City of LondonAn Outlier Ventures study of blockchain investments in early-stage rounds shows that start ups have raised more than US$20B (since 2013), and the focus has moved from pure cryptocurrency to new applications. This figure and the new emphasis come from Outlier Ventures latest Investments in Blockchain Report, which provides an overview into blockchain investment and market trends worldwide over the past 6 years.

Joel John, Research Analyst at Outlier Ventures
Joel John, Research Analyst at Outlier Ventures

Joel John, Research Analyst at Outlier Ventures explains: “There is often an expertise gap with capital investments. The heavy competition in early-stage financing for blockchain-based startups means a large number of investors provide nothing more than capital. Investments in equity are considered a hedge against liquid tokens. In addition to a lack of much-needed guidance during the early stages, this also brings along expectations of quick exits from investors that are used to typically being in liquid assets like ICO tokens.

The Outlier Ventures’ findings

The Report reveals:

  • $23.7B raised by 3,738 blockchain companies since 2013
  • early-stage fundraising dominates – with follow on rounds scarce (75% of all deal flow focused only on early-stage rounds).

Blockchain startups have raised finance in multiple forms including:

  • ICOs
  • debt
  • direct investments
  • crowdfunding.

However, when Outlier Ventures discounts a handful of exchanges and wallets, there has been no application which has broken through to mainstream adoption. Yet this is definitively not about any lack of capital. The challenge, Outlier Ventures argues, is more about expertise and guidance at early stages, especially when it comes to areas unique to Web 3.0 (such as token design).

The outlook for 2019

In 2019, the frequency of blockchain investments will, in the view of Outlier ventures, be up nine times in comparison to 2013. Pre-seed, Seed and Angel rounds account for ~75% of all the deals in the ecosystem.

The number of early-stage backers has increased substantially due to the massive returns from early investments in Bitcoin and Ethereum. But this ‘form of financing’ has not converted to follow on-rounds. This suggest that, while early-stage funding is relatively easy, many traditional VCs are waiting for evidence of product-market fit and clearer signs of revenue before making further investments.

John continued: “Average seed amounts are healthy, but evolving to reach a Series B raise is a hard business. Challenges with learning curves in user-experience and designing profitable business models make it difficult for startups in the ecosystem to evolve past a point.  Blockchain startups have the two-fold challenge of establishing a new paradigm and warding off existing competition –  a hard task to do without the necessary guidance in place.

Blockchain focus areas

In terms of blockchain investment focus area, Bitcoin’s early mover advantage and network effects meant most teams focusing on the space early on were building specifically for it. Since then a shift has occurred:

  • from focusing purely on cryptocurrency
  • to convergence applications.

AI leads the pack. Fintech and data analytics are starting to close the gap – with a growing area focus on:

  • data ownership
  • increasing interest in self-sovereign identity (an emphasis which logically follows recent data exploitation scandals).

Nevertheless, fundraising remains cyclical. Founders are still dependent on Bitcoin’s price to raise capital for what may not necessarily be a token dependent project. The heavy exposure of institutional players in the ecosystem to token prices mean that risk appetites vary, depending on the performance of individual tokens.

This means, to Outlier Ventures, that there is;

  • greater competition to raise capital from a handful of backers during bear markets
  • competition against a number of other equally well-funded projects during bull markets
  • expertise and value-added services are the only key differentiators that teams can rely upon.

The Outlier Ventures’ context

Outlier Ventures is a venture platform that supports the development and growth of new technologies. To do this it seeks to advise and invest in teams and businesses which create value for an open data economy. Established in 2013, Outlier Ventures claims to be Europe’s first venture firm dedicated to blockchain technology.

The Outlier Ventures team works with seed and growth-stage startups as well as larger businesses committed to the vision of an open and decentralised data infrastructure. It has invested in, or partnered with, IOTA, Ocean Protocol, Fetch.AI, SEED, Sovrin, Haja Networks and most recently Agoric. In addition, it is launching a Base Camp program to support the development and growth of new technologies in the open data economy with:

  • a 3-month accelerator program based in London
  • £35k immediate funding for early-stage projects
  • up to £200k total funding available per team
  • office space, legal, accounting and back-office support
  • access to an ecosystem of investment, enterprise and tech partners.

Enterprise Times: what does this mean

The amount raised, at almost US$24B astonishes. Equally astonishing is that so much has produced so little that is relevant to enterprises, or even individuals. At one level this must challenge, when inflation adjusted, the dot.com era for ‘conspicuous consumption of investment capital’.

Another conclusion from the Outlier Ventures’ Report: location matters for future funding. Founder access to a network in regions where funding activity is active determines the possibility of a start up being able to raise follow-on rounds:

  • the United States leads globally when considered at a national level
  • yet regional fintech hubs – such as London – are catching up with former favorites (such as San Francisco).

Indeed, London has evolved to be a hub for early-stage companies looking to raise seed stage rounds. According to Outlier Ventures, London has seen roughly $1 billion raised by blockchain companies in the past six years (though that is still less than 5% of the total).

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