A total of $23.7 billion has been invested into blockchain startups since 2013 – but how is this money being used, and is it affecting these companies’ moves to profitable business models?
A new report from Outlier Ventures (Slideshare) has explored the various funnels of funding and how startups involved in blockchain technologies are competing in the wider ecosystem.
According to the Outlier report, three quarters of all venture capital (VC) deals are at the pre-seed, seed and angel stage. The average seed stage round for blockchain companies is at the $1 million mark; yet compared with an average series A at $10m, a disparity occurs. Blockchain startups have either too much money pumped into them without a product fit being established, or if they are established are competing directly against companies with significantly more funding.
Part of this gap can be seen as an after-effect of the ICO. The ICO’s rise came almost directly alongside the explosion in the price of Bitcoin; but alongside that a slew of bad actors and miscreants came along for the ride. The subsequent crash scared them off but the reputation remained.
As a result, more conventional rounds of funding are seen as the norm. Joel John, research analyst at Outlier and author of the report, noted that seed stage funding compensated for a ‘drastic decline’ in ICOs through 2018.
“This may have been a challenge during the early stages of the ecosystem but multiple startups today raise healthy amounts early on in their growth cycle through equity while keeping tokens as a core part of their business models,” John tells The Block. “Startups have grown well and beyond the ICO phase of funding.”
The good news is that many more blockchain companies are attracting initial funding; 2019 will see nine times as many deals in this space compared with 2013. Yet market variables continue to be a factor. Outlier notes that funding is cyclical – as it is in many other sectors – but a correlation remains between the decline of Bitcoin and a shrinking funding pool.
Yet blockchain startups frequently don’t make it to the other side. Mortality rate is high due to ‘challenges stemming from regulations, a lack of traction, and access to investors that fund firms post series B’, as the report puts it.
John notes that while product-market fit is a challenge for all industries, blockchain companies have greater difficulty. “The key challenge blockchain-specific entities face today is with onboarding users to the new paradigm with user experiences that are simple enough,” says John. “A generation of companies may have died simply because they were too early in the adoption cycle.” Changes that have been successful, John adds, are around how wallets are handled, such as in-browser integration via Brave, and onboarding users such as Samsung’s in-mobile key management.
Last month Outlier issued a report which found blockchain startups had raised $822 million across the second quarter of 2019 – lower than previous iterations but with much greater potential, particularly in how enterprises were associating with the technology.
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