What is venture capital and how does it work?
Humans have been looking for profit in every activity for a long time. In the world of trade and business, this human nature is more apparent. In every field that people are making money from, the footprint of investment and Thirst for profit It is seen in economic activities. The digital currency market is no exception to this, and investors and companies have a strong presence in this market. But despite the nascent nature of this market, large institutional investors enter this field less often and we can witness the presence of venture capital companies in this market. But what is this type of investment and what effect does it have on the digital currency market and businesses active in this field?
In this article, we introduce venture capital funds and the reason and impact of their presence in the cryptocurrency market.
What is venture capital?
Venture Capital is a type of private financing that investors to Newly launched companies which are thought to have high growth potential. VCs are generally funded by wealthy individuals, banks, and other financial institutions.
However, this action does not always have a financial aspect, but these companies may invest in startups from a managerial and technical point of view and help the growth of these start-up companies by providing advice.
Although investing in small businesses is risky, there is also the potential for extraordinary growth. Therefore, this type of activity is very attractive for venture capitalists. Despite financing and providing advice, VCs get a part of the shares or a share of the issued tokens by supporting the startups, so they can interfere in the management affairs of the startups.
Venture capital funds usually consist of a group of investors. The process is that the fund managers send a proposal to the suppliers, in which all the information of the target startup is included. In return, these people pay an amount as a contribution to the fund. In the next step, after collecting the capital, the start-up is financed.
The presence of VCs in the digital currency market
The digital currency market is growing rapidly, and this has drawn the attention of small and large investors to this market. Venture capital funds and other institutional investors are increasingly looking at blockchain businesses to see if there is value in financing them.
Non-Blockchain startups seek VC funding because they may not be able to raise initial capital. In the early days of the existence of the cryptocurrency market, because ICO and its various types were popular, blockchain startups did not seek to attract the attention of venture capitalists. But in the last few years, with the growth of the digital currency market, this type of view of businesses is changing, and we are seeing the activity of VCs more and more.
Currently, these companies are not only looking at the powerful projects of the market, but they have turned their attention to the lesser known projects of this market. In other words, these companies are more interested in businesses that focus on solving problems and providing efficient products.
Venture capital financing steps
Now that we are somewhat familiar with the concept of venture capital, it is better to focus on the steps of this process.
Funding by VC firms is usually divided into five stages. However, additional rounds may be added if funding goals are not met in previous rounds or if founders wish to seek additional funding.
Zero stage or Pre-seed
The pre-seed stage is the ideation stage and is usually not considered a formal stage, because in this stage the team members are researching whether the founder’s idea can be turned into a product or not.
If the founder of the circle has good and wide connections, he may be able to communicate with several angel investors. Compared to VC funds, angel investors are very wealthy individuals who tend to operate individually, and unlike VCs, these investors can ignore the validity of a project if they have full confidence in a founder’s ability.
Stage one or seed capital
This phase of the initial financing round is short. This stage includes testing the durability of the product in the market. The startup determines the viability of the product using a tool such as market potential analysis. As the name suggests, the market potential analysis tool helps provide a framework for conducting market research and determining whether a product is worth bringing to market.
The startup may also have to convince the venture capital fund that their product is worth backing. The project founder tries to convince VC experts with tools like profit and loss statements, cash flow forecasts, project roadmaps and even white papers. It is worth noting that angel investors may still participate in this stage.
Series A or Startup capital
Series A starts when the startup has introduced its product to the market, and in other words, our cryptocurrency project has started to operate. There is no need to apply for a startup in this round, because at this stage the business has a strong community and steady cash flow. Therefore, investment companies offer their proposals on a voluntary basis.
What the founders want at this stage is capital, so that they can expand their business and follow the project roadmap. Investment at this stage is less risky, because the product or service of the project has already been released.
Series B or early stage
The Series B investment round is dedicated to sales and marketing growth. Businesses that have reached this stage are in the development stage. They are looking for opportunities to expand their activities and improve market access. Such projects have many active users.
To accelerate the growth of the business, the founders plan to use the funds to build a strong team and strengthen their product. At this stage, the start-up is usually looking for marketing and sales, human resources, business development and improving the provision of services to users.
Series C or Expansion stage
The last formal round of VC funding is the expansion stage. At this stage, a business plans to reach out to other markets. Companies that reach the Series C investment round have a colorful presence in the market and their product has many users. Funding helps them introduce new products or services and introduce their activities to other markets.
At this stage, the risk is less, but the return is also low. A startup at this level should generate enough revenue with a commercially available product. Many of the capital recipients at this stage, two to three years have passed since the establishment of their business.
At this stage, in addition to VCs, managers of hedge funds, private equity firms and investment banks also enter the field.
Advantages and disadvantages of venture capital investment in the cryptocurrency market
The performance of venture capital companies in the digital currency market is the same as in traditional markets. VC firms are looking for high returns, which means taking a portion of the equity in the business. In addition, it is possible that these companies withdraw from their investment in startups in sensitive and risky times. Besides this, such funds take over a part of the management power of the business owners and interfere in the sensitive decisions of the start-up.
On the other hand, despite these negative points, the presence of VC companies in the project gives legitimacy to the crypto start-up, which also attracts more capital from retail investors. This is because existence ICO And other methods of attracting capital of digital currencies create much less barriers to enter the market. In many cases, a website and a White paper It’s everything crypto companies need to launch an ICO.
These companies will take the necessary steps for financing, such as checking the strength of the project and the team’s ability to deliver on promises, as well as researching the cryptocurrency market and community to predict profitability. In addition, VC funds include expert managers who specialize in evaluating companies.
In addition, venture capital funds have long accepted the risks of this process, so they know how to get funding and make a profit. The experience they share may be valuable consulting for many crypto projects.
Credible VC companies in the digital currency market
Knowing that the presence of venture capitalists in the cryptocurrency market can lend credibility to blockchain projects, we introduce the top venture capital companies in this field.
Coinbase Ventures Coinbase Ventures
Coinbase Ventures was founded in 2018 and is based in San Francisco. The company is the venture capital arm of Coinbase.Inc. This company is looking to invest in early-stage startups that operate in the field of digital currencies and blockchain.
Andreessen Horowitz, known as a16z, is a Silicon Valley venture capital firm that specializes in financing technology companies. The active arm of this company in the crypto market is called a16z crypto, which has had successful activities in blockchain projects to date. Founded in 2009 by Marc Anderson and Ben Horowitz, the firm has raised $7.1 billion to date across seven funds.
Pentra Capital is one of the famous VCs in the field of cryptocurrencies, which mostly enters projects in the early stages and uses experienced consultants and experts. This company manages a capital amounting to 700 million dollars.
Animoca Brands Animoca Brands
Animoka Brands is one of the active companies in the field of bold investment, which mainly operates in the field of blockchain and metaverse games. This company has made more than 250 investments in the field of cryptocurrencies, according to the managers of Animoka, the purpose of these partnerships is the growth of Metaverse and the blockchain game industry.
Paradigm is a San Francisco-based investment firm focused on cryptocurrencies and blockchain-related technologies worldwide. Paradigm was founded in 2018 by Matt Huang (former partner of Sequoia Capital) and Fred Ehrsam (co-founder of Coinbase). Paradigm is an investment firm that backs major blockchain companies and protocols.
Binance Labs Binance Labs
Binance Labs is known as the bold investment arm and accelerator of Binance. Since 2018, this company has invested in more than 200 projects from 25 countries. It has also led to the launch and growth of more than 50 native Web3 projects, including Polygon, Perpetual Protocol and Dune Analytics. As of August 2022, Binance Labs is the largest VC in the field of digital currency with assets under management worth $7.5 billion.
The impact of risky investment on the market
The presence of venture capital companies in the crypto market has accelerated the growth of this market. The injection of capital and the provision of management solutions and marketing strategies by VCs will pave the way for the growth and development of crypto businesses.
Therefore, the presence of these companies can be taken as a good omen, because it will eventually lead to the development of this market and blockchain technologies.
What is venture capital writing and how does it work? The first time in the blog Valx. appeared.