Funding in the crytopasset industry is undergoing a broad shift amid the ongoing decline in market values. Institutional and venture capital (VC) money is taking up the slack as retail investors leave the space, according to a new review by Outlier Ventures, an early-funding technology VC firm based in the UK.
Outlier reports that VC investment in the crypto industry is up 316% so far in 2018 over last year, with the majority of funding coming from the US. However, the increase in VC funding is backgrounded by a major drop in overall initial coin offering (ICO) investments of 74% between Q1 and Q3, or to about $1 billion from $3.8 billion earlier this year.
The report also reveals a shift in the type and quality of project funding being pitched today, claiming a “drastic reduction in the frequency and size of token sales,” which were in the past mostly bought up by retail investors. In lieu of the ICO model, private equity investment is increasing at all funding stages, with late stage funding becoming more common this year versus last year (mergers and acquisitions fall in this category, which have also risen this year).
Projects are bringing more to the table now, with a “considerable improvement in both the amount of traction and complexity of token design by startups before they approach [...] markets.” Outlier “expect private investors to increasingly dominate the earlier stages of [projects’ lifecycles],” who will only later offer public markets stake in their ventures.
By way of explanation, Outlier partner Eden Dhaliwal identified an “[exasperation] over valuations of tokenized networks” that has caused a renewed interest in “equity based blockchain investments,” and away from ICOs. Another source of token frustration is the difficulty of getting a token listen on exchanges, with Outlier suggesting that hundreds of tokens from 2017-18 sales are yet to be listed on a large exchange.
Overall, the story told is one of increasing professionalization of the crypto industry, as professional (private) investors replace retail (public) investors, and take stakes in more polished and fewer projects. CrypoGlobe has been reporting on the increase in institutional interest in cryptoassets even as prices tumble to new year lows.
Institutional interest in Zero-Knowledge Proof (ZKP) technology - whose flagship cryptoasset is perhaps Zcash - is growing according to Outlier, who cite EY’s and ING’s experimentation with ZKP during 2018.
The review took special mention of the state of crypto in China, saying that not only is the Chinese government monitoring blockchain transactions, but also that Chinese “[s]ervice providers are also expected to monitor on-chain transactions” and report their findings to the government - although such an attitude would not be exclusive to China according to other sources.