10 VC Firms Betting Big on Bitcoin and the Blockchain

By July 19, 2015Bitcoin Business
Click here to view original web page at www.coindesk.com

With more than $800m so far invested in bitcoin and blockchain technology startups since 2012, it's safe to say that venture capitalists are certain captivated.

Investments in the industry have already exceeded the cumulative total for 2014, with more than $380m pledged to startups in publicly announced funding rounds this year.

While an impressive figure on its own, what that number doesn't successfully convey is how many seed to late-stage firms are making bets on the new wave of innovators aiming to take bitcoin and blockchain technology forward.

CoinDesk's Bitcoin Venture Capital data indicates nearly 200 VC firms have invested in bitcoin companies, a total that excludes the many individual and angel investors that have participated in public funding rounds as well as the various private deals kept out of the public eye for as-yet-unannounced stealth projects.

Out of these many investment firms, however, clear leaders have emerged whose investment deals and ideals have influenced the wider ecosystem.

With this in mind, we've compiled a list of 10 of the most influential and visible investment firms in the industry.

IDG Capital
IDG Capital

The only non-US entity on the list, China's IDG Capital has emerged as an early, yet conservative investor with a stronger emphasis on applications of the blockchain as a distributed ledger.

IDG's first investment came during its May 2013 funding of Ripple Labs, a distributed payments protocol provider that has raised $37m in total and recently closed a $28m Series A.

Later, it took part in Koinify's $1m fundraising. Originally conceived as a decentralized Kickstarter, Koinify has since announced it plans to pivot as a result of unsustainable revenues.

Though the firm seems to prefer investments in distributed ledger tech, IDG has nonetheless backed one of the largest bitcoin services providers, Boston-based Circle Internet Financial, having participated in Circle's $50m Series C in April.

A representative from IDG Ventures USA indicated that the firm is currently looking for early stage opportunities, while its China-based counterpart is focused on late-stage deals.

khosla ventures
khosla ventures

Described by TechCrunch as a "mega VC firm", Menlo Park-based Khosla Ventures recently raised $400m to fund its next batch of seed investments, some of which could end up being devoted to bitcoin or blockchain firms.

Khosla has been relatively quiet in the public regarding its stance on bitcoin, the blockchain and if its investment thesis favors one or the other. Still, that hasn't stopped it from participating in some of the most talked about funding rounds in the space.

Khosla's bitcoin portfolio includes industry fundraising leader 21 Inc, which has amassed more than $120m in startup capital to date, as well as the sector's largest pure technology play Blockstream.

Elsewhere, Khosla has backed smaller funding rounds by blockchain technology specialist Chain and financial services provider BlockScore.

boost vc
boost vc

San Mateo's Boost VC may be moving away from a specific focus on bitcoin (recently announcing its newest class would be equally dedicated to virtual reality), but since its inception in 2013, it's been one of the most prolific investors in the space.

Boost VC has stated it aims to back 100 bitcoin companies by 2017, and it already boasts a portfolio including startups with growth potential including Align Commerce, BlockCypher, BTCPoint, BitPagos and Reveal.

Given that most of its investments are early stage, it's hard to fully evaluate Boost's emphasis on volume in its approach to the ecosystem.

So far, only one of its portfolio companies, blockchain smart contracts startup Mirror, has reached a Series A round.

AME Cloud Ventures
AME Cloud Ventures

The early-stage startup fund founded by Yahoo founder Jerry Yang, AME Cloud Ventures has emerged as another cautious and infrequent investor in the bitcoin industry.

The Palo Alto-based company boasts three of the best-funded startups in its portfolio to date – BitPay, Blockstream, Ripple Labs, as well as Blockcypher and blockchain identity solution ShoCard.

Despite the public investments, however, both Yang and his firm remain quiet about both their investment strategy and opinions on bitcoin.

Lightspeed Venture Partners

Lightspeed

Though Lightspeed has arguably slowed the pace of its investments in the technology, the venture capital firm was one of its earliest and most vocal supporters, with partner Jeremy Liew voicing his enthusiasm publicly for the technology as early as 2013 and appearing as a witness at the New York BitLicense hearings in 2014.

Overall, Lightspeed has made an interesting investment in an array of bitcoin and blockchain companies either directly or through its subsidiaries, backing BlockScore, digital asset exchange Melotic and China-based bitcoin exchange BTC China. Lightspeed also made a key early investment in bitcoin-focused incubator Boost VC in May 2013.

However, Lightspeed moved most decisively in October 2014 backing a $30.5m funding round for bitcoin wallet provider Blockchain. The funding, then the largest in the space, arguably set the stage for even bigger rounds at the top of 2015.

Liew has said of his firm's strategy:

"We believe that in the next few years the core opportunities in the bitcoin ecosystem will be driven by store-of-value and speculation use cases, and that only after these use cases support a much higher bitcoin market cap will the bitcoin 2.0, distributed ledger opportunities be ready to scale to realize their full opportunity."

Ribbit Capital
Yet another venture firm that has provided perhaps more thought leadership than investment to the technology's ecosystem is Ribbit Capital.

Launched in 2013, the VC firm was one of the first to take an interest in the space, with founder Micky Malka joining the Bitcoin Foundation, then the industry's leading trade group, as an industry board member.

Though enthusiastic, Ribbit has been equally patient backing some of the ecosystem's biggest funding rounds, including those from Blockstream, BTCJam, Coinbase, Ripple Labs and Xapo.

Still, according to Malka, there's value in adopting a long-term investment strategy with regards to the ecosystem. Following Coinbase's $75m Series C, he told CoinDesk:

"The good news for bitcoin is the long-term belief from established players that it is worth understanding what can happen in this ecosystem instead of simply believing it will never happen. It's obvious still early but Rome wasn't built in one year."

Union Square Ventures

Union Square Ventures
Union Square Ventures

Driven by outspoken partner Fred Wilson, Union Square Ventures (USV) has been among the most actively engaged in the public dialogue on the technology.

While liberal with its praise, however, USV has been conservative with its funds.

To date, USV has made investments in only three bitcoin and blockchain companies – bitcoin services firm Coinbase, decentralized commerce network OpenBazaar and open-source identity protocol OneName.

The investments, while seemingly disparate, however, suggest one of the more well-defined theses among major VC firms. USV believes in exploring whether the explosive growth enabled by the bitcoin protocol could be applied to verticals beyond finance rather than investments in bitcoin's supporting ecosystem.

As Wilson told CoinDesk in January:

”We’re not interested in investing in a company that’s the same as Coinbase. I think Coinbase has a big opportunity in front of itself and so we’re careful not to investment anywhere close to what they’re doing.”

RRE Ventures
RRE Ventures

Another firm not as public with its praise for the technology, RRE has more quietly added an impressive list of bitcoin companies to its portfolio.

Starting with bitcoin exchange itBit in 2013, RRE has since invested in bitcoin mining firm 21 Inc; merchant payment processor BitPay; API specialists Gem; hardware wallet provider Case; Mirror and Ripple Labs.

Perhaps its most noteworthy investment, however, is blockchain technology firm Chain, which is led by CEO and RRE partner Adam Ludwin.

RRE's investments are noteworthy given their variety, though most of these startups are focused on fundamental aspects of the bitcoin ecosystem, whether it be machine-to-machine payments or blockchain-based smart contracts.

However, these investments could come to form only a fraction of what's next for the firm, as it has raised $1.5bn over seven funds since its founding in 1994.

Digital Currency Group (formerly Bitcoin Opportunity Corp)

dcg,

BitFlyer, BitPay, BitPesa, BitGo, BitNet, BitPremier, BitX – these are just a handful of the bitcoin-focused startups boasting a 'bit' prefix and backed by Barry Silbert's Bitcoin Opportunity Corp.

Recently rebranded as Digital Currency Group (DCG), Silbert's fund has been one of the most active investors both personally and through DCG, with major names such as Coinbase, Circle and Ripple Labs rounding out its portfolio of 35 companies.

DCG has been bullish on bitcoin on all fronts, backing firms both in the US and internationally in Latin America, Mexico, Japan and South Korea, and supporting innovation in virtually all areas of the digital currency ecosystem.

Andreessen Horowitz

andreessen horowitz,
andreessen horowitz,

Perhaps inarguably the most high-profile firm involved in the bitcoin ecosystem has been Andreessen Horowitz, the private equity firm launched by Netscape founder Marc Andreessen and Netscape product manager Ben Horowitz.

Following its participation in Ripple Lab's April 2013 investment round, Andreessen Horowitz moved aggressively to help develop and cultivate the industry's two best-funded startups, Coinbase and 21 Inc, which account for $227m in total investment or more than $1 in $4 so far invested in the industry.

Andreessen Horowitz has also seen general partner Balaji Srinivasan take on an active role in the development of 21 when he assumed the company's CEO position in May.

Andreessen himself has further adopted the role of one of the technology's most high-profile defenders, routinely tweeting about developments that both directly and indirectly impact the space from his heavily followed @pmarca account.

The company has also participated in smaller investment rounds for TradeBlock and OpenBazaar, signaling that it remains interested in early bets on potentially disruptive ideas.

Venture capital image via Shutterstock


bitcoin, NYDFC
bitcoin, NYDFC

The full video of the 28th January New York bitcoin hearing can be viewed here. Stay tuned to CoinDesk for more updates on today's hearing, and be sure to follow us on Twitter for live tweets.

Fear, uncertainty and doubt (FUD) is a term often used in bitcoin circles to describe feelings about the prospect of regulation concerning virtual currencies, and there may be no better phrase to convey the mood at the start of the New York Department of Financial Services' (NYDFS) first day of public hearings on virtual currencies.

Following a prolonged and palpable excitement in the boardroom, an uneasy quiet took hold following the arrival of Cameron and Tyler Winklevoss, principals of Winklevoss Capital Management and major investors in BitInstant - the company whose CEO was arrested not 24 hours before for his association with Silk Road, the biggest online bazaar of illegal goods and services devised to date and a veritable worst nightmare for regulators.

But if fear and uncertainty were high at the onset on both sides of the aisle, what gave way after four hours of questions, answers and debates was a feeling that the immense energy and intellectual capital driving the space will persevere at the expense of virtual currency's more fringe ideological elements.

Mark T. Williams, a professor at Boston University School of Management and upcoming panel speaker, described the comments by Barry Silbert, founder and CEO of SecondMarket; Jeremy Liew, partner at Lightspeed Venture Partners; Fred Wilson, partner at Union Square Ventures; and the Winklevoss brothers as being undeniably pro-regulation.

"The vice chairman of the Bitcoin Foundation [Shrem] made them realize that they’ve lost leverage, and if they want to regain that, they better be more accommodative, instead of being more adversarial. Up until now, the strategy of bitcoiners has been anti-establishment, anti-regulation, but if they want to make Bitcoin payment system to be used globally, they will need to work with regulators”

Regulation in 2014

If the assembled investors were more willing to bring controls to the ecosystem, regulators also seemed to open up to the new financial technologies, as well as the possibility of a future of banking where the speed of money transfers no longer lags behind the speed of information.

Creator of Litecoin, Charlie Lee, indicated that he was excited at how both parties were able to find this common ground over the course of the day's panels:

"I feel they're coming in with a very open mind and they seem pretty receptive of our ideas, so I feel pretty positive about the outcome."

Of course, while regulators as well as industry investors seem united in this common goal of continuing bitcoin's great economic experiment, discussion later turned to the admittedly massive challenge of adapting 50 to 100 year-old statutes to the needs of entrepreneurs who need to compete in a fast-moving market.

However, the NYDFS seems optimistic events like this will lead toward finding a solution, and soon. Benjamin M. Lawsky, superintendent of financial services for the State of New York, said:

"Ultimately, it’s our expectation that the information we’ve gathered in this fact-finding effort will allow us to put forward, during the course of 2014, a proposed regulatory framework for virtual currency firms operating in New York."

A thawing of the ice

IMG_2614

While Lawsky began the conversation by noting that the event was "not a congressional hearing", an early drawing of the lines was evidenced by the hearing's first question, which directly addressed the "cloud hanging over the industry" following the arrest of BitInstant's Charlie Shrem. But Liew and the other witnesses moved quickly to distance themselves from Shrem and illustrate how the case could be seen positively.

"This speaks to the satisfactory nature of existing regulatory framework," Liew said.

Cameron Winklevoss went further, suggesting bitcoin investors would even be welcoming to clear regulation that could prevent similar setbacks to the community.

"The Wild West attracts cowboys. A sheriff would be good thing."

Models of regulation emerge

Regulators spent much of both discussions focusing on how the witnesses believed bitcoin could be best regulated. Wilson took the lead on this question, noting that New York should be cognizant of how its actions could stifle innovation and push young companies to distance themselves from making themselves known to regulators:

"Many of these new companies, are two, three, four-person companies. It will be very difficult for them to do what JP Morgan Chase does."

Wilson went on to suggest that New York implement a permissive environment that allows entrepreneurs to test their ideas before bearing the heavy cost of compliance. This "safe harbor" period would allow entrepreneurs time to move through the licensing processes, but without the fear they could be shut down.

However, Daniel Alter, Lawsky's General Counsel, expressed reservations about such a permissive climate, noting that when a service involves "sending money to terrorists," more serious considerations needed to be made. Lawsky said:

"If the choice is permit money laundering on one hand, but permit innovation on the other, we're always going to choose squelching the money laundering. It's not worth it to society to allow money laundering to exist to allow 1,000 flowers to bloom from innovation."

Speaking in the second panel on virtual currencies and regulation, Judie Rinearson, partner at Bryan Cave, suggested she too supported a safe harbor plan, drawing a comparison between bitcoin and the prepaid card industry, which in its early stages had issues limiting fraud. She added:

"I think that's a fabulous idea, that it's worth thinking about, as long as it's not owned by fraudsters."

Exchanges, wallets most likely targets

Panelists differed on where regulation should be enacted, but certain consensuses did emerge. For example, Lee and Rinearson both indicated that miners should not be constricted.

The best option available to regulators, the witnesses indicated, was to put a special emphasis on businesses that facilitated the transfer of virtual currency to fiat. Rinearson stated:

"I know that I mentioned that I kind of look at virtual, digital cryptocurrencies as something that are under the water. I don't see that as the regulated part. The risk comes when you're getting out of the water, then it's time. Because as soon as you can take these currencies and exchange them for a fiat currency, the risk changes considerably."

"Any regulation should help to secure cryptocurrencies and the wallets used to hold them." - Charles Lee at the New York bitcoin hearings

— CoinDesk (@coindesk) January 28, 2014

Investor protection was another big point of emphasis for regulators, who sought guidance on how to protect consumers from the risk of the notoriously volatile financial instruments, and whether insurance pools should be used to protect consumers from loss. Rinearson continued:

"There are other things that these exchanges need to be investing in, and setting up this insurance pool for consumers who are investing in a volatile product, I guess I don't see that as a use of this fund."

A united business front

Despite the bitcoin world's anti-centralization stance, what emerged at the hearing was a clear commonality in how bitcoin's primary investors are looking to move the technology forward, and indications are this will mean embracing regulation at the cost of the early ideology that propelled the market to where it is today. Liew said:

"The market of radical libertarians is not very big, the market for criminals is not very big."

Liew also talked about what he called "a change in character of the people being involved in bitcoin", noting that bitcoin is "moving in the direction of greater legitimacy" and today's bitcoin businesses, like the Bitcoin Foundation, are attracting very different types of users.

Perhaps most vocal was Wilson, who laid out his five stages of bitcoin adoption. The first phase being defined by an "open source, geek, nerdy, crypto-libertarian kind of thing"; second being the vice phase; and the third and current phase defined by price speculation.

The promise of bitcoin

The coming stages, of bitcoin mass adoption, were also given ample play, as the gathered investors attempted to get regulators to see the larger benefits that could come from a financial system built on top of bitcoin's infrastructure.

In comments, witnesses were keen to put the emphasis on the unknown advances that may be waiting around the corner, while stoking fears that too much action could inhibit job growth and push innovation overseas at a time when the US is still fighting high unemployment.

"We're trying to create a world where transactions can move globally for free. We need to put the compliance into the code." - @fredwilson

— CoinDesk (@coindesk) January 28, 2014

He also hinted at what the benefits of this change would bring to New York, saying that the next stock exchange and the next Ticketmaster will be built on top of bitcoin, and that a large bitcoin exchange could even find its home in New York given the right actions from regulators.

NYDFS hearing image by Pete Rizzo

Investments in the industry have already exceeded the cumulative total for 2014, with more than $380m pledged to startups in publicly announced funding rounds this year.

While an impressive figure on its own, what that number doesn’t successfully convey is how many seed to late-stage firms are making bets on the […]

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