even as the network effects progressively get stronger and stronger. This
is in stark contrast to our existing model that works in the opposite direction (extracting value for the few).

Cost savings

Pent-up demand from retail investors

Reduce transaction costs by relying on a good website,

Lin Lin and Dominika Nestarcova (2019) point out thatwhite paper and tech-stack for the token distribution

the ICO boom can be partially explained by the desire

instead of on underwriters.

by retail investors to invest in blockchain venture

Equity dilution may not be required

found out to their dismay, most ICOs did not offer

Depending on how a token sale is structured, founders

a short-lived speculative opportunity. Due to strict

capital and private equity deals. However, as investors

don’t need to give up equity of their company. Newly
minted tokens are not equivalent to shares or stakein the startup, but rather, they are usable assets.
As an example, Protocol Labs raised capital via a SAFT
sale for its Filecoin token. Filecoin is used as a formof payment for users to store their files on a decentralized network and is also awarded to miners who use
their computing power to store files for other users.
Through this method, Protocol Labs was able to raise$205 million from more than 2,100 investors without
giving up equity in its underlying company.

them a long-term investment contract, but rather
regulations barring retail investment in private equity
in most countries, retailers still have pent-up demand.
To this day, there are very few examples of financial
products that give retail investors exposure to private
equity in general, and even fewer that focus on private
equity in blockchain companies. Securities Exchange
Commissioner Hester Peirce has voiced her concerns
regarding this issue several times over the past few
years, and she has been working on several initiatives
to evolve how regulators in the U.S. approach the retailand accredited investor laws. In addition to respecting
an individual’s right to self-determination and controlof their financial decisions, there are strong economic
arguments for enabling retail investment in private
equity. Specifically, the more investors there are in thestartup, the more dispersed the risk of the investment is.

Cointelegraph Research Venture Capital Report

24

Do you prefer investing in blockchain startups that havea token or do not have a token? Why?
At Framework, our thesis is that open-source finance (aka DeFi) presents a gargantuan opportunity for innovation in financial products and financial services.
Entrepreneurs now have orders of magnitude decrease in the cost and time required to create new financial concepts and an ability to distribute to users aroundthe world via open blockchain networks. Over the last 15 months, we’ve seen thepotential for open networks built on top of blockchains where a token is thecoordination mechanism. The power resides in the ability to have open-source
and composable software creating layers of abstraction that these products arebuilt upon and leading to an ability to produce exponential results. For instance,in September and October of 2020, Uniswap — a team of 8 — facilitated more

Insider Insight withMichael Anderson,
co-founder ofFramework Ventures

spot exchange volume than Coinbase Pro. Investing in this area requires a different
mindset than traditional VC investing in corporate equity of startups. We specialize
in investing in open networks where a token accrues the value produced by the
network, and we are purpose-built to be the best-in-class partner to the coreteams and the communities of these networks.

2.2.3

Token Sale Downsides
Regulatory risk
Regulatory risk is at the top of the list for token
offerings. Until now, regulators have been vague
in their dealings with cryptocurrencies, especiallyas they relate to their status as securities. Some token
offerings have marketed themselves strictly as utility
or currency tokens, leading them to believe that theyis opening itself up to massive volatility in the priceof its equity. The valuation of a company can plummet
rapidly due to massive dumps of its token from shortterm speculators.

Technology risk
Offering a token sale immediately brings technology

won’t be viewed as securities in the future. But withto the forefront. If the token being created is done

the recent crackdown on Ripple by the SEC, it’s clear

so in a way that is insecure, it could lead to problems

that any token claiming not to be a security could

down the road. The industry is riddled with companies

be heavily scrutinized. Ripple believed it was simply

whose tokens have been stolen, hacked and compr-

selling its XRP cryptocurrency in a public sale, but theomized by bad actors. This is especially a risk for any

SEC claims it was holding an “unregistered, ongoingstartup that is working with little to no knowledge

digital asset securities offering.” The cascading effectof cryptocurrencies and is simply looking for anotherof these allegations are huge and have led cryptocur-

outlet to raise capital. According to an Ernst & Youngrency exchanges to delist XRP, causing the value of thereport from 2018, more than 10% of the $3.7 billion

cryptocurrency to plummet.

raised via ICOs at the time was stolen. In just one example, a 2017 ICO completed by CoinDash was hacked,

Volatility
The second drawback is that since the startup’s equity is trading on secondary markets, the startup

Cointelegraph Research Venture Capital Report

resulting in a loss of funds for investors. Hackers replaced the Ethereum wallet address on the CoinDash
website with their own, causing $7.3 million to be sent25

to the hackers’ wallet. There is no shortage of stories

base, these investors may not provide value to thelike these that make token offerings a technologicalstartup itself. In fact, venture investors spend a signif-risk for startups if mismanaged.

icant portion of their time providing support to their

Lack of mentorship and industry
expertise

Harvard Business Review, venture investors spend

portfolio companies. According to estimates from the

Retail investors lack the expertise of venture firms.
It might just take one introduction or idea from an experienced venture investor to turn a startup aroundor help pivot the company into a new market. Andeven though token sales can onboard a larger investor

25% of their time serving as directors and monitorsof startups, 20% of their time recruiting management,
and 10% of their time assisting in outside relationships.
This time investment by venture firms with experienced
fund managers is completely lost when a startup opts
for a public token sale.

“ Instead of mediating the transactional relationshipby regulations and contracts, the fundraising process canbe carried out using deterministic code (smart contracts)that automates the relationship between the ICO issuer
and investor.”
Lin & Nestarcova (2019)

2.3

Determinants of Fundraising Success
When a startup is raising money, it is helpful to know

blockchain-related business in 2019, and moved

if their goals are realistic and if there are any variables

into an almost entirely new product line.22

that can help or hinder the success of their funding(Figure 11)

round. In the dataset prepared for this report, we observed several noticeable patterns including:
1. The majority of blockchain investment deals
have been in the seed round. Between 2012 and2020, our dataset recorded 1448 deals in the seedround compared to 248 angel investor rounds
and 378 Series A. Interestingly, only five companies have done a Round D or E including: Circle,
Coinbase, High Fidelity, TradAir, and Robinhood,
although Robinhood’s crypto trading abilities does
not really make it a “blockchain company” like Circle
or Coinbase. Coinbase and Robinhood are bothplanning IPOs this year, and Circle is rumoured22

2. However, Series A and B rounds have seen thelargest amounts of capital with $3.89 billion and$2.90 billion respectively between 2012 and 2020.
(Figure 12)
3. The majority (69.2%) of blockchain companies have only engaged in one funding round.
However, there have been 38 blockchain companies with at least 5 funding rounds or more. The
award for highest number of funding rounds goesto Crowdz, with 11 funding rounds.
(Figure 13, 14)
4. 2020 saw a notable trend in VC investments

to be planning an ICO. The British-based TradAirin blockchain infrastructure, trading infrastructure,

has not announced any plans to go public, and theand wallets.

San Francisco-based High Fidelity shut down their(Figure 15)

https://www.hypergridbusiness.com/2019/12/high-fidelity-shutting-down/

Cointelegraph Research Venture Capital Report

26

Figure 11

Number of Deals per Funding Round 2012 – 2020
Seed

Series A

Series B

Series C

Series D

Series E

1,439

378

83

19

4

3

= 10 deals

Figure 12

Capital Raised per Funding Round 2012 – 2020
$1.4B
$1.2B
$1.0B
$0.8B
$0.6B
$0.4B
$0.2B
$0
2012

2013

2014
Angel

2015

2016

2017

2018

2019

2020

Seed

Series A

Series B

Series C

Series D

Series E

Figure 13

Number of Funding Rounds Per Blockchain Company 2012 – 2020
80%
70%

69.2%

60%
50%
40%
30%
19.8%

20%
10%

6.7%

2.2%

1.2%

0.5%

0.2%

0.1%

4

5

6

7

8

0%
1

2

3

0.1%
9

10

11

Source: Cointelegraph Research

Cointelegraph Research Venture Capital Report

27

Figure 14

10
8
6
4
2
0
Cro
wdz
bitF
lyer
Rip
ple
Coi
nba
se
Fila
me
nt
Vee
m
Zen
Spo
rts
An c
h or
ID
Cha
inal
ysis
Cird
Dat
e
aG
um
bo
eGi
fter
Gem
Pee
rNo
va
Ri
Sato pio
Imp
shiP
act
ay
Rev
olu
tion
1W
orld
Onl
ine
Abr
a
Alp
ha
Billo Point
nG
rou
p
Bitb
on d
Bitf
u ry
Gro
up
BitP
ay
Blo
Bitw
ckF
ala
i Le
ndi
ng L
LC
Blo
BUT
TON cko
Wa
llet
Ch r
on i
cled
Coi
npl
ug
DeF
iner
Driv
ezy
Ellip
tic
F ac
t
o
m
Idea
n om
ics
Lyk
k
Myt
hica e AG
l Ga
me
s
Ver
iSm
art

Number of Funding Rounds 2012 – 2020

Blockchain Startups With Over Five Funding Rounds

Source: Cointelegraph Research

The current market environment is similar to that of us being on a high speed
bullet train whilst simultaneously laying the tracks as we go along. Whilst capitalis readily available for the most ambitious teams, we’ve seen that teams need support beyond capital. Enabling founders to navigate regulatory uncertainties, build
communities and ecosystems leads to tremendous value being captured in a waythat is unseen before.

Insider Insight withEtiënne vantKruys,
founder of TRGC

Figure 15

Capital Raised by Category in 2020
37.2%
$979.58M

15.1%$397.62M

22.5%
$591M

Source: Cointelegraph Research

11.8%$311.74M

10.6%$278.7M

2.8%$73.37M

Blockchain infrastructure

Trading infrastructure

WalletCrypto exchange

Payments

Compliance and regulation

Cointelegraph Research Venture Capital Report

28

Venture Capitalists Are Funding
Decentralized Technologies
Crypto media outlets named 2020 the “year of DeFi,”

With over $39 billion locked in DeFi protocols as of Mar.

and it definitely was so before the BTC rally stole the7, 2021, this industry has only started to discover theshow. DeFi is building an alternative to the traditional

power of this technology to disrupt traditional finan-

financial system and democratizing finance by giving

cial services. Over the past year, many DeFi protocols

individuals access to financial products that are often

increased their user bases significantly23: for instance,

restricted to professional investors. DeFi protocols

Uniswap, a popular DEX, achieved 15x growth in theare mainly focused on lending, trading and payments

number of unique addresses in 8 months of 2020.

at the basic level of functionality, yet it also offers

Such rampant growth drew the attention of VC inves-sophisticated instruments, such as derivatives andtors to the DeFi sector. As the metrics on the emerging

flash loans.

sector speak volumes,, more than 100 projects havereceived money from venture capitalists during 2020.

Blockchain Technology Stack
ExamplesAccessEquipment

Service

Channels

Wallets

Dapp Stores

Key Sectors
Public Gateways

Decentralized Finance
Decentralized platforms for financial
products connect the real world
to the digital world via wallets andon-ramps, driving mass adoption andengaging noncrypto users throughfinancial rewards and other benefits.

Decentralized Applications

Apps
Picks & Shovels

Functionality
Infrastructure

2.4

Scalability Enhancers

Virtual World & Gaming
Leverage gaming to drive tokenization of assets and mass adoption andblockchain interaction by non-crypto
consumers, who are active usersof large geteway projects

Scalability & Privacy
Blockchain Protocol

Protocols
Source: #Hashed

23

Primary Focus

Secondary Focus

https://uniswap.org/blog/year-in-review/

Cointelegraph Research Venture Capital Report

29

Figure 16

400

$16B
$14B

300

$12B
$10B

200
$8B
$4B

100

$2B
0

$0
Jan ‘20Feb ‘20Mar ‘20

Apr ‘20May ‘20Jun ‘20

Source: Cointelegraph ResearchJul ‘20Aug ‘20

Sep ‘20

Uniswap protocol volume

Oct ‘20

Nov ‘20

Dec ‘20

Uniswap V2 monthly unique addresses

However, VCs made the first steps in the field of DeFi

the support of VCs at all, which resulted in $258 million

back in December 2017 when MakerDAO raisedin capital raised. In other words, very few DeFi projects$12 million in a round led by Andreessen Horowitz andrelied on massive participation from retail investors

Polychain Capital. Following that, 2018 can be catego-during their fundraising.

rized as the year of the first big wave of VC capital inflow to the emerging segment. The backbone projectsof the DeFi industry, such as dYdX, Compound, Universal Market Access, Argent and Set all raised funds
during 2018. In aggregate, the five startups collected$28.2 million in equity and token sales during thoseearly days of DeFi.
From 2019 on, the sector has been growing expo-

Traditionally, venture capitalists invest in companies
in exchange for equity. However, this model did not live
long in the DeFi sector as the introduction of governance tokens upended venture capital investments into
decentralized finance. The ubiquity of the governancetokens has brought about a new era in fundraisingin the DeFi sector, and both ICOs and equity sales
became rare for the decentralized finance industry. The

nentially in total value locked in decentralized financemajority of the newly launched DeFi projects pursue

protocols, and so has the importance of VC-led funding.

a “combined” strategy as they raise capital in private

After the explosive “summer of DeFi” in 2020, venture

token sales first and then conduct public token sales.

capitalists are more confident about the product-mar-

While many DeFi protocols, such as Instadapp or De-

ket fit of their portfolio projects. During late summer

Bank, raised VC funds without a token, some platforms,

and autumn of 2020, funding rounds for DeFi protocols

such as Uniswap and 1inch, made the lucrative decisionwere publicly announced at a quickening pace, withto raise VC funds first and then airdrop a token later

venture capitalists, such as Polychain Capital, Frame-to early users. dreessen Horowitz and Polychain Capital.

work Ventures and CoinFund, being heavily involved.

Following that, 2018 can be categorized as the year

Our research revealed that venture capital has become
the predominant way for DeFi projects to raise funds,
making the DeFi boom significantly different from 2017
cryptomania, or the era of ICOs. In 2018–2020, only
3 of the major DeFi companies — Bancor, Loopring
and Kyber Network — opted for a “classic” ICO without

Cointelegraph Research Venture Capital Report

of the first big wave of VC capital inflow to the emerging
segment. The backbone projects of the DeFi industry,
such as dYdX, Compound, Universal Market Access, Argent and Set all raised funds during 2018. In aggregate,
the five startups collected $28.2 million in equity andtoken sales during those early days of DeFi.

30

Blank Wallet

28%

Spark Digital Capital, Woodstock Fund,
A195 Capital, Altonomy
Dafi Protocol
Rarestone Capital, AU21 Capital,
Morningstar Ventures, Polymer Capital

Public token
sale (% total
token supply)

32.5%

2.5%
1.0%
2.0%
1.5%

Private token
sale (% total
token supply)

ChainGuardians
Twin Apex Capital, Moonwhale,
GBV Capital, Moonrock Capital

24.9%

19%

Vortex DeFi
Faculty Capital, Magnus Capital,
X21 Digital, A195 Capital

Recent fundraisings by DeFi projects.

But take away the legal designation of — taking into ac-

investing in decentralized finance. A consistent trend

count that both equity and governance tokens repre-

of increasing TVL and decentralized trading volumes

sent a share of ownership in a project — and the core

gives a feeling that DeFi is a segment of untapped

capital provider remains: those are VCs who are fuelingopportunities. Even so, the protocols are full of risks:

the growth of the DeFi projects. Indeed, the majority

exploits and hacks result in multi-million-dollar lossesof the top-20 protocols by TVL — including Uniswap,

with alarming frequency. Forks, clones and “vampire

Compound, Synthetix and Aave — are VC-backed.

attacks’’ on protocols can see market shares fluctuate

The unprecedented growth of DeFi and VC activity
by established venture capitalists might have had
FOMO-inducing effects among the DeFi-agnostic
funds and forced them to reconsider their strategies.
However, they may have ample reasons to refrain from

2.4.1

Source: ICO Analytics, Cointelegraph Consultingwith the same volatility that investors come to expectof their tokens. Although hardly any of the VC-backed
projects have had their vaults drained, allocating capital in this unregulated and highly experimental field requires rigorous due diligence from venture capitalists.

Most Popular DeFi Companies For VCs
There are five main verticals inside the decentralized

activity in the DeFi industry as well as portfolios of thefinance segment: trading and exchanges (including

dominant players. Of 220 venture capitalists thatliquidity and derivatives projects), lending, infrastruc-participated in at least one publicly announced fundingture, data and analytics, and a side category for otherround, 28 have carried out 6 or more DeFi invest-

startups. With 18 funds active in funding DeFi projects,

ments in 2020, and more funds are joining the groupthe map comprehensively represents the fundraisingof DeFi backers.

Cointelegraph Research Venture Capital Report

31

The map of investments by most active VC funds 2020–2021
Covalent
DIA
Polkadot

Dune Analytics
DharmaLinen AppBella Protocol
Nexus Mutual
Gelato Network

APY.Finance
Persistence
Acala Network

Dapp
Dune Analytics
InsurAnce

Dune Analytics
dfuse
MATH

Kylin Network
Nsure Network
OptionRoom

SKALE Network
The Graph
OxygenTidal Finance
KILT Protocol
PolkaFoundry

Instadapp
RaribleThe Graph

MarlinMoonbeam
SKALE Network

API3
Matter Labs
Ethereum

DFINITY
SolanaNEAR Protocol

Crust Network
DefiDollar
Polkadex

NEAR Protocol
Matter Labs
Terra

Polkadot
Witnet
NEAR Protocol

Cosmos Network
ICON
ONTology

Injective Protocol
Polkaswitch
Reef Finance

Stone
Casper Labs
Terra

Equilibrium
ETHA Lend

Ramp DeFi
ParaSwap
Kava

Synthetix
Linear FinanceTokenSets

SKALE Network
Vega Protocol
MakerDAO

Alpha Finance Lab
Perpetual Protocol
Tari
Keep Network

Manta Network
dForceSwivel Finance

SaddleSlingshot
0x Labs

Matic Network
CompoundSynthetix

DerivaDEX
CoFiXParaDEX

UMA
Dodo
Uniswap

Ankr
SolanaAva Labs

Zilliqa
Persistence
DeFi Wizard

Coinbase Ventures

StakerDAO
Kava
Kira Network

Manta Network
UniLendReef Finance

TRGC

Stafi
Frontier
MCDEX

JarvisAPY.FinanceOddz Finance

ETHA Lend
ZeroSwap
OpenDeFi

Genblock Capital

Arrington XRP Capital

Kyber Network
dYdX

Paralink Network
Nsure Network
Terra Virtua

AU21 Capital#HashedChainGuardians
Blockchain Cuties
APY.Finance

Hopr
Kylin Network
Nsure Network

Razor Network
Alkemi
Ramp DeFi

Tidal Finance
ChainGuardians
ExeedmeMoonrock CapitalMulticoin Capital

Persistence
Crust Network
DeFi Wizard

DIA
Kylin Network
VortexPolychain Capital

PNYX Ventures

BifrostPolkastarter
ZeroSwap

dHedgeSifchain
Reef Finance

UniLend
Xend Finance
ZeroSwap

DAOVentures
Polkamarkets
Terra Virtua

OpenDeFi
1inch
Manta Network

Reef FinanceSifchainOddz Finance

ChainGuardians
Exeedme
CUDOS

Polymarket
Gauntlet Network
Clover FinanceSpark Digital Capital

Ava Labs
Acala Network
MakerDAO

Hopr
Blank
Polkamarkets

Unbound
PolkadexLinear Finance

ETHA Lend
Dafi Protocol

MantraDAO
Ramp DeFi
RioDeFi

Tixl
Persistence
Ocean Protocol

Nuo Network
CompoundLiquity

UNION
Ethrenity Chain
Exeedme

Celo
KeeperDAO
dYdX

ElrondMarlinThe Graph

SpiderDAO
Mahaswap
Linear Finance

DharmaManta Network
ParsecPersistence
Celer
Casper LabsPolkastarter
Dafi Protocol

DerivaDEX
SaddleRazor Network
1inch
Frontier
Dafi Protocol

Data & Analytics
Dune Analytics
Cozy FinanceMatter Labs

CompoundMakerDAOdYdX

Kine Protocol
1inch
Opyn

SaddleCoFiX
DerivaDEX

ArgentReflexer Labs
Gauntlet Network

Wallets & Assetasset management
Management

Dragonfly Capital

Yield Protocol
Synthetix
Keep Network
Uniswap

CMS Holdings

Maps.meBlank
BetProtocol

OxygenAcala Network
DefiDollar

Swivel FinanceDerivaDEX
UpbotsDFX Finance
Perpetual Protocol
Linear FinanceKine Protocol

Management /Risk management
Markets
Prediction markets

Paradigm

Andreessen Horowitz

Gaming & NFTs / Other

Chia Network
Ava Labs
NEAR Protocol

CompoundMakerDAO
Celo

UniswapdYdX
Keep Network

Blank
Maps.meTidal FinanceExeedme
ChainGuardians
Playcent

Ethrenity Chain
MahaDAO
Serum

Infrastructure
NEAR Protocol
Vega Protocol
Acala Network

Kylin Network
UNION
Terra Virtua

Blank
Maps.me
BetProtocol

InsurAnce
Axie Infinity
Aave

Terrafom Labs
1inch
0x Labs
Injective Protocol

Antler Interactive
Web3API
API3

Acala Network
OxygenDefiDollardYdX
ParaSwap
Dodo

Dune Analytics
Polymarket
Cozy FinancePantera Capital

Rarestone Capital

Kine Protocol
Linear Finance
Perpetual Protocol

Acala Network
The Graph
Boardroom

BonfidaLinear FinanceReef FinanceTrading & Liquidity

Dafi Protocol
APY.Finance
Qredo
Manta Network

MCDEX
Manta Network
Balancer

Genesis Block Ventures

Lending & Stablecoins

DFX Finance
UpbotsDerivaDEX
Swivel Finance

Swivel Finance
Synthetix
Alpha Finance Lab

Compound
DefiDollar
Perpetual Protocol

Framework Ventures*

CMS Holdings

Horizon Finance
BoringDAO

DerivaDEX
Balancer
1inch

Magic
Zapper
Flux

HXRO
NFTfi
RaribleSaddleSlingshot
Primitive

Fractal
Pods
Synthetix

dHedgeDodo
Kava
Futureswap

NGC Ventures

Divergence Ventures

NFTx
Polkadot
3box

Edgeware
Aave
Teller FinanceWoodstock Fund

DeFiance Capital
DFX Finance
Serum
FractaldHedgeChainlink
Zapper
The Graph

API3
Boardroom
The Graph

NEAR Protocol
Acala Network
ParaSwap

Serum
Balancer
Opyn

Alameda Research
CoinFundBinance Labs

KR1
Covalent
Tidal Finance
NFTfi

Hopr
MATH
Matter Labs

Dune Analytics
Covalent
MATH

Maps.meUNION
HedgetRazor Network
APY.Finance
Frontier

OIN Finance
OxygenLinear Finance

UpbotsManta Network
Sifchain

ParaSwap
BalancerOpium Protocol

Perpetual Protocol
SaddleRamp DeFi
Horizon Finance

MarlinPlasm Network
1inch

Acala Network
Vega Protocol
SIREN

Source: Cointelegraph Research

Cointelegraph Research Venture Capital Report

32

APYSwap
Oddz FinanceIf 2020 was the year of DeFi for blockchain venture capitalists, what will2021 be?
2020 has been a year in which many experiments were carried out around DeFi.
We expect to see meaningful use cases of DeFi in 2021. We have been keeping
a close eye on DeFi since early 2019. The industry was growing organically until theyield-farming explosions occurred. However, this growth in TVL was due to DeFi
tokens, and there was a lot of surplus demand. Now, we are seeing the demand
bubble fade away and expect meaningful use cases of DeFi through real demandin derivatives, synthetic assets and NFTs.

Insider Insight with
Baek Kim,

With the attention DeFi received, we saw the number of transactions in decentralized services surpass those of centralized services. Centralized exchanges felt

Principal of#Hashedthe need to collaborate with the DeFi projects or launch decentralized servicesof their own. We expect to see more wallets being integrated into mainstream
services in 2021. In Asia, wallets have already been integrated into Kakao and Line,and we look forward to seeing explosive growth in digital asset exchange activities
through wallet integration to many B2C services in the near future.
Traditional financial services are coming into the DeFi space. For example, KB (oneof the biggest commercial banks in South Korea) has launched a digital asset
management company to offer crypto custody-related services for institutional
investors who are rapidly jumping into the DeFi space. We believe that DeFi will
be a compulsory layer — not merely a complementary layer — in all blockchain
services in the near future.

2.4.2

DeFi VC in 2021 and Beyond
In Cointelegraph’s survey of DeFi projects in September

Alden pointed out in a recent interview with Raoul Pal

2020, 36% of the DeFi protocols surveyed expect in-on Laua Shin’s Unchained podcast, DeFi is the realm

stitutions to become a crucial market segment for de-of no KYC/AML, and this keeps heavily regulated in-centralized finance. We expect the VC activity in thevestors away. However, Pal pointed out that over time,

space to remain strong over 2021 and 2022; however,heavily regulated investors will join DeFi, too, once the24

we do not expect corporate or non-crypto experienced

industry is too big to ignore — similar to how investors

venture capitalists to engage heavily in DeFi. As Lynstarted following Bitcoin.

24

DeFi Adoption 2020: A Definitive Guide to Entering the Industry, Cointelegraph Research 2020.

Cointelegraph Research Venture Capital Report

33

Hashed Overview
Committed to enabling mass adoption of blockchain technology, Hashed commands a global presence in the emerging
economy of digital assets, with strategic locations in the US and Asia. In the US, Hashed International, LLC operates out of
its principal office in San Francisco as a vehicle to provide research and advisory services. Working in tandem with HashedInc., located in Seoul, South Korea, Hashed offers a unique combination of both traditional and entrepreneurial acumen,
utilizing its investment management team and an extensive network of visionaries and advisors to realize meaningful
growth for the industry.
Simon Kim
CEO & Managing Partner at
Hashed, leading a keynote speechduring Korea Blockchain Week 2018with over 10,000+ attendees

Hashed in the US and South Korea
Silicon Valley and the broader US regions have been the powerhouse of world-class technical talents. Hashed takes
an ecosystem approach when investing in the blockchain industry, focusing on cultivating a tight-knit community offounders who are pioneers in cryptography, distributed systems, consensus algorithms, and high-performance trading
infrastructures. In addition, Hashed leverages employees’ past experiences at Google and Amazon, remaining vigilant to
not only identify points of innovation but also make possible strategic alliances in corporate partnerships with companies
such as Samsung and LG.
As a leading blockchain advocate in South Korea, Hashed initiated local awareness and educational campaigns involving
the public as well as the government. Notably, Hashed has hosted a number of blockchain events and conferences, among
which Korea Blockchain Week has become established as one of the most seminal blockchain events in Asia. Since 2018
the event has attracted more than 10,000 participants and 300 companies from around the world, including industry
giants such as Samsung, LG, SK, etc. Hashed takes pride in having paved the way for leading blockchain projects to enter
the Asian ecosystem via South Korea as its main gateway.

Hashed VisionThis experience has culminated in the creation in December 2020 of Hashed Venture Fund I, valued at USD $120 million
and with strategic investors including leading IT companies and conglomerates in Korea. Through this first fund, Hashedaspires to realize its original thesis that the world is evolving from a centralized platform-based economy to one that
relies on a protocol economy underpinned by blockchain. With corresponding technological advancements being madeto enable global access, more transparent design, direct incentives for network contributors, and the protection of data
sovereignty and privacy for individuals, Hashed believes that this evolution will foster significant changes to the socioeconomic and even the political dimensions of our future lives.
At this critical point, we recognize that there is a clear gap in the VC ecosystem, with no incumbent VCs providing both
capital and supporting services aimed specifically at blockchain start-ups—an industry white space that Hashed is uniquely
positioned to fill. In addition, Hashed distinguishes itself from others by having its roots in both Asia and the US. Up until
now, two thirds of the biggest exchanges by trading volume have been based in Asia. By combining retail interest andtechnical sophistication to tap into an unprecedented number of active users via its biggest messenger portals, Asia is
now poised to become an explosive site for successful and promising projects being developed around the world. It is
this bridge that Hashed will build to further expand its global contribution.

3

Limited Partners

3.1

Blockchain VC Investment Thesis
In the era of negative interest rates and the quest

private equity market has grown rapidly since its intro-

for positive returns, first-mover investors have cho-

duction in 2012, with total investment funding increas-

sen to look beyond traditional investments in search

ing from just $1 million to almost $3.07 billion in 2020.

of new and alternative opportunities. The blockchain
Figure 17

Blockchain Private Equity Funding Per Year
7
$5.46

6
Billions, $

5
4

$3.02
$2.63

3

$1.79

2
1
0

$0.14

$0.10

2012

2013

$0.44

$0.46

$0.8

2014

2015

2016

2017

2018

2019

2020

Source: Cointelegraph ResearchCompared to traditional VC, blockchain VC offers twoof having funds locked up for several years with limited

main benefits: diversification and liquidity.

ability to trade. This applies to all tokenized funds,
including real estate funds and biotech VC funds.

1. Diversification: Blockchain startups offer LPs theability to gain exposure to a new industry that is often

Limited partners and buy-side investors that areuncorrelated with how private equity performs in oth-interested in having exposure to blockchain private

er industries.

equity have several options, including direct investment in crypto assets, such as Celsius’ CEL token,

2. Liquidity: Due to the private nature of the portfo-

or directly in the private equity of the company

lio companies, LPs are often locked into investments

Celsius. An additional option is to invest in a VC funduntil the company is acquired or has an initial publicthat focuses on blockchain technology. This section

offering. However, investors can mitigate this issue

covers the different investment profiles, including his-by investing in tokenized funds that enable LPs to sellor adjust their positions on a secondary market instead

torical risks and returns and key considerations before
entering the market.

BLOCKCHAIN PRIVATE EQUITY

Cryptocurrencies

VC Fund

Tokenized Securities

Source: Cointelegraph Research

Cointelegraph Research Venture Capital Report

35

3.1.1

Buying Digital Assets Directly
Buying digital assets gives more opportunities to retail

The advantages of buying digital assets directly include

investors because there isn’t a professional investor re-greater liquidity than traditional private equity, often

quirement. There is also often no minimum investment

no KYC/AML, 24/7 trading, and no management or per-amount or lockup periods, although large investors

formance fees. Price volatility is the main problem

can negotiate deals with startups. For example, Celsius

of digital assets. Additionally, there are cybersecurity

gave professional investors steep discounts on theirrisks, and investors are responsible for their own pri-token price in exchange for locking up CEL tokens forvate key storage. Buying digital assets is often impossi-

a period of time.

ble with traditional e-brokers, although some e-brokers,
such as eToro and Robinhood, do offer products thattrack the prices of digital assets.

Notable examples of non-equity tokens

In May 2018, Celsius raised what

In the summer of 2020, the Graph

Uniswap is a decentralized protocol

was then $50 million worth of cryp-raised $5 million in a “simple agree-

for automated liquidity provision

to in CEL’s initial coin offering.

ment for future tokens” format foron Ethereum. The UNI token’s ma-

In 2020, CEL increased 4,000%

accredited investors from Frame-

jor purpose is governance overfrom $0.14 to $5.72. Although

work Ventures, Coinbase Ventures,the Uniswap protocol and offers

Celsius CEO Alex Mashinsky says

CoinDesk parent Digital Currency

revenue sharing. The governancethat CEL is not a security, CEL may

Group, Multicoin Capital and DTC

contract includes a fee switch thatcome under scrutiny following

Capital. GRT tokens started trading

enables UNI owners to earn a share

the SEC’s case against Ripple.

in mid-December and had slightlyof the protocol’s fees. The switch

Celsius also sold private equity

less than a 100% return before theis subject to a 180-day timelock,in its firm during 2020 on the web-month ended.

providing investors half a year

site BnkToTheFuture.

to prepare for the shift to the newrevenue-sharing model.

What percentage of your portfolio is in private equity, and what percentage is in non-equity tokens? What are the differences between investingin private equity versus non-equity tokens?
In our previous proprietary fund, our investments in equity and non-equity tokens
have been two-to-eight. All investments from Hashed Venture Fund I will be in equity. In essence, we aim for optimal balance between the two depending on various
factors as there are both benefits and downsides to each form of investment. The
main differentiation factor is that with the token investment we are more focusedon network development, whereas we pay more attention to the projects that havelong term adoption value in the equity side. Also, with the latter, we establish closer
relationships with the founding team to optimize our value add.

Insider Insight with
Ryan Kim,
Co-founder & Partner#HashedFrom the ICO bubble, we have learned to be cautious of rapid network expansion
prior to product stability since it could cause harm for the community members
and projects involved. On the other hand, there are also cases when the projects
require network effect from the beginning. By assessing the product offering andtheir development needs and phases, we take a holistic approach in assessing the
optimal form of investment. Overall, the trend in 2021 has been that we are finding
more equity opportunities in the industry than before.

Cointelegraph Research Venture Capital Report

36

3.1.2

Buying Security Tokens
Tokenized securities enable investors to directly invest

rectly, this gives the startup all of the investor’s capitalin startups instead of investing in venture capital funds.

upfront. In contrast, VC funds typically invest their

Benefits of buying security tokens directly include

capital over a period of time instead of all at once

slightly lower minimum ticket sizes than VC funds andto ensure the startup is meeting milestones.25

no management or performance fees. However, therequirement to be a professional investor is a barrier
to entry for some. Purchasing security tokens is similar
to buying individual stocks. Even though security tokens are issued on a blockchain, they are still securities.
Thus, they are heavily regulated to protect investors
and prevent fraud. Due to the limited supply of security
tokens, portfolios that focus on such tokens will haveless diversification, and there may be an asymmetryof information. If an investor buys security tokens di-

There are only a few websites that enable investors
to purchase security tokens, such as Tokensoft, tZero
and Openfinance. In Singapore, 1exchange, iStox
and InvestaX are notable examples of security token
platforms.26 Interestingly, several security tokens
are launching directly on Uniswap instead of paying
fees to digital asset marketplaces, such as Tokensoft.
A good resource for professional investors interested in learning about which security tokens exist andwhere they are traded is https://stomarket.com/.

Learn VC: Security Token
Security Token presents the ownership information of the investment product recorded on a blockchain.
In the case of investment in traditional stocks, ownership information is written on a document and issued as a digital certificate. It’s the same process for security token, but ownership information is recorded
on a blockchain and issued as a token.

Notable examples of security tokens:

Mt Pelerin is a fintech company

RealT, an American company based in Florida,

established and regulated in Swit-

enabled real estate investments for the publiczerland. It was bootstrapped by its

through tokenization. Since 2019, RealT allows

own community through an equity

its clients to invest starting from a few dozen

crowdfunding that raised moredollars in ownership shares of high yieldthan $2 million in 2018, the first(10% to 13%) residential and commercial real

one to offer a tokenized shareestate in the US, with rental revenue being

with full voting and dividend rights

proportionally and directly paid to token

to the public. Mt Pelerin has been

holders in stablecoin. With 75 properties soldone of the leading actors in theand new ones being offered on a weekly basis,

asset tokenization space since then,the huge success of that model also brought

and it is currently working on theincreasing costs and complexity to manage

creation of a tokenized full reserve

each new sale, the many investors of RealT

financial institution in Switzerland.

and the distribution of rental revenue.

25

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3339040

26

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3634626

Cointelegraph Research Venture Capital Report

37

Buying VC funds
There are several types of crypto hedge funds, andfrom diversification. If one of the startups in the fundblockchain VC funds are just one subcategory. Ac-

fails, a fund investor will not lose their entire position

cording to the “Crypto Hedge Fund Report” by Price-because they still have exposure to other startups.

waterhouseCoopers and Elwood, there are four types

Second, VC funds typically have sophisticated methodsof crypto hedge fund strategies including discretion-

for gauging a startup’s competence and its probability

ary long-only, discretionary long/short, quantitativeof success as mentioned in the last section. However,

and multi-strategy. In addition to this, there are also

the downside of investing in VC funds are the fees. The

VC funds and fund of funds. When an investor invests

other entry barriers include wealth and geographic

in a VC fund, their capital is being dispersed acrosslimitations imposed by government regulations

several investments. This enables investors to benefit

CRYPTO FUNDS

Discretionary

Fund of Funds

VC

Multi-strategy

Quantitative

Source: Cointelegraph Research

Many of the famous blockchain VCs do not accept out-

However, Blockchain Capital and Delphi Digital areside investors (third-party limited partners) even if they

open for investment, and they respond to investor

are accredited. For example, Digital Currency Group,

information requests. Blockchain Capital was found-which owns Coinbase and CoinDesk, does not accept

ed in 2013 by Bart and Brad Stephens and they haveexternal investment. Even the blockchain VCs that say

invested over $150 million in a total of 80+ blockchain

they accept outside investors are reluctant to provide

technology companies and crypto assets over the last

any information. When trying to receive investor infor-

seven years. The performance of its previous four funds

mation from blockchain VCs, only a few respond.

has had net IRRs of +46%, +63%, +55% and +7%.

Figure 18

Blockchain Capital’s Historical Return of Funds I – IV

60%
50%

9

63%

7.8

8

55%
46%

7

6

6

40%

5
3.5

30%

4
3

20%
1.1

10%
0%

Fund I

Fund II
TVPI

Fund III

7%

Fund IV

2
1

Total value pad in multiple

70%

Net IRR

3.1.3

0

Net IRR

Source: Blockchain Capital, Cointelegraph Research

Cointelegraph Research Venture Capital Report

38

It is primarily famous for its tokenized VC fund, Fund

It is currently raising its $250-million Blockchain Capital

III, which was one of the first tokenized securities andFund V, which is a traditional venture capital fundfor its early involvement with Brock Pierce. As of Dec.

(not tokenized) for accredited investors with a term

28, 2020, its fund token, BCAP, had a net asset valueof 10 years. It closed the first funding round of Fundof 6.4, making a 73% return for 2020.27 The token’s re-

V in April 2020 with $62 million. The new fund is an-turn since inception in 2017 is 540%.28 The holdings

chored by one of the largest publicly traded paymentthat make up BCAP include equity in companies, suchcompanies and includes participation from an endow-

as Securitize and Harbor, and in digital assets suchment, foundations and the family offices of multiple

as Nexus Mutual (NXM), BlockStack (STX), Nervos (CKB),

prominent Silicon Valley entrepreneurs. Its previ-

ETH and BTC.

ous Fund IV was oversubscribed within six monthsof announcement.

What types of returns do you hope to earn froman investment and within what time frame?
We take a venture-style approach to any investment we make. This means we havea multi-year investment horizon even after there is a liquid token. We also takea more concentrated approach, given that we dedicate financial and softwaredevelopment resources to the networks post-investment. With any investment
we make, we expect that it can return a multiple of the entire fund.
Insider Insight withMichael Anderson,
co-founder ofFramework Ventures

Traditional VC vs. Blockchain VC
Traditional VC 29

Blockchain VC

Average Annual Return

15 – 27%

73%

Average Management Fee

2%

2.3%

Average Performance Fee

20%

23%

Average Lockup

5 – 10 years

Quarterly — 10 years

Average Minimum Investment$200,000$133,000

Source: Cointelegraph Research. The averages for Blockchain VC funds are based on a limited sample of VC funds that we could find information about online.

Delphi Digital, a bespoke blockchain consulting firm,

tickets of $50,000. One of Delphi Digital’s big picks

is also in the process of launching its first VC fund.

is DeFi platform Synthetix and its SNX token.

It is looking to raise $20 million with the same fees

Similar to mimicking the holdings of Berkshire Hatha-

as Blockchain Capital — i.e., 2/20. Unlike Blockchain

way’s portfolio, investors can watch what investments

Capital, Delphi Digital only has a lock-up period

blockchain VC funds make.

of three years, and it is happy to take smaller sized27

https://loop.blockchain.capital/

28

https://www.securities.io/blockchain-capitals-bcap-token-outperforms-market-in-q2-2020/29

https://vcstarterkit.substack.com/p/how-vcs-make-money https://seraf-investor.com/

Cointelegraph Research Venture Capital Report

39

Notable examples of Blockchain VC funds:

Select Crypto Fund Terms
Pantera Capital ICO
Fund 30

Delphi Digital

Blockchain CapitalFund VManagement Fee

3%

2%

2%

Performance Fee

30%

20%

20%

Redemption Lockup

Quarterly 31

3 years

10 years

Minimum Investment$200,000$100,000$100,000

Source: Cointelegraph Research.

Risk Alert
Be careful not to send money or crypto assets to invest in blockchain VCs without being sure you are sending
the funds to the correct address. There are many scammers that pretend to be Pantera or Dan Moorehead
and put up fake websites in order to trick investors.

Some VC funds are tokenized and are examples of tokenized securities.
These funds add the additional benefit of being liquid.

VC Funds

Tokenized
VC Funds

Security
Tokens

Source: Cointelegraph Research.

Notable examples of tokenized funds:

30

https://static1.squarespace.com/static...Factsheet.pdf

31

With 12 months’ notice

Cointelegraph Research Venture Capital Report

40

Future trend: The death of VC funds?
Someday, there might be a fourth way of investing — VC DAOs. A decentralized autonomous organization has
certain features that make it ideal for fundraising, investing and supporting a project through a period of rapid
growth. The network effect and ability to crowd-source investment are particularly effective at raising awareness among potential users, investors and developers, with fewer formalities associated with raising capital via
a VC. Some DAOs are encroaching on the early-stage fundraising market, an area previously controlled by VCs
and angel investors.
Investing in a DAO is relatively easy, especially if you know how to buy Ether and already have a crypto wallet.
DAOs have much more flexibility to invest in novel strategies beyond equity investing and even basic token
investing. They can make OTC markets for unlisted assets, invest in managed trading funds, sponsor teams
in competitive crypto gaming leagues, buy and securitize NFTs, and generally monetize any new trend thecrypto-native asset class spawns next.
VCs still maintain a number of key advantages, such as more legal and regulatory clarity, strategic support andpersonal connections to other industry players. Those VCs looking to innovate can consider how a DAO uses
network effects and influencers to rapidly conduct due diligence, fund and raise awareness for projects. Not
all of these advantages are unique to DAOs but, instead, are a bi-product of open and transparent business operations.
Notable examples of VC DAOs:
1. MetaCartel Ventures is a for-profit community that targets Ethereum DApps and includes prominent
Ethereum developers, such as Stani Kulechov of Aave and Hugh Karp of Nexus Mutual
2. The LAO is a member-directed venture capital fund registered in Delaware that has already backed over
30 blockchain projects.

3.2

Do Asian Blockchain Companies Offer
Higher Returns with Lower Risk?
Crypto Native

Slow Adoption in West (2019+)

Mass Adoption in Asia (2020+)

BitcoinTon by Telegram

050m

Daily Active Accounts
in Dec 2020

Active Accounts(Launch Canceled)

Active Users Onboard(Launched in June 2020)

Ethereum

Libra by Facebook

Link by Line

1m

Klaytn by Kakao

590k

0

165m

Daily Active Accounts
in Dec 2020

Active Accounts(Launch Postponed)

Active Users Onboard(Expected in 2H 2020)

Source: #Hashed and Coinmetrics (October 2019)

Cointelegraph Research Venture Capital Report

41

Due to the sheer size of potential adopters, Asian

Fenbushi, founded by Bo Shen — were actively making

blockchain companies may be the equivalent of emerg-

investments in the blockchain space. In 2016, Credit

ing market stocks. While Europe is currently in the

China Fintech Holdings, Shanghai Xinhua Distribution

second position in terms of blockchain VC investment

Group Ltd, Jilin Province Investment Group Corp Ltd(24.1%)compared to 53.9% in North America, the trend

and others launched a $1.44-billion fund of funds formay be reversing.

investment in fintech including blockchain.32 Kenetic

Hashed believes that mass adoption of blockchain
networks will happen in Asia faster than the rest of theworld, given the push by large messenger players
to launch their own tokens. For example, Klaytn and
Link already have 50 million and 165 million users,
respectively, while Facebook’s Diem, formerly referred
to as Libra, and Telegram’s TON have been stopped
by regulators in the West. Due to the positive regulatory stance that many Asian regulators are taking, thehigher return associated with blockchain companies
may not even be accompanied by higher risk.

followed suit in 2016, and NEO Global Capital sprungto life soon after in 2017 with offices in Singapore,
Shanghai and the United States.33 During the summer of 2017, the People’s Bank of China announced
support for new technologies, such as blockchain andartificial intelligence, in order to advance economic
reform in the country.34 With this positive sentimenttoward blockchain from the government, blockchain
VC funds in China proliferated. The following year,
a government-backed blockchain fund called Xiong
An Global Blockchain Innovation Fund was launchedwith a starting capital of $1.6 billion in Hangzhou.35 Also

Asia’s blockchain VC market peaked in early 2018,

in 2018, Huobi launched a research wing, with an initialdeclined in 2019, and regained momentum in 2020.

investment of $1 billion.36 However, by late 2019, many

Hundreds, and maybe even up to 1,000, VC funds

Chinese VCs had left the market due to the downturn

launched in China and Hong Kong between 2016 andin crypto prices. Chinese blockchain startups raised

2018. As early as 2015, Chinese funds — such as Node$368 million via 71 funding deals; however, this was

Capital, founded by Jun Du, CEO of Huobi.com, andstill 67% less in total deal volume compared to 2018.37

How does the Asian blockchain scene compare to the United States’?
While the fundamental blockchain infrastructure was largely built in the U.S., we expect to see mass adoption of blockchain applications in Asia more quickly thanin the rest of the world due to the push by large messenger players to launch theirown tokens (Klaytn by Kakao and Link by Line), as well as the strong retail capitalflow fueling the development of promising projects.
Chai provides a real example of how blockchain-based payment services are capable of scaling to a point of mass adoption in Korea as well as other Asian markets.
While the fundamental blockchain infrastructure was largely built in the U.S., we expect to see mass adoption of blockchain applications in Asia more quickly thanin the rest of the world due to the push by large messenger players to launch their

Insider Insight with
Ethan Kim,
Co-founder & Partner#Hashedown tokens (Klaytn by Kakao and Link by Line) as well as the strong retail capitalflow fueling the development of promising projects.
Chai provides a real example of how blockchain-based payment services are capable of scaling to a point of mass adoption in Korea as well as other Asian markets.
Terra (a public blockchain) provides Chai with blockchain-based payment services
by utilizing Terra’s own stable coin (KRT). Chai pays Terra significantly less transaction fees than those of traditional payment gateways.

32

https://static1.squarespace.com/static...Factsheet.pdf

33

With 12 months’ notice34

http://www.gov.cn/xinwen/2017-06/27/content_5205951.htm

35

https://www.chinamoneynetwork.com/2018/04/10/hangzhou-sets-up-1-6b-government-backed-blockchain-fund-to-invest-in-start-ups

36

https://medium.com/@LindaWillemse/huobi-labs-announced-it-will-launch-a-us-1-billion-global-blockchain-industry-fund-9b9193624b48

37

https://www.coindesk.com/after-painful-2018-chinese-blockchain-vcs-are-getting-back-into-the-market

Cointelegraph Research Venture Capital Report

42

Outside of China, the rest of Asia was not asleep.

startups due to uncertainty surrounding government

In 2018, SBI Holdings Inc. launched an AI and block-stimulus packages and capital controls. South Ko-

chain fund, with $457 million in assets under manage-

rea’s #Hashed raised $120 million for the venture fundment out of Japan. In 2019, the blockchain-focusedfor crypto deals. Huobi launched a new lab dedicatedWoodstock Fund was started by Pranav Sharma

to DeFi and vowed to invest in and incubate startups

in India.

in this space,39 and SPiCE VC’s $15-million tokenized

While VCs from Asia consolidated in 2018, North
American VCs started to look east. Polychain Capital
invested in the Chinese token project Nervos in 2018,

3.3

blockchain fund is also focusing on Asia. In 2020, theylaunched their token on the only exchange in Asia
allowing digital assets, Malaysia’s Fusang exchange.40

and in 2019, Texas-based Multicoin Capital hired Bei-

Although expansion into the Asian VC market may

jing-based investor Mable Jiang to search for new deals

be interesting for some investors, there is also a steep

in Asia.38 Despite COVID-19’s interruption of global

learning curve. Funds that lack knowledge of Asia may

affairs and business, the crypto market kept humming.

be better off focusing on the regions where they have2020 saw a renewed state of interest in blockchain

connections and asymmetric information.

Venture Capital Taxes for Investors
Criteria to invest in blockchain VCs

Earnings and payouts

Most countries lack specific regulation on venture cap-

Traditional VC funds, as well as blockchain VC funds,

ital funds that invest in DLT technology. Consequently,

have two ways to pay their earnings to shareholders:regulatory frameworks that apply to venture capitalý

Income dividends

cused VCs. In most countries, investors cannot enterýCapital gains distributions.

VC funds unless they are qualified as a high-net-worth

Dividends are distributed monthly or quarterly

funds in general are also applicable to blockchain-fo-

individual or accredited or professional investors.
As a result, VC funds are mostly financed by institutional investors who are subject to stringent evaluation
criteria prior to joining the VC fund.

in most cases, whereas capital gains are distributed
once a year. Income dividends and capital gains aretaxed at different rates in various countries; rates
are also dependent on the level of income for multiple countries.

38

https://www.coindesk.com/multicoin-capital-hires-principal-in-asia-as-crypto-vcs-look-east

39

https://www.prnewswire.com/news-releases/huobi-announces-the-establishment-of-huobi-defi-labs-301104641.html

40

https://www.coindesk.com/spice-unable-to-get-liquidity-in-the-us-takes-tokenized-blockchain-vc-fund-to-asia

Cointelegraph Research Venture Capital Report

43

Tax Rates in the U.K., the U.S., Hong Kong and Brazil for Single Individuals
Country

Income Dividends

Capital Gains Distributions

The United Kingdom41, 42

Basic rate — 7.5%

Basic rate — 10%

The United States43

Higher rate — 32.5%

Higher rate — 20%

Additional rate — 38.1%

Additional rate — 20%

Taxed as ordinary income with theIncome level less than $78,750 — 0%

rate ranging from 10% to 37%.
Qualified dividends are taxed
at rates from 0% to 20%, butseveral criteria should be met (seeIncome level between $78,750
and $434,550 — 15%
Income level higher than $434,550 — 20%

publication 55044 by IRS).
Hong Kong45

0%0%Brazil460%Capital gain:ānot more than 5 million BLR — 15%ābetween 5 and 10 million BLR — 17.5%ā

between 10 and 30 million BLR — 20%āover 30 million BLR — 22.5%

Source: Cointelegraph Research.

Capital Gains Distribution
Source: Cointelegraph Research.

Capital gains taxation rates by country (%)
033

41

https://www.gov.uk/tax-on-dividends

42

https://www.gov.uk/capital-gains-tax/rates

43

https://www.irs.gov/taxtopics/tc409

44

https://www.irs.gov/pub/irs-pdf/p550.pdf

45

https://www.investhk.gov.hk/en/setting-hong-kong/tax-basics.html

46

https://taxsummaries.pwc.com/brazil/corporate/income-determination

Cointelegraph Research Venture Capital Report

44

PNYX Ventures came together in early 2017 as a proprietary trading entity with expertise in trading traditional macro markets and technology expertise from the start-up world. Right then we meticulously
modeled up order books, identified liquidity avenues across different exchanges, and quickly established a niche in systematic trading with some dynamic blend of discretionary perspectives to extractalpha on a risk-adjusted mandate. Soon enough the bear market ensued and we were still able to consistently generate returns through delta-neutral strategies and even achieve profits from shorter-term
directional trades.
As the market evolved and became saturated, the opacity of trading in the early days soon matured
and trading profits started to narrow. We went back to our start-up pedigree to better understandblockchain designs, their utility, and value. Soon enough the bet on open finance as a form of decentralized money as a derivative layer on top of a primitive understanding of the simplistic store-of-value
in digital assets reached its fruition through the culmination of the DeFi summer this past year. Not
only trading was relevant across a myriad of decentralized platforms, understanding the technology
and intent of protocols became essential to have the foresight to derive and seek value. PNYX Ventures
took to some primary market opportunities to galvanize our thesis in certain DeFi ideas and aspirations
which eventually translated into much success. Through our advisory on certain projects and the help
from making markets since the early days of decentralized liquidity pools, we not only added value
from a token design or ecosystem cross-pollination but rather down to the bootstrapping of a protocol
during the infancy stages as it finds relevance and product fit.
With the heat of DeFi, we soon discovered certain limitations in the Ethereum network and first looked
to help improve efficiency. However, through revisiting incumbents and exploring the new frontier,Polkadot and Web3’s vision became aptly coherent to solve real existing issues while generating value
through an addressable market. The days are still early but just as an early-stage Venture Capital styleof investment, PNYX Ventures is pre-positioning ourselves ahead of the point of inflection. The researchhas been relatively approachable given the solid foundation laid by previous chains and protocols.
Thus, a majority of our investment thesis is built on the successes we’ve seen in the current market,
coupled with good implementation procedures and the team’s execution. The aforementioned criteria
have always been the key in inventive start-ups where problem-solving and pivoting are imperative
towards eventual success no matter the arduous journey prior.
We have now identified Polkadot and particularly the substrate layer to be technologically superiorversus the incumbent and there can be a flippening of DOT’s value against that of ETH’s. The most appealing notion of Polkadot is not it’s grand ambition to conquer and destroy but rather assimilate andaccommodate. This in itself is elegant in coalescing the essence of good and leaving behind the bad,ultimately optimizing and scaling towards a Web3 future. W e continuously seek out high-caliber teams
and ideas building towards this paradigm to work together in navigating blockchain capital markets
from the starting point of tokenomics till launch in the secondary market. We remain very constructiveof a decentralized future with the technology improving lives.

“Equilibrium is the first crosschain money market on Polkadot
that combines a comprehensive
lending platform with the professional DEX. It’s offering all things
Ethereum-based primitives cando but with less risk, in an interoperable manner, and in a single
interface.”“Kylin Network aims to Builda Cross-chain Platform Powering
the Data Economy on Polkadot.
It will be the Data Infrastructure
for DeFi and Web 3.0 Poweredby Polkadot.”
https://kylin.network/“Manta Network is a privacy-preserving, decentralized exchange.
Built as a layer-one solution
on Substrate, Manta Network
is natively compatible with otherprojects built on the Polkadot
ecosystem.”https://manta.network/https://equilibrium.io/en

Cointelegraph Research Venture Capital Report

45

4

4.1

General Partners
Valuation Methods for
Blockchain Companies
Valuation in the VC industry is one of the most impor-and has attracted a lot of phony entrepreneurs looking

tant topics for startups and investors. Founders needfor a get-rich-quick deal.

to find a balance between funding needs and theshare in the company that can be sold without losing
control over the project’s development. On the other
hand, investors try to calculate a reasonable pricefor the company’s shares in order to maximize theirinvestment return. Due to the general hype aroundthe words “blockchain” and “cryptocurrency,” many
companies in this space are valued highly. For example,
Michael Saylor’s MicroStrategy shot up to $494 million
after announcing plans to buy Bitcoin in August andFor the most part, traditional private equity valuation
methods can also be applied to blockchain deals witha few caveats, such as how to choose relevant examples for a comparative analysis and how to calculate
the discount rate for a discounted cash flow analysis.
Basically, there are two groups of valuation techniques: quantitative and qualitative. This article focuseson the former.
The two most common quantitative techniques are

September of 2020. Grayscale’s Bitcoin Trust is stillcomparative analysis and discounted cash flows (DCF).

trading at a 20% premium to Bitcoin’s spot price, its

Some analysts also use a cost-to-duplicate approach

Ethereum trust has a 140% premium and Litecointhat aims to estimate how much money an investor

has a massive 6,000% premium. The interest to gain

would need to spend in order to build a similar busi-

exposure to the blockchain industry without holding

ness, but usually, it gives only a lower boundary for theprivate keys via regulated financial vehicles has bid

company’s value and says nothing about the idiosyn-

up the price per share of blockchain-based companies

cratic aspects of the project.

Learn VC: P/E Ratio
The same goes for the P/E ratio. For example, if this cryptocurrency custody company had $2.5 million
in profit in 2019, then its earnings per share is $2.5 million divided by 1 million shares outstanding equal
to $2.50 in earnings per share. If it is selling its shares at $275, then the P/E ratio is 110. For example, Apple’s P/E ratio after the coronavirus was hovering around 24 but reached a maximum of 41.93 in Decemberof 2020. Therefore, to justify an investment in the cryptocurrency custody company, its future would need
to be significantly more promising than Apple’s future.

Comparative analysis of Binance
The metrics used to investigate a deal can dependon the funding stage that it is in. For firms that arein their Series A funding round and beyond, priceto sales (P/S), price to book (P/B) and price to earnings
per share (P/E) are common comparative analysis
multiples. CA assumes that similar businesses have

Cointelegraph Research Venture Capital Report

comparable financial ratios, such as EV/EBITDA, P/E, EV/
Sales and others. To make a CA valuation, you can use
financial statements of the company you are estimatingor you can make forecasts about the company’s future
results. The easiest and the most precise way to getmarket multiples is to take publicly traded peers. They
publish audited financial statements, and you can find46

the actual price of their stock on an exchange. Unfor-

Since Binance is a private company, it does not pub-tunately, there may be no direct peers to the company

lish financial statements, so we need to make some

you are evaluating. Then, you should either take someassumptions. First, we assume that exchange fees arecomparable publicly traded companies from a slight-

the core source of Binance’s revenue. The average

ly different area, or you can find information about

fee is 0.1%, and the daily trading volume is estimatedfundraising activities of private companies in the sector

to be $3.4 billion. These assumptions give us an annual

your evaluated company operates in. But you should

revenue of $2.5 billion. Second, Binance publishes thebe very cautious with the data about the private deals

dynamics of the BNB token’s quarterly burning. Initially,

since it is usually unverifiable.

the BNB white paper stated that each quarter, Binancebought off of the open market a number of tokens

For example, to evaluate the private equity value

equal to 20% of its profits. In 2019, Binance updatedof Binance, we analyzed three blockchain peers of Bi-

its white paper so that the amount of BNB to be burnt

nance: Square Inc., a payment technology company

is linked to the exchange’s trading volume.48 The com-that allows users to buy and sell Bitcoin; DocuSign,pany does not disclose which volumes are taken into

an e-signature company that has an exclusive Ethere-account (total, spot, taker/maker). However, tradingum blockchain program for select users; and Silvergate

fees are the core source of revenue for Binance. If Bi-

Capital Corp., a company that provides U.S. dollar loansnance’s profits have not substantially changed sincecollateralized by Bitcoin. Ideally, you should find several

2019 and if trading volumes are highly correlated withdirect peers that operate in the same segment. In a re-the profit, then we can still consider the dollar value

cent report by Messari on the upcoming Coinbase IPO,

of BNB tokens burnt to be 20% of Binance’s quarter-

Messari looked for publicly traded crypto exchanges

ly profit.

and found two: BC Technology Group on the Hong
Kong Stock Exchange and Diginex on Nasdaq.47 De-

Since Binance has already burned $181 million worth

spite being a new company with only semi-annualof tokens in 2020 and the forecast for the fourthrevenues of $300,000, Diginex’s P/S ratio was 274x.

quarter is $98 million to be burned, the estimatedMessari disregarded Diginex due to its unbelievably

profit for 2020 equals $1.4 billion. The company does

high ratio, but we think that is an accurate indicator

not disclose whether this is net profit or gross profit,of the demand for publicly traded blockchain compa-

so we assume $1.4 billion to be gross profit. We also

nies. Messari found BC Technology Group’s averageassume that the long-term growth rate of this crypto

2018–2020 P/S ratio to be 19.9x, although this averageexchange will be 10% per year. Finally, we do not ex-

disregarded its 2020E multiple of 30x because, again,

pect huge capital expenditure and changes in working

it was considered an outlier.

capital in the future. The table below shows the dataof Binance’s peers required for making the calculation.

Multiples of Binance’s Peers
DocuSign

Silvergate

SquareAverage

MarCap, USD bln

38.62

0.51

82.97

−

Revenue, USD bln

0.97

0.09

4.71

−

Gross profit, USD bln

0.73

0.08

1.89

−

EV/Revenue

39.7x

6.7x

17.6x

21.0x

EV/Gross profit

52.8x

6.4x

43.9

34.3x

Source: market data, Cointelegraph Research.

An EV/Revenue multiple of 21x along with the estimated revenue of Binance give us a value of $52.5 billion. An EV/
Gross profit multiple of 34.3x gives the value for Binance’s private equity of $47.4 billion.

47

https://messari.io/article/coinbase-ipo-could-command-28-billion-valuation

48

https://bitcoinexchangeguide.com/research-reveals-binance-whitepaper-changed-to-burn-bnb-by-trading-volume-vs-profits/

Cointelegraph Research Venture Capital Report

47

Discounted cash flow analysis of Binance

Alternatively, if you cannot evaluate the probabilities,
you can draw a conclusion depending on the growth

To calculate the fair value of the company using therate that the value of the company ranges from

DCF approach, an investor has to estimate future cash

$10 to $20 million. This range can serve as a starting

flows (CF) and a discount rate (r). Usually, cash flow

point in the deal negotiations.

calculation is based on a projection of growth rates

Our calculations show that the discount rate for Bi-

in the startup’s revenue, costs, capital expenditure,etc. Estimation of this rate is a rather tricky questionnance is 12%. It was derived using the average value

because you need some sound forecasts that arefrom the betas of Binance’s peers using the formu-

not always available. The problem of the growth rate

la r = rf + β × ERP, where rf is risk-free rate (10Y U.S.

calculation can be partially solved by implementing

Treasury Bond yield, 0.88% as of December, 2020),

elements of scenario analysis. For example, you can as-

and ERPis an equity-risk premium for the U.S. mar-sume that the revenue (or the profit) of the evaluatedket (5.35% in November, 2020, Source: damodaran.

company will grow by 20% annually with the probabilitycom). Betas of public blockchain comparables (Do-of 0.3, by 30% with the probability of 0.5, and by 40%

cuSign, Silvergate and Square) are 1.72, 2.45, andwith the probability of 0.2. In this case, you can develop

2.09, respectively, so that the average beta is 2.09. Betaa DCF model, calculate the value of the company

is a measure of the volatility of the stock in comparison

in each case, and then make a probability-weight-

to the whole market. To calculate, we use the concept

ed estimate.

of the so-called “total beta,” which is better suited than
the traditional beta for the valuation of private com-

Consider you have calculated the value of the block-panies because the latter takes into account compa-

chain startup company Relai.ch given assumed growth

ny specific risk, while the former considers only therates in its sales and costs, and found out that its po-

market risk.49 The beta that we use in our valuation

tential profits next year could range from $10 millionof Binance’s private equity is the average of the total

to $20 million. Then, the probability-weighted value

betas of the comparable companies. To calculate totalof the company will be:beta, you need to divide the standard deviation of thestock’s daily returns by the market’s standard deviation

Estimated Company Value = p1 × Value1 + p2 × Val-

(SP500). The data is in the table below.

ue2 + p3 × Value3 = 0.3 × 10 + 0.5 × 15 + 0.2 × 20 =$14.5mln

Betas of Binance’s Peers
Indicator

SP500

DocuSign

Silvergate

SquareAverageStandard deviation

0.0216

0.0371

0.05300.0452−

Total beta

1.00

1.72

2.45

2.09

2.09

Source: raw data (quotes) from investing.com

Therefore, we have the following assumptions: The annual cash flow in 2020 will be equal to $1.4 billion; the discountrate is 12%; and the growth rate is 10%.
Binance EV =49

$1.4bln(1 ÷ 12%)+$1.4bln × (1 + 10%)(1 ÷ 12%)2+$1.4bln × (1 + 10%)2(1 ÷ 12%)3+ ... =

$1.4bln(12% − 10%)

= $67.3 billion

For more details see https://lotusamity.com/total-beta/

Cointelegraph Research Venture Capital Report

48

According to the DCF formula, Binance’s valuation

returns in blockchain VC are expected to normalize

is approximately $67.3 billion.

over time while more money is invested and the indus-

The main challenge with the DCF approach is the esti-

try becomes more mainstream.

mation of the discount rate, specifically the beta coeffi-

Overall, different valuation techniques lead to diverse

cient. In traditional finance, you can just use industrial

results. The difficulty of calculating DCF for a company

betas that are already calculated by some analytical or-is one reason why many VC investors prefer compar-

ganizations — e.g., damodaran.com. As the blockchain

ative analysis (CA). While the DCF approach said thatindustry is still nascent, there is not a uniform stand-the value was $67.3 billion, the comparative analy-

ard for beta. Instead, VCs must calculate the betas

sis showed that it should lay somewhere betweenof other blockchain companies and take the average.

$47.4 and $52.5 billion. Overall, we find Binance’s val-

As early-stage VC investments are risky and blockchain

uation to be roughly double the valuation that Messari

is risky, discount rates can be as high as 40% – 50%.

gave to Coinbase early this year. This may seem high,

DCF has some limitations that make this approachless applicable to blockchain VC. First, this method
requires long-term growth rates to calculate future
cash flows. Extremely high growth rates that are shown

but Binance’s trading volume is approximately 4x thatof Coinbase. In early January 2020, Binance registereddaily trading volumes above $20 billion, while Coinbase
Pro registered in the $5-billion range.

in the blockchain industry may lead to an upward bias

A good practice is to calculate the value of the compa-

on the valuation of VC companies. Second, the concept

ny using different methods because if investors onlyof DCF implies that you can reinvest positive cash flows

use one approach, they may overpay or reject goodat a rate equal to the discount rate of your project.

deals depending on the results of that calculation.

However, this is not guaranteed, as the historically highQuantitative vs. Qualitative valuation — which methods do you mostly
rely on to analyze a PE investment?
Very simply put, we invest in people, not ideas. Having platforms like LA Blockchain
Summit, Global DeFi Summit, Blockchain & Booze, to name a few, we’re able to test
and see a founders’ drive, passion and conviction for the problem they’re trying
to solve. We’re able to get a detailed glimpse on how they act in front of the media,
their initial customers, and most importantly, if they can get others to be excitedabout what they’re so passionate about. Sure, we use industry data and market
analysis tools like LunarCrush to better understand how people are talking aboutcertain protocols and their industry performance as much as we can, though it really comes down to people and the founders who are building whatever it is thatthey’re excited about.

Cointelegraph Research Venture Capital Report

Insider Insight with
Alon Goren,founding partner ofDraper Goren Holm

49

4.2

Regulation on VC Funds
Why Do Blockchain VCs Like to Register in Cayman?
Dash Core Group engaged a local firm — Frazer Ryan Goldberg & Arnold LLP —in early 2018 to conduct an analysis of potential offshore jurisdictions for the
Dash Investment Foundation, a legal entity that we envisioned would hold assets
belonging to the Dash network. This was obviously a great challenge, given thepermissionless nature of the Dash network and the ever changing set of participants within it. Our initial screen looked at factors unique to our needs for a network-controlled financial entity, as well as costs from regulatory, tax and reporting
burdens. These included legal requirements, such as local directors, number

Insider Insight with
Ryan Taylor,of audits per year and many other factors that drive operating costs.

CEO ofOnce we had a short list of jurisdictions, we evaluated the corporate entity

Dash Core Grouptypes available in each. In conjunction with local legal counsel in Cayman Islands,
we honed in on the benefits of a foundation company limited by guarantee. This
was a relatively novel legal structure in Cayman with many benefits well alignedwith what we wanted to accomplish. Cayman foundation companies are ownerlessand memberless entities with no beneficial owner, which ensures the network
could control the entity without worrying about ownership rights. That attributesolved a major hurdle for us because we didn’t want beneficial owners, even on paper. Rather, we wanted the DIF to exist exclusively for the benefit of the network.
Today, the DIF has started to make its first successful investments in entities building their businesses in partnership with Dash. As we grow together, the network
benefits from its investments, which allows reinvestment in the ecosystem’s growth.
We hope this model acts as a legal interface between the Dash network andreal world assets and can create a more efficient means of investing in the network’s growth.

Tokens issued during ICOs may be deemed to be securities in several countries. For example, in the “Reportof Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO”50, the Securities
and Exchange Commission (SEC) specified that mosttokens issued during ICOs are securities. A relative
simplicity of an ICO process and lack of transparent regulation make ICOs attractive for fraudsters51,
so legal authorities in certain jurisdictions, including
China and South Korea, have banned ICOs completely.
Most countries, however, have not prohibited ICOs
completely but have established a relatively stringent
regulatory framework for this type of fundraising.
Investors may have limited legal protection wheninvesting in ICOs.

Regulation in the U.S.
American VCs that purchase tokens have to take into
account that any venture capital fund must adhere
to the 20% rule: “Immediately after the acquisitionof any asset, other than qualifying investments
or short-term holdings, [hold] no more than 20 percent of the amount of the fund’s aggregate capital
contributions and uncalled committed capital in assets(other than short-term holdings) that are not qualifying
investments, valued at cost or fair value, consistently
applied by the fund.”52 Therefore, as crypto assets are
non-qualifying liquid assets, a venture capital fundis not entitled to hold more than 20% of its capitalin assets that are liquid.53

50

https://www.sec.gov/litigation/investreport/34-81207.pdf

51

https://cointelegraph.com/news/new-study-says-80-percent-of-icos-conducted-in-2017-were-scams

Cointelegraph Research Venture Capital Report

50

Furthermore, in the U.S., individuals have to have over

$1 million in net worth excluding real estate in order$200,000 annual income for the past two years withto meet accredited investor requirements and, there-

the same income expected for the current year or overfore, be able to enter a VC fund.54

Insider Insight with #Hashed: When investing in blockchain companies,
what is the most common obstacle you face?
Lack of harmonization in global regulations on cryptocurrency has been one of the
obstacles we face from cross-border investments.
Another critical issue is a lack of standardization in audits within the industry. Dueto the lack of reliable audits, we see many hacking incidents in the blockchain
space. Unless there are ways to improve audits and safeguard funds on blockchain,
we will continue to struggle to bring about mass adoption of this technology.
However, the biggest challenge for blockchain companies still lies in the lackof readily usable products for average users, and we hope to onboard more intuitive projects through Kakao and Line in the upcoming years.

Regulation in Hong Kong

Regulation in Switzerland

Insider Insight withJin Kang,
Head of Legal at#HashedIn contrast to regulation in the U.S., legal acts in Hong

Traditionally, Switzerland has been an attractive

Kong allow investment funds not to be licensed or reg-location for crypto businesses thanks to the absence

istered for Type 9 regulated activity (asset manage-of capital gains tax (albeit, there is an annual wealth tax

ment) if a firm only manages a portfolio that invests

that varies from canton to canton and applies to crypto

solely in digital assets, which do not amount to “secu-

assets) and crypto-friendly regulations.

rities” or “futures contracts.” Therefore, a VC fund caninvest in ICOs without applying for a Type 9 license.

What is the best structure for a VC fund in Switzerland?
Most VC or private equity investment vehicles used by fund managers in Switzerland are limited partnerships established in foreign countries. As in othercountries — e.g., Hong Kong above — it is uncommon to use Swiss-based funds
to be used to structure private equity funds.
However, Switzerland has introduced a new type of fund, the so-called L-QIF. L-QIF
must be structured according to one of the legal forms provided for in the Swiss
Collective Investment Schemes Act (CISA). Therefore, L-QIF must have either thelegal form of a contractual investment fund, an investment company with variable
capital (SICAV) or a limited partnership for collective investment (LP). As the aimof the new bill is to promote innovation, the investment regulations regarding theInsider Insight withPatrick Frigo,
founding partner ofWadsack Zug AG

L-QIF will be liberalized, particularly in view of the limited circle of investors. The
law thus contains no restrictions regarding possible investments or the distribution of risk, making the concept of the L-QIF extremely flexible. Accordingly, hybrid
L-QIFs investing in a combination of different asset classes, such as securities andother assets, are also permitted. Besides the better time to market, this flexibility
makes the L-QIF extremely attractive.

52

https://www.law.cornell.edu/cfr/text/17/275.203(l)-153

Jonathan Cardenas, The rise of the crypto asset investment fund: An overview of the crypto fund ecosystem, GLOBAL LEGAL INSIGHTS (2018)54https://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=8edfd12967d69c024485029d968ee737&r=SECTION&n=17y3.0.1.1.12.0.46.176

Cointelegraph Research Venture Capital Report

51

However, even though the L-QIF is very flexible, it should be kept in mind that basic principles applicable to allcollective investment schemes also apply to L-QIFs. Against this background, the law stipulates the generalprinciple according to which the fund management company, or the SICAV, must ensure that the liquidityof the fund is appropriate to the investments, investment policy, risk diversification, group of investors andredemption frequency.
The second core element, according to the legal definition, concerns the limited circle of investors, withinvestments in L-QIFs reserved exclusively for qualified investors. According to the CISA, all professional
clients, according to the Financial Services Act (FinSA), are considered qualified investors. These include bothprofessional clients in the narrower sense and institutional clients. In addition, private clients within the scopeof a long-term asset management or investment advisory agreement with a prudentially supervised financial
intermediary are qualified unless they have declared that they do not wish to be considered as such.
A core element of the L-QIF is the waiver of product approval or authorization on the part of the fund company. An L-QIF needs neither approval nor authorization. Consequently, the law provides for an exemption fromthe obligation to obtain approval of the fund documents of the L-QIF and any amendments thereto. The same
applies to the authorization requirement for the SICAV and the LP.
In order to ensure a similar level of transparency for L-QIFs, the institution entrusted with the managementof the L-QIF has some notification duties (assumption or abandonment of the management of an L-QIF).
Finally, it is important that an L-QIF be treated transparently from a tax point of view so that taxation only takes
place at investor level.

4.3

From the Sell side’s Perspective:
Tokenizing a Fund
Tokenization of VC funds is a recent phenomenon, with

ý

only a handful of VC funds so far being tokenized.55 To-

It provides liquidity to its qualified investors:
In a typical VC structure, it is challenging for bothkenizing a VC fund is similar to equity crowdfunding,limited partners (LPs) and GPs to exit their invest-

which has been a growing industry that emerged afterments, as they are locked on for several years. LPs

deregulation of the sector by the 2012 Jobs Act in theare typically restricted from trading or selling their

U.S. and similar acts in Europe and Asia. It provides nu-

investments, with typical exits happening throughmerous benefits from the perspective of VCs and theiracquisitions or IPOs, and the time horizon of return

general partners (GP) but also some risks that we will

being five to seven years.57 Tokenizing a VC fund en-

go over in this section.

ables LPs, GPs and other qualified investors to exit
their investment faster by liquidating it on the

At a high level, the tokenization of a VC fund helps

secondary market.

to make its underlying investments more liquid.56 By doing that, it provides numerous benefits
to the VC fund and its GPs:

55

https://dailyfintech.com/2019/10/07/tokenized-venture-capital/

56

https://vnx.io/fr/blog/tokenizing-venture-capital-as-the-future-of-investing/57

https://hackernoon.com/https-medium-com-firstcrypto-cryptovc-13ec13ff886

Cointelegraph Research Venture Capital ReportýIt makes capital easier to deploy, which can
result in a higher IRR: By being able to cash out

52

on returns earlier, returns can also go back intoýý

Increased competition for established players:

the fund and provide more capital to be reinvested

Established VC funds currently have a competitivein a more agile way. This shorter feedback loop,

advantage, as VC funding is largely restricted to in-therefore, provides more opportunities for new

stitutional investors and high-net-worth individuals.

investments and the potential of a higher potential

Tokenizing a VC fund would mean competing with

IRR for seasoned GPs. This higher IRR can also help

a larger less-regulated pool of tokenized funds, thus

GPs raise funds more easily as they demonstrate

resulting in increased competition due to lower

better fund performance.

barriers of entry.

It provides access to a broader investment

ýRestriction of freedom to operate and higher

base, making it easier to fundraise, especiallypressure to deliver returns: Currently, VC funds

for emerging or unproven VCs: Most funding forare typically private, closed-end funds and

VC firms is provided by institutional investors, such

don’t have liquidity. Making funding more liquid

as pension funds and endowment funds, that prefer

could restrict their freedom to operate, to take risks,

to work with larger well-recognized VCs due to theirand to make “contrarian” investments.63

limited risk tolerance. Tokenizing a VC fund58

democratizes access to that asset class by opening
its capital to retail investors,59 thus providing more
funding opportunities for emerging VCs.

Tokenizing a VC fund is also similar to a publicly traded
VC fund; however, publicly traded funds have disclosure requirements for financial figures, which is still
not the standard in the crypto market. Publicly traded

However, despite all those benefits, tokenizing

funds also have a larger pool of voters, and thesea VC fund also presents risks, especially at the regula-

voters may have incentives to vote for decisions thattory level. Specifically:

maximize the token’s short-term value at its long-term

60

ý

The regulatory framework of tokenized funds
still presents some unknowns in contrast
to the LP structure: The LP structure has beenwell-defined for decades at the regulatory level andin the U.S. tax code.61 LPs are, therefore, investing in a structure with a well-defined timeline anda clear tax structure. This could make it harder for
tokenized funds to raise money from institutional
investors as the trade-off between higher liquidity
and undefined regulatory framework might notpresent an attractive risk profile.

ý

expense. In order to avoid the issues associated witha broader base of voters, GPs can launch tokens that
represent indirect fractional non-voting economic interest in the fund, similar to Blockchain Capital’s III Digital Liquid Venture Fund that raised $10 million in only
six hours with an entity incorporated in Singapore. Blockchain Capital held an ICO of BCAP tokens for
99 accredited American investors and 901 foreign investors. Blockchain Capital sold to U.S. investors underthe exemptions from registration pursuant to Regulation D and Regulation S of the Securities Act 1993. The
overseas investors did not need to meet net-wealthCompliance issues could impact free and in-requirements and, therefore, could be retail investors

ternational exchange of security tokens, thus

but still need to pass KYC requirements.64 However,undermining tokenization.

as one can see from Blockchain Capital’s experience62

From the perspective of the VC, tokenizing a fundcould also present other drawbacks:

with tokenizing funds, it opted to tokenize its third fundbut then abandoned the idea for Funds IV and V.

58

https://blog.tokenomica.com/tokenization-of-vc-fund-attracting-the-initial-capital-through-tokenized-equity/

59

https://www.linkedin.com/pulse/tokenization-venture-capital-rob-frasca/60

https://dilendorf.com/resources/tokenizing-equity-benefits-risks-and-practical-considerations.html

61https://hackernoon.com/the-promise-and-peril-of-tokenized-funds-32d0ea7e5901

62

https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/lu-tokenization-of-assets-disrupting-financial-industry.pdf

63

https://medium.com/spicevc/why-tokenizing-a-fund-is-a-good-thing-23a2cd524fd

64

Laura Shin, This VC Is Sure Venture Capital Is About To Be Disrupted, FORBES (Apr. 18, 2017)

Cointelegraph Research Venture Capital Report

53

Figure 19

Blockchain Capital Fund’s Asset Raised vs Current Assets Under Management
180

166

160
140

150

Millions, $

120
100

92

80
60

35

40
20
0

0.01

12

10

Fund II

Fund III

1

Fund I

Source: Cointelegraph Research.

Fund IV
Raised Assets

Current AUM

How do you find out about deals before other VCs do? Is there a lotof competition for blockchain equity deals?
Our industry’s rate-limiter is the number of world-class founders working on blockchain and DeFi concepts. At the earliest stages, we seek to partner with thesefounders to help them realize their ideas. By seeking out and partnering with the
top talent, we become the preferred capital provider but also a core user of the
product and network in the initial phases. We’ve baked this strategy into our thesis
and coined it “Network Capital,” as it involves being an investor, user, supplier andInsider Insight with

contributor, and it is how we find the best opportunities as well as dictate theMichael Anderson,

success of our portfolio.

co-founder ofFramework Ventures

In addition to increasing its pool of potential investors

fund holders and then reselling them on a second-by tokenizing a fund, a tokenized venture fund also

ary market — either a decentralized exchange, suchenables GPs to rebalance their holdings in a way that

as Uniswap, or a centralized exchange that has listed

is a lot easier than traditional VC funds. The liquidation

the tokens.

of positions can be done by buying back tokens from

VC firm (GP)Investment
management

Tokenized the fund
ICO proceeds

ICO issuer

Equity token

LPs

Fund

Capital,
Crypto currencies, etc

ICO investors

Investments: tokens, equity, ICOs, etc

Source: Lin & Nestarcova (2019), Cointelegraph Research

Cointelegraph Research Venture Capital Report

54

4.4

The Exit Strategies
Ex(c)iting positions
Operating in an industry that disrupted the very basics

a new normal for VCs funding blockchain projects.

of fundraising mechanisms, venture capitalists had

However, the economic rationale of venture capitalto break new ground in many aspects of the investing

itself remained unwavering. To realize its gains andprocess. Private tokens sold instead of equity, andsustain its business model, a VC has to exit from an in-communities of project believers were valued overvestment at some point after the funding round.

sound business plans and financials — all has become

Insider Insight with Polychain: Can you describe what exit options exist for blockchain VCs? As many blockchain companies are decentralized or nonprofit, IPOs seem tricky.
We believe crypto will ultimately become the most liquid asset class in the world precisely because that liquidity is usually not contingent on IPOs or listings on traditional, geographically sequestered financial markets.
While IPOs are certainly an option for more traditionally structured equity businesses Coinbase is a great example, and there will be others who follow a similar path) the real opportunities afforded by cryptocurrencies
come from their open, decentralized natures and from the new businesses and behaviors unlocked by that
decentralization. We often see teams forming, building out a set of DeFi contracts, and deploying them withan associated governance token in under a year. This is a much faster turnaround from formation to launchthan you’d expect from any traditional venture-backed business, and each of those token launches represents
a potential liquidity event. The process is similar, though generally longer, for teams deploying new layer-one
crypto networks, but again, liquidity begins at the genesis block. For these reasons, we’re seeing all kindsof novel new capital formation and organization structures happening on-chain.

Token adoption is an overriding factor that makes

allow investors to better time their exits, as VCs areblockchain- and crypto-focused VCs unique. VCs that

free from the time-consuming search of trade buyers

invest in a startup’s digital token are more flexible

or a grueling IPO process with a following lock-up peri-

in exiting their investment compared to VCs buying

od. Having tokens as a means for investment, VCs canequity. With digital tokens, divesting is effortless:play by their own rules with no need to adjust to buy-

A VC can easily sell project tokens on an exchange anders’ conditions. As a result, VCs are able to optimize

then convert crypto into cash. Secondly, token sales

their exit strategies and increase their IRR.

Future Trend: Exiting with tokens
Almost unnoticed in the media, a partial exit of KR1 from Nexus Mutual (token: NXM)65 is an example of how
tokens make an exit flexible for VCs. In July 2020, amid the “summer of DeFi,” KR1 sold 35,128.30 NXM tokens
worth $492,991.85. Previously, the fund invested in Nexus Mutual in a seed round in 2018 and then madea follow-on investment in 2019, acquring NXM at an average price of $2.24 per token. KR1 seized the momentand sold for $14.03 per token, thus generating approximately 6.3x return on investment. With tokens, KR1 wasable to release about a quarter of its initial Nexus Mutual position and continue to hold the other three quarters. Moreover, tokens allowed the fund to tailor its exit strategy to the state of the nascent DeFi market.

65

https://www.bloomberg.com/press-releases/2020-07-23/kr1-plc-portfolio-update-nexus-mutual

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55

However, buying equity — instead of the project’s to-ment buyout. Regarding IPOs of blockchain companies,

ken — is still preferred by many startups and funds.

financial market authorities may pay extra attention

Private equity exits in the blockchain industry are

to applications and may even reject applications thatno different from those common to other VC indus-

would be approved if not for the blockchain-related

tries, such as educational technology or healthcare.

nature of the company. Despite the delays and extra

Traditionally, VCs are tied to three major exit strategies

scrutiny of blockchain firms seeking public funds, sev-

from a successful startup: an IPO (including listings foreral companies are going to hold an IPO in 2021.

SPACs), mergers and acquisitions (M&A), or a manage-

Future trend:
Top private equity blockchain companies will go public
Coinbase

BlockFiOn Dec. 17, 2020, Coinbase announced it had filed for

In July 2020, BlockFi posted a job listing for a chief

an initial public offering with the SEC. Research firm

financial officer that could prepare the team for late-

Messari declared the 35-million-customer company

stage investment, acquisition and/or IPO.67

could be valued at $28 billion.

Bakkt

GeminiOn Jan. 11, 2021, ICE’s institutional exchange, Bakkt,

On Jan. 14, 2021, Bloomberg announced that theannounced it will launch on stock markets at a possible

Winklevoss twins were considering taking their crypto$2.1-billion valuation.66 Bakkt is set to merge with VPC

exchange public.68 The Winklevoss twins are the richest

Impact Acquisition Holdings, trading under the ticker

Bitcoin billionaires, with a combined worth of about

VIH. VPC is a so-called “special purpose acquisition$2.8 billion in BTC, according to Forbes.69 They famous-company,” or SPAC. It is a shell company whose only

ly invested $11 million into Bitcoin back in 2013. They

purpose is to buy or merge with another company andcurrently have over $10 billion in assets under custo-

allow it to be listed on the stock markets without goingdy.70

through the lengthy and expensive process of an initialpublic offering.

66

https://cointelegraph.com/news/bakkt-crypto-exchange-to-debut-on-stock-markets-through-spac

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https://coingeek.com/blockfi-inches-closer-to-us-public-listing/68

https://www.bloomberg.com/news/articles/2021-01-14/winklevoss-twins-consider-taking-gemini-crypto-exchange-public

69

https://www.forbes.com/sites/michaeldelcastillo/2021/01/11/bitcoins-recent-surge-creates-new-billionaires/

70

https://cointelegraph.com/news/winklevoss-brothers-reportedly-eye-public-listing-for-gemini-crypto-exchange

Cointelegraph Research Venture Capital Report

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Traditionally, M&As are the most common exit route for a VC. To better understand the forces at work behind thedevelopment of the blockchain VC industry, we surveyed the landscape of M&A exits.

Most Notable Acquisitions of VC-backed Companies in 2020
Acquirer

TargetTargetmarketSectorDeal size

Previous
VC funding

Notable VC investors

FTX Exchange

Blockfolio

RetailData$150 million$17.5

Founders Fund, Pantera

millionCapital, Huobi, Abstract
Ventures

SBI Holdings

Coinbase

B2C2

Tagomi

Institutional

Institutional

Prime

Undisclosed,$30

brokerage<$100 million million

PrimeUndisclosed,

brokerage<$100 million million$28

SBI Holdings

Pantera Capital, Multicoin
Capital, Digital Currency
Group, Founders Fund,
Collaborative Fund

BitGo

HarborInstitutional Security token Undisclosed,
company<10 million$38

Founders Fund,

millionAndreessen Horowitz,
Pantera Capital

BitGo

GenesisLuminaVo1t

Institutional

Institutional

Global Trading

Crypto asset

Undisclosed,$4Bain Capital Ventures,

manager<10 million

million

Craft Ventures

CryptoUndisclosed,

$3.07

KR1

custody<10 million

milionSource: Cointelegraph Consulting, Crunchbase database

M&As can be used as a sobering indicator for the fairwrong during the next two years? Could some of theprice of a company since VCs are known for inflating

blockchain industry startup valuations be VC fiction?

valuations after they make their investment in the*Cough Cough The Graph Cough Cough*. Each invest-

company. News announcements about subsequent

ment cycle is unique, but we always advise to read thefunding rounds can have headlines of seven- or more-news with a balanced and objective mind.

digit valuations; however, M&As reveal the real market
value of a company.

We expect at least three large ecosystems to loom
prominently in the crypto space in 2021. The fact that

The acquisition of Vo1t, a custody services provider,these crypto incumbents have been investing heavily

by Genesis Trading was one of the starkest examples

into a diverse basket of blockchain-related businessesof how an M&A can reveal a company’s fair valua-

is a clear prerequisite for the emergence of crypto mo-tion. The company was backed by KR1, a blockchain

nopolies that would be able to meet any user’s needs

investment company, and though the deal size was not

and generate enormous revenue. We suspect thesepublicly announced, we can derive it from KR1’s port-

companies could further drive consolidation in the

folio updates. KR1 held a fully diluted position of 7.94%

blockchain industry through active M&As in 2021. Ex-

in Vo1t, and the fund received $243,712 for its staketernal companies, such as banks, brokers and payment

in the company after the deal was inked. This reveals

companies, could also throw their hand in the crypto

a valuation of $3.07 million under the acquisition deal

services ring through acquisitions in order to compete

terms. Notably, back in 2018, Volt raised $2 million

for part of the market share of this burgeoning indus-

at a post-money valuation of $17 million. What went

try before it becomes saturated.

Cointelegraph Research Venture Capital Report

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5Conclusion
It has been an amazing year in the crypto space. The

was the boom in decentralized finance space with overtotal market capitalization of the cryptocurrency$26 billion locked in various protocols by late January,

space saw an increase from $191 billion in January

2021. According to the dataset prepared for this report,

to over $765 billion by the end of the year — a 300%

approximately 25% of the deals funding in 2020 wereincrease. One of the major drivers behind this growth

related to decentralized finance.

Insider Insight with Founding Partner at Draper Goren Holm, Alon Goren:
What will be the major trend in 2021 be?
2021 will be the year for non-fungible tokens. We’re already starting to see their very early developmentin 2020, but 2021 will be the year of more mainstream amplification for these digital collectables. You’re going
to see gaming companies tapping into fashion-inspired NFT companies as they create unique skins and collectables designed by and for their community at large. You’ll see more artists leverage the power of unique
digital collectables to amplify their value offering to their fans. You’ll continue to see more exciting experimentation done around digital art, new mainstream collaborations, and more. I’m confident we’ll see the first NFT
being sold for $10,000,000.00.

While the overall investment in the industry wasof investment regulations in innovative jurisdictions.

definitely impacted by COVID-19, and we are still way

This is because tokenized funds that can be tradedbelow the 2018 blockchain VC funding heights, we areusing distributed ledger technology are simply better

beginning to see a lot more venture capital activity

than legacy trading platforms that limit what investors

from both traditional VC firms as well as dedicatedcan do with their assets, such as trading on the week-

crypto firms. This should come as no surprise due

end, using their shares as collateral for personal loans,to the superior returns that blockchain VC has offeredor lending their shares to other traders for lucrative

historically coupled with very low correlation with tradi-

interest rates. As the distributed ledger technology

tional markets.

continues to penetrate new industries and markets

Going forward, we absolutely agree with Founding
Partner at Draper Goren Holm, Alon Goren, when
he says that NFTs will be important. We also see an increasing interest in fund tokenization and liberalization

Cointelegraph Research Venture Capital Reporteach year, we see a clear path ahead: blockchain
VC funds are going to have an influx of capital froma global base of investors, and they are going to benefit
from a diversified choice of investment opportunities.

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Disclaimer
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between the buying price and the selling price of some cryptocurrencies and if you
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