Venture capital investment in blockchain technology (token vs. equity)

Transcript

a lot one second um let me just switch yeah i think up that should be better okay cool um so hi everybody uh renee here um from germany yeah unfortunately i cannot be with you physically due to some travel restrictions that you might have seen some some floodings which are not too far away from the area where i live but well good on on my side um so i will i will talk in the next 20 minutes uh and at the end save a bit of time to some questions that you might have

on venture investments in blockchain technology i hope to give some flavor to investors mainly venture capital investors who invest in in different types of blockchain projects but also give entrepreneurs some ideas of i would say two roots blockchain project typically explore when they want to raise capital being at the classical equity route or uh or a kind of crypto token or governance token route so just before we kick in on the interesting stuff just in a nutshell who do i represent um so i work for you the european investment funds public body um and that institution is investing yeah over the past 25 years and in different venture capital strategies

um and it's likely data always is a bit tricky to get but it's likely the biggest um institutional investor in venture capital in europe so the mission is pretty much to support all sorts of small companies and innovation but we do that indirectly we don't directly invest in these projects and companies we do that indirectly mostly within my team in venture capital funds we invest roughly 1.5 billion per annum we are roughly a bit over 30 people and yeah we do i would say roughly um yeah we have a portfolio of a bit over 500 venture capital funds um and we see i would say quite a lot of stuff in in europe um so as i said we we invest in venture capital what does

that mean again we do that indirectly by our venture capital funds we also do that with business angel and sometimes co-investments but that's specific 98 of the activities and in primary vc funds and we back pretty much everything from extremely early stage strategies to what some people would call late stage vc across what you see here five main themes you could say or areas so everything that has to do with blockchain technology is aggregated on our side on something which we call disruptive technology um and has particular fund of funds that tries to support different blockchain strategies and i'm

pretty much working uh within there just to give you a bit of of background and then after that slide here we go a bit into the blockchain specifics blockchain falls a bit on the what we call a deep tech or disruptive tech angle in the blockchain space um it's mostly around the right hand side of the funds so there are some we call specialized vertical funds in the blockchain space in europe um that are exclusively actually investing in the space uh where we have some particular funding for uh there is not that much activity in the tt side a bit here and there and there are some generalist deep tech

funds we also support but i think the most interesting stuff is on the on the right hand side both for for vc funds but also for entrepreneurs in the space to to hear a bit so that's just as a light background so what's what what is our background in that space i would say there are two and that will be i guess the main part of that talk now to two angles to how blockchain companies are financed in europe uh where you get financing and what vcs and entrepreneurs might consider if they want to raise capital in the space one is a classical vc equity model where you know through several funding rounds typically you invest in a company typically these companies i would say utilizing

blockchain technology as part of their operations maybe not their core activity or a lot of the blockchain infrastructure companies are kind of equity transactions um so here are some examples a lot of them you might know from you know wallet providers to custodial solutions to people like explorer who might only um let's say use blockchain technology for their for their businesses for surya and these are just examples there are plenty more and that has historically been i would say the predominant focus of a lot of the vc funds uh because that's what is known uh i would say and uh some of the business model their value accrual works in a classical equity sense

so um there we already have quite a few i would say exposure already it's increasing um and on the protocol network model um that's still relatively young developed mostly with the last would say two to three years um so here i would say this is when you want to go the route of actually raising um capital via a let's say a crypto token route uh where you think that's the best maybe for your business model um there i would say we have become more open uh gradually with particular funder funds we are we are allowing managers to do so it's still a very early stage field i must

say um but there's a lot of interesting stuff happening but there's also exposure to that mostly currently i would say in the d5 space but there's other stuff also coming elsewhere in the crypto ecosystem but these are typically the two routes companies explore uh when they seek financing for their project being at an equity model or a protocol model you could say and now coming a bit into sharing a bit some insights on the market uh and probably what on the one hand side vcs uh would want to consider uh and as well as entrepreneurs in the space i'd say generally no surprise on the left-hand side skype probably used to you there is an influx of capital

in that market for all sorts of early stage um projects in europe um the numbers here you see is only european uh companies um there is a few outliers here and there in 2021 already with probably sorry you've recently seen um but generally there's an uptick scene after you would say ico type of activity slowing down in 17 and 18. due to regulatory yeah the regulator stepping in at the end of the day um and that's mostly equity still um type of models when we when you remember the chart before um but there are some interesting i would say european protocols when it comes to protocol investments or crypto talk investments is difficult to

say this is a european or french or german or italian company because essentially is a decentralized group of people doing something at the end of the day but i think some of these names and logos i just picked a few that that i know um that are probably known to you um that have some strong european roots um so we definitely see that um also growing um still overall in terms of i would say activity there is a bit more in the u.s and in asia on the one-hand side driven by some of the investor appetite being a bit more activity there or state intervention if you want on the chinese side sometimes

there that that is higher than what you probably see in the european um vc ecosystem but i'm confident that we are very confident bullish on that entire ecosystem uh not only if i distinguish it between equity and crypto protocol investments but generally the developer activity the community that's being built the first interesting uh and i would say more more protocols and companies that getting significant traction in the space and that move away from i would say the initial infrastructure built around wallets custody solutions um exchanges to yeah probably end user applications at the end of the day hopefully

so so we are very very uh bullish on that technology and ecosystem the question is maybe for you for uh for the one time entrepreneurs as well as maybe gps and vcs who are investing in the space who is kind of investing in blockchain products in europe you probably see two type of um intermediaries or investors typically on the one hand side it's kind of we call them generalists not students shouldn't see in from a negative angle typically these are funds who cover a lot of software topics within their investment strategy and they typically invest opportunistically in the space they typically have some actually more junior people who have an affinity to blockchain

and it's typically an entry door a bit in that and that we see here and there a bit however these generalists typically do equity deals um in in the space because crypto token investments are still new for them um and uh it's not that easy to sign to find sometimes people with with a lot of expertise and ties to the to ecosystem and things you need in that space and often they co-invest with with kind of vertically focused blockchain funds and the right-hand side you see an extract of some of these people some we are invested in as eif however here i think what's interesting is in europe you probably can get in touch with roughly 40 teams

a lot of them are very very small in terms of um the capacity to invest as you see on the right bottom side some of the labels here are a bit different or outliers to that but the majority of funds are below way below the 50 million euro fund size so they can write very very early small checks um either on the equity side which they also do but also in crypto protocols they invest in but is still relatively relatively small globally still all these specialized crypto funds also in europe in terms of the capacity to invest are relatively small compared to what anderson horowitz pantera pulley chain and others in the u.s

and sometimes in asia can can provide so it's not at that level if it needs to be at that level or a differently organized debate someone can have uh particular at the protocol level um i think yeah you only get a certain exposure to the network and not above that so more capital doesn't necessarily help but of course you could finance more companies but still europe is still at uh i would say a bit behind there compared to the funding availability probably in the us and europe and we are also trying to make a change there um maybe for some of you who are maybe vcs or gps where do you get funding for your ideas as a venture capitalist and then we come next kind of slides to

the company level again mostly you will need to look into specialized crypto funder funds uh or investors who specialize in the field who are pretty different to what you see in regular venture capital funds um i put some examples here there are others um probably these are kind of well known to a few people um and on the other side you have a lot of crypto native people that are also keen to support venture funds in the space either from a community perspective so uh layer one protocols who have a bit of money uh and they wanna fuel the community indirectly via that route sometimes explore that that way or you have yeah native crypto native individuals who have made money in this space and want to invest

also in funds in that in that space but it's very different to regular venture activity you won't find pension funds and insurance companies and very very early corporates actually investing in the venture side of of cryptographic technology or blockchain technology here but that's mainly for the for the vcs yeah uh maybe because a lot of you i guess uh or some of you of course are interesting to understand uh or want to raise capital um and do that in the form of of crypto token or governance token to to to incentivize people in the protocol um that you're going to build um for

starting a bit for the vcs or investors in the room um i think uh in europe at least there are particular considerations you might want to take when you want to invest actually in crypto token projects uh versus the classical equity route the classical reaction rook is not too complicated i would say it has some things you need to think about on the underlying company level in the project level um when it comes to regulatory elements but if you actually invest in crypto tokens it becomes a bit of a different animal in europe unfortunately there's no i would say there's a big uncertainty around how crypto assets are treated on the european level each of the jurisdictions does it a bit

differently that's why if you are vc investing in the space you need to get a bit acquainted that a lot of these deals will actually happen from a structured perspective outside of europe currently mainly in the british virgin islands in switzerland and cayman islands taxation suddenly has a different twist to it if you invest in crypto tokens from a fund perspective it might trigger um different text treatments for you and for your investors uh when it comes to simple things or simple things when it comes to your participation form of staking of the initial investments you might have done in a protocol it can trigger also tax implications for you as an investor in these these companies um that are not that easy to deal with

um and you need to think about different things than compared to a classical generalist maybe because suddenly you have a digital asset that somebody holds you hold the company holds for you that can be you want if you want stolen hacked um so there are things to consider then um the classically i would say notary a paper-based model where well your shares are held at the notary on a piece of paper uh that can hardly be stolen or getting away from you here it's a bit different so there are things you need to consider and also when it comes to uh yeah evaluation of these assets um it's a bit of a a tricky thing i would say

um adding up um some some items i think you need to get used if you invest in crypto tokens that um your prior probably different type of value add to these protocols it's mainly about community building and protocol development uh versus maybe on the equity world you have some other focus the deals are different than inequity that we love syndicates sometimes there's actually one single token deal you can do and you only have a smaller proportion of the network typically done by theft so equity um your different community dynamics i mean in a regular equity deal you have shareholders of your company you deal with yes you take care about why you are concerned about the stakeholders but here actually the stakeholders are also

shareholders and you deal with a vast majority of people often you have an open source code and you need to have a good understanding of the technical assessment of that code it's a bit different to what you sometimes have on the regular equity side and yeah even though some investors sell that investing in tokens provide early liquidity particularly in the venture case we know when investors know is not necessarily the case either due to lockups or it's just a venture it still takes time until companies are i would say developing and it's not done within a fraction of a second it just takes time until these projects are built um but that these are quite i would say

the different animal aspects you want to consider as a venture capital investor in that space um and yeah i would only recommend to seek advice from people who are active in the space uh to not harm yourself too much and also the companies who you work with it's one route you can go there are also other opportunities on the equity side still that that people can can look at maybe for entrepreneurs in the room um i think if you talk to investors vcs typically who want to find such interesting of course risky projects a lot of people also come in directly to me or vcs of course and approach kind of the question you know how should i find this should i create a token or or

or go the equity route um a lot of people of you might probably have a sense that this might not be the first questions you need to ask yourself is typically just around the yeah the type of problem you want to solve and how you want to operate the company and then maybe a protocol token model might make sense in other cases the value accrual might be best captured with the classical equity investment versus creating a token uh and for you if you're an entrepreneur in the space i think even though it's a bit of a hassle and maybe not the nicest topic but seek legal structure advice for that a lot of the companies in europe need to structure their

if you want to go to crypto token model fundraising route you need to structure yourself outside of europe typically because of uncertainty reasons and risk there and you need to speak to experienced people there to not fall into a trap i think the most of the thing is community building and showing to your investors and to the people you work with how you're going to build actually that network of a protocol from node operators to users at the end of the day and also even though crypto tokens can be a nice route to explore um it also has a certain risk to it so what kind of your pivot options if the token model doesn't really work um and the actual token design you have chosen you cannot really get out and you

kind of your assets are locked and the liquidity is locked there how can you get out of that to to pivot there are certain things you can discuss with investors as well who are open to that um but yeah that's just a light overview of the vc ecosystem so in a nutshell i guess we are very bullish we see a lot of stuff a few specialists relatively small if you want to get exposed to crypto tokens in europe i would say um start talking to people or get advice um both on the vc side as well on the company side because not as trivial as it sounds and with regulations like mika coming up um there might be clarity but there also might be pushbacks to what you're currently doing so that for me just just an overview so

um thanks your marriage for for your attention happy to take any questions sure yes i can hear you yeah probably well there there are some

uh and it's a bit complicated there are some national probably um it depends on i would say where where the activity of the company is based or the the actual if you want hold of the participants of that tao are situated because there are i would say national um guidance been given the germans for example have recently published a relatively lengthy implications of from mining to taos to staking to all sorts of activities you might want to do how that is going to be i would say text so there's no general answer i can give you here probably you need to look into your national um kind of um tax case

law if you want or or current guidance being given and that's moving targets so unfortunately i cannot give you a very detailed answer on that front but there will be like you will see with um with mika and other regulations popping in that there is uh a very serious treatment of that coming probably up just an example for staking in germany if you stake a single token uh there is a grace period being started from the get-go of 10 years under which you will be obliged to pay taxes versus before it being at one year that help that can have quite a impact depending on how you how you hold these tokens or how they're

being taxed pleasure good too you