Venture capital is known as one of the most innovative finance industries. While most investors try to put money only in non-risky assets that will bring decent revenue only in 20+ years, venture capitalists are likely to take noble risks.
They put their money in perspective and innovative businesses that may change the world. Unlike traditional investors, they don’t ask for a controlling stake. VC is fine even with 5-20% ownership. To mitigate risks, they often ask for help from companies that can help them find prospective projects according to their risk profile.
In this article, we all have a deep dive into understanding venture capital, how it works, and how blockchain can make it even more attractive to startups and investors. Buckle up, it will be interesting!
Understanding Venture Capital
It’s a form of private equity investment where investors provide money and recommendations to early-stage, high-potential startups. It’s a risky process that needs careful preparation. That’s why investors use VC funds that save their time by choosing startups according to the investor’s interests.
Some like to risk and invest in highly-risk projects that may disrupt the world but can fail without bringing revenue. Others like to “play it safe” and invest in more stable yet promising projects.
They are profitable both for investors and startups. Investors can find exciting projects that bring them even more revenue. Startups and small businesses don’t need to take bank loans or become dependent on a single investor. They have more freedom of action since VC funds receive only a minority stake in the company. And it positively affects the economy since businesses can implement new technologies faster than ever.
Venture investments are made with a long-term perspective, allowing startups to focus on growth and innovation rather than short-term profitability. This patient approach supports startups and helps startups to build dream projects without quality compromises. Venture capital fuels entrepreneurship and encourages individuals to pursue their prospective business ideas, creating new visioners.
VC funds often serve as a bridge for companies to access public markets through initial public offerings (IPOs) or other exit strategies. As startups mature and demonstrate growth and profitability, they may seek to go public or be acquired by larger companies. But how do crypto venture capital investors get profit from it? They still got a portion of this company, so even when the startup sells itself to the corporation, investors will still have their share of the profit.
What are Blockchain and Cryptocurrencies?
Blockchain is a distributed ledger technology that provides decentralized, secure, and immutable connections between multiple computers. This technology can be used for a variety of purposes, including cryptocurrencies, voting, storing personal data, and many more. Each act of communication between those computers is called a transaction. They are secured by cryptographic algorithms which are almost impossible to hack (it would take 5+ years to hack just one crypto key in the transaction, while it can have dozens of them).
Each new transaction has a reference to the previous transaction, which makes the record immutable. No one can remove a record single-handedly since it is already stored in the blockchain. Cryptocurrencies are unique tokens in the blockchain that users can exchange with each other at a pre-described rate. It is not issued by any central authority, which makes it immune to interference or manipulation.
Blockchain, Cryptocurrencies, and Venture Capital
Blockchain is constantly transforming venture capital. Many businesses have started to use Initial Coin Offerings and Security Token Offerings as new ways to raise money. VC funds often use decentralized finance services to find new approaches to fund their business. Blockchain and cryptocurrencies have disrupted the traditional funding landscape by introducing alternative fundraising models that involve digital tokens in exchange for funding with fiat money.
Venture capitalists finally saw the perspectives of blockchain, so they started investing in promising projects. It leads to wider adoption, so we will see even more business which leads to economic growth, making crypto even more appealing to investors and funds. ICOs emerged in the early 2010s as a popular blockchain-based crowdfunding method. In an ICO, a startup issues its tokens and sells them to investors. Usually, there is an exchange for established digital coins. ICOs attracted significant attention and enabled startups to quickly raise substantial amounts of capital.
However, they faced multiple regulatory challenges since fraudulent startups scam potential investors by using ICO. One of the most infamous cases is DAO and Bitconnect. So, many investors prefer to quit investing in ICO from little to no-known companies. STOs can be considered a more secure and regulated alternative. Security tokens represent partial ownership in a company, similar to traditional securities. Thus, they are subject to securities regulations.
STOs provide a more compliant and legally structured fundraising method. Investors in STOs gain ownership rights and potential financial returns like in traditional investing. So, this approach is a bridge between the traditional securities industry and blockchain. Decentralized finance services are another tool for crypto venture capital investors. They unlock an ecosystem of services for decentralized lending, trading, and investing without intermediaries.
DeFi uses smart contracts to automate the process. There is no way to change a smart contract single-handedly if one of the parties wants to modify the contract they need to ask other parties to sign a new one, so the current version can become invalid. I count asset tokenization as one of the best DeFi practices for venture investors. Blockchain technology allows the tokenization of online and offline objects, including homes, cars, and even businesses.
To simplify the explanation, let's imagine that 4 investors bought an apartment in New York. The seller provides them with a house and 4 blockchain tokens that prove their ownership even in the digital world. Once they sell this apartment for $1 million, each gets their share and they give these tokens to new sellers. Generally speaking, tokenization represents ownership or value using digital tokens on a blockchain. Tokenization unlocks liquidity by permitting fractional ownership. VC funds can implement this technology to offer investors more flexibility and liquidity in their investment portfolios.
Blockchain and cryptocurrencies transform venture capital in numerous ways. These technologies are giving startups new ways to raise capital, and they are also giving crypto venture funds new investment opportunities.
Case Studies: Blockchain and Cryptocurrencies in Venture Capital
To prove my words, I want to show you how blockchain is already a crucial part of the modern venture capital market. Coinbase is a crypto exchange that is as old as crypto. It was founded in 2012, just a year after “Pizza Day”. Here users can store, buy and sell crypto. This service was founded by multiple VCs, including Andreessen Horowitz, Union Square Ventures, and Greylock Partners. In 2021, Coinbase went public and raised $3.1 billion in its IPO. Currently, it has over 50+ users and proceeds over $1 Billion daily. So you can imagine the revenue that those early investors get from this service.
ConsenSys is a company founded in 2014 that provides various blockchain-based tools, including the Ethereum software development kit (SDK). ConsenSys has been funded by multiple venture capital firms, including Andreessen Horowitz, Accel Partners, and Digital Currency Group. As of today, it’s one of the leading providers of blockchain technology solutions. Back in 2021, they raised $400 million in a Series D round, which valued the company at $7 billion. So, we can clearly say that this investment is paid off. Cartesi is a blockchain platform that combines the security and scalability of blockchain with the flexibility of traditional programming languages. It eases the process of creating dApps as layer-2, layer-3, or even sovereign rollups. Cartesi was founded in 2018 and as of mid-2023 has raised $20+ million in venture funding.
These are the most common examples of how blockchain and cryptocurrencies are leveraged in the venture industry. There are hundreds of smaller companies providing stable revenue to their investors while staying true to their passion for innovation.
The Role of Defiway in Venture Capital
Defiway has financial tools that can help build wealth for everyone: from smart students from unprivileged communities to crypto venture funds. The Wallet service allows VC capitalists to store money securely. They can access it by using the mobile app or web version. But it’s not a typical hot wallet, that is possible to crack using vulnerabilities in smart contracts. In Defiway’s Wallet, all coins are stored in a secure cold (offline) wallet that gets connected to the internet only when the user logs into the app. It’s impossible to hack this wallet remotely, which additionally protects VC capitalists from theft.
Payroll service eases the salary payroll, by saving hours or even days on this complex yet crucial process. From now on, VCs can look for remote employees worldwide, picking the smartest people on the staff. They don’t need to look for employees only in their region since they can pay fully legal salaries to people living abroad. All they need to do is set up the firm account and add employees with their salaries to it. Once it’s time to pay, the system automatically payroll the employees. Defiway's Bridge service eases money transferring between various networks. Transferring coins from one network to another is impossible without specific tools since different networks have dissimilar architectures. The bridge tool acts like an “in-between” service that allows you to exchange money between networks within the least possible fees.
Defiway’s Bridge is one of the safest options as of today. Most crypto bridges need to request you to sign multiple smart contracts to exchange money: at least it’s the “Approve” and “Send”. Each additional smart contract adds more channels through which transactions can be hacked due to internal smart-contract conflicts. Defiway’s Bridge requests you to sign only the “Send” smart contract, eliminating hacking possibilities.
The Future: Blockchain, Cryptocurrencies, and Venture Capital
Blockchain already had an impact on VCs, and this trend is likely to continue in the future. It won’t happen overnight, since it’s a more gradual process. But we will see how blockchain-based investment services will become more common in the next 5-10 years. They are fast, secure, and immutable, which fits the investor's needs.
We will see a wave of investment into DeFi projects. Year by year, blockchain becomes more and more regulated, attracting investors worldwide. This “money wave” boosts innovations in the blockchain and crypto industry making them even more appealing to VC funds. Eventually, investors will see the power of crypto, and start to use blockchain-based tools to improve transparency and efficiency in other, more traditional industries. We already see health tech, Edutech estate tech, and many more. We will see even more startups in various sectors, such as real estate, art, renovation, etc.
However, before it, the industry needs to overcome multiple challenges such as security and regulation development. Blockchain is a secure technology, but there are still risks of phishing and internal fraud. VC firms will need to carefully pick blockchain projects before investing. Venture funds also should consider the constantly changing regulatory environment. Some things that may be entirely legal today may become restricted within 2-5 years. So, investors should understand risks, pick the safest option and promote pro-blockchain laws in local and international governance institutions.
Venture capital is always considered an innovative industry since these investors are not afraid to take risks to get revenue from the prospective project. Most crypto projects that you know were funded by various capital firms. As of today, their investors have great investment returns, calculated in millions of dollars. At the same time, there are various ways in which blockchain instruments ease the VC’s work. Many businesses create their cryptocurrency and sell it on Initial Coin Offers.
But since ICOs have a poor reputation, most innovative businesses switch to STO, where investors get a token that provides them partial ownership of the company. It’s more similar to classic VC funding, while it can become international because of its borderless blockchain nature. Many VC companies also use various DeFi tools that ease the research process and democratize the investment industry, making it more accessible to anyone interested in building their wealth.
If you want to find a more creative and profitable way to grow your capital, stick with Defiway! Subscribe to our Twitter and add our blog to the bookmarks, so you won’t miss any updates. Try our services to get a safe and user-friendly experience.