DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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The market capitalization of cryptocurrencies have significantly grown over the past few years. In 2020, when the world was facing a global pandemic, the cryptocurrency sector was one of the only industry that was booming.
In 2021, crypto startups received a total funding of 25.2 billion dollars. The crypto industry witnessed a massive growth followed by funding of $4.8 billion by VC firms. The global venture capital market grew from 1% to 4% in 2022.
This shows that investors' risk appetite has increased and venture capitalists are willing to put their money into the cryptocurrency market. The study of VC firms is crucial to retail investors as it can help to identify profitable investments.
In this article, we will understand what venture capital is, the top VC firms, and how VC funding benefits crypto startups. Let’s begin with understanding what exactly venture capital is.
Venture capital funding is a type of funding that is provided by private equity investors to startups with high growth potential. These investors are called as venture capitalists and in general finance, they offer funds to startups in exchange for an equity stake in that startup.
Venture capital funds are provided by high-income individuals, venture capital firms, or by family and friends in some cases. This investment is made at a very early stage of a startup and thus the retail investors are not part of this funding.
In general, this funding is provided to a company that wants to expand its business. However, in the crypto space, things work out quite differently. VC funding is already considered as a high-risk high-return form of investment as investors invest in a business idea and not a company.
VC funding is even riskier in the crypto industry as it comes under unregulated space and investors have to pick a startup from numerous projects, some of which can be scams or projects with weak ideas.
However, venture capitalists strongly believe that some of these crypto projects have the potential to grow exponentially and become high market cap companies. Thus, in spite of the risks, VC firms choose to invest in crypto startups with the goal of attractive ROI.
To balance out risks, venture capitalists diversify their portfolio by investing in a number of projects at the same time. That way, even if one or two projects fail, the rest of them will take care of a good average return.
As we know, the standard venture capital funding works in a similar manner to that of venture capital funding in the crypto industry, there are a total of 5 stages where funding is provided. Let’s discuss all 5 stages in detail.
It is a phase where a crypto project is merely an idea. As the project is yet to be established, the investment only comes from family and friends. It is not the main funding round but if projects decide to go with it, it is called an intermediate funding round.
At this phase, projects are usually testing their product’s viability and studying their competitors in the market. The roadmap developed by the project helps to seek out potential investors during this initial stage.
Investment in seed round mainly comes from either the founders or angel investors. Wealthy investors who invest during the seed round are known as venture capitalists.
The series A round can only be carried out once the project has a minimum viable product. At this stage, the product is already exposed to a community and is validated. As the risk for investors is reduced, institutional investors show strong interest in startups in the Series A round.
Venture capital firms generally take a 50% stake in the project and contribute towards the project’s growth in terms of marketing and expanding its team.
At this stage, the company is already well-established. As a result of marketing and advertising, the project has a huge user base. Thus, VC firms can expect revenue at this stage. The series B round is a larger round in terms of funds.
Series B round is usually carried out to scale the business. Investments are used for marketing, business development, human resources, and so on.
In the last stage, the investment or financing comes when the company is aiming to improve the balance sheet and secure operating capital in order to make their profits reach new heights. VC funding is also done to finance an acquisition or for going public by listing the shares on an exchange. This comes under the Series C round.
Now that we are familiar with the stages of VC funding, let’s take a look at how it benefits crypto projects.
Being backed by reputed VC firms is always a good sign for projects as it creates a good image in the market and helps to build positive sentiments about the project. Here are the benefits offered by VC firms to the crypto projects.
Well, in the case of VC funding, it’s a win-win situation for both the crypto startups and the venture capitalists. Venture capitalists might be a good option to get funds for your crypto project. But, in the same manner, there are sweet rewards for venture capitalists too.
The whole cryptocurrency market is famous for “High risks high reward”. The market is extremely volatile as compared to the stock market. However, high volatility also brings high returns which venture capitalists don't want to miss out on.
Additionally, the crypto industry has just started to grow and there is still a lot of potential in the market. VC firms want to find the rare gems and be a part of this revolution. Venture capitalists often invest some portion of their portfolio into the crypto startups if not all.
Before making any investment in a project, venture capital firms do thorough research about that project's idea, team and way of executing activities. Thus, knowing the projects in which venture capitalists are investing can help retail investors build trust in those projects.
Here are the top 5 Venture capital firms and the projects they are invested in.
It is a Californian crypto VC firm founded in 2009 by Mark Anderson and Ben Horowitz. This firm invests in both blockchain-based and non-blockchain-based companies. The top investments of this firm include the following.
The Digital Currency group as the name suggests is a cryptocurrency-focused venture capital firm that invests in Bitcoin and blockchain companies. The firm has digital assets like Bitcoin, Ethereum, Ethereum classic, Decentraland, and many more in its portfolio. Following are the companies DCG has invested in.
Coinbase is a centralized cryptocurrency exchange platform. Coinbase venture is a branch of the same company which deals with VC funding. Although many VC firms have invested in Coinbase, the company itself offers VC funding to other companies. Here is the list of companies Coinbase has invested in.
Pantera is another blockchain-specific VC firm that identifies itself as the first institutional asset manager of US. The company invests in various sectors of blockchain and cryptocurrency like crypto exchanges, institutional trading tools, DeFi, and many more. Pantera Capital has investments in the following companies.
It is a VC firm specially focused on Metaverse projects and GameFi projects. It is one of the leading investing firms when it comes to Metaverse and NFT-related projects. Here are some of the popular investments of Animoca Brand.
Venture capital funding is an essential aspect behind every major project's success. The funding and the expertise which venture capitalists bring on the table are of utmost importance for any crypto project.
We hope this article helped you understand what VC funding is and how much significance it has for crypto startups. If you want to know more about the other types of fund raising methods used by crypto projects, do check out our articles on ICO and IDOs.
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