Over the past two years, and especially during the cryptocurrency bubble that peaked at the end of 2017, there was a mad dash by venture capital firms to acquire a stake in new crypto-focused ventures. Just about any seemingly reasonable blockchain-based idea or initial coin offering could gain some traction and, in many cases, very rich funding.
But once the bubble burst and the cryptocurrency winter set in as the ongoing bear market for digital assets persisted, only five token or blockchain start-ups have flourished enough to attain unicorn status—a designation indicating their valuations are $1 billion or higher.
A mix of digital currency and blockchain technology businesses, these five crypto unicorns are:
1. Bitmain: A privately owned company headquartered in Beijing. Bitmain designs application-specific, integrated circuit chips and integrated circuits (ASICs) for Bitcoin mining.
2. Cardano: Home to the cryptocurrency ADA which can be used to send and receive digital funds. This digital currency launched in 2015 and is able to make direct transfers via cryptography that are guaranteed to be secure.
3. Dfinit: A blockchain-based cloud computing project whose aim is to develop a decentralized "internet computer that will become the cloud 3.0." It's registered as a non-profit foundation in Zug, and operates research centers in Palo Alto, California and in Germany.
4. Ethereum: The open-source, public, blockchain-based distributed computing platform and operating system that features smart contract functionality. Ethereum supports a modified version of Nakamoto consensus via transaction based state transition.
5. Xapo: A Hong Kong-based company that provides a Bitcoin wallet combined with a cold storage vault and a Bitcoin-based debit card.
Interestingly, all of these blockchain unicorns originated in what's been dubbed the Crypto Valley by aficionados, the region in Europe that encompasses Switzerland's Zug canton and parts of Liechtenstein. According to a recently released report by Switzerland-based CV Venture Capital in collaboration with professional services firm PricewaterhouseCoopers and tech firm inacta, as of the end of September 2018 there were over 600 blockchain-related companies registered in the area with a total market capitalization estimated to be around $44 billion.
That's twice as many firms as were registered in the region during the spring of 2017. However, the severe correction in digital currencies has weighed on that market cap, bringing the total valuation down to $20 billion in Q4 2018, a decrease of 55 percent.
How difficult has it become for new start-ups to grow to unicorn status? During the cryptocurrency go-go days of 2017, when Bitcoin was skyrocketing, the crypto exchange Coinbase became the first startup in the cryptosphere to reach unicorn status. Its valuation was buoyed by the huge surge of interest at that time in Bitcoin, ether and new tokens.
Now of course, the landscape is very different. The road to unicorn status is much harder to achieve, and it's likely fewer start-ups will be able to scale up to those heights, though it's not impossible. Initial coin offerings (ICOs) have fizzled as a fund raising vehicle, but some promising tech start-ups are attaining unicorn status by having a company valued at more than $1 billion acquire them.
Such was the case recently when Philippine-based crytpcurrency platform Coins.ph was bought by Indonesian unicorn Go-Jek, in a deal described as "north of $70 million." Go-Jek is a multi-platform business that operates in a variety of segments including ride-sharing, logistics and digital payments.
Nonetheless, most start-ups will likely not be fortunate enough to gain unicorn status so quickly. VC funding will probably be the vehicle for financing most entrepreneurial blockchain startups.
What are VCs looking for now when considering investment in a crypto start-up? Olaf Hannemann, co-founder of CVCV said his group invests in early stage startups and provides growth capital to promising blockchain companies.
“Through our incubator we aim to build successful companies. At an early stage we believe equity is priced via other incubator offers rather than valued. At a later stage, valuation kicks in and token pricing can be a part of it. These days we see a more traditional approach to equity funding, as well as tokenized equity. Security token offerings (STOs) and digital security offerings (DSOs) could become the predominant funding vehicles in the future. But for now they are just that, different and in some part new, vehicles. Ultimately, we invest in founders and their start-ups.”
Although CVCV focuses on blockchain startups only, Hannemann says they still operate like a traditional VC company. “We are in it for the long-term, helping founders build successful start-ups. We look at the fundamentals and invest accordingly. We look at the team, product/market fit, timing and a startups´ potential to hit 10x plus. Once everything aligns, then we invest,” he adds.
Kavita Gupta founding managing partner at ConsenSys Ventures recently said in an interview that there has been a shift in how VCs invest in the crypto space. Venture capitalists are getting comfortable with this new paradigm:
“Crypto investing is distinctive: liquidity, duration, risk profile, volatility etc. are very different than the long-term traditional investment fund. The landscape is also changing for blockchain investors and the profile of entrepreneurs is changing. We see a shift from a majority of young technologists serving as CEOs to a lot of seasoned engineers and serial entrepreneurs entering the space. A product's vision, roadmap and especially the thought of adoption and user friendly interface have become a big part of the conversation. Some of the big VC's are setting up crypto dedicated funds bringing Web 2.0 and Web 3.0 worlds closer and validating lots of early tech in the space, which just a year ago would have looked fake.”
Many also believe there's additional potential in the five unicorn crypto firms, as well as other, similar ventures, to build out new business that could boost or help retain their valuations. Indeed, just this week, London-based, Bitcoin mining infrastructure provider Bitfury Group announced it had "launched an entertainment division that will oversee the development of an open-source blockchain-based music platform." Bitfury was recently given a $1 billion valuation.
Andre Bruckmann the CEO and founder of Mycro.Jobs is optimistic about this development, but stresses that good ideas won't be enough to raise funding anymore. An actual path to revenue will be a requirement:
“Unicorns such as Ethereum or Cardano could one day be the basis for a decentralized society. Their valuation today is just the beginning. VCs are looking for strong teams and meaningful business models. Projects consisting only of whitepapers don't stand a chance anymore.”