As Bitcoin prices slump, venture capital turns its focus to blockchain technology

According to CoinDesk, venture capitalists are increasingly interested in blockchain, the underlying technology of Bitcoin.

Some of the ecosystem’s most active investors told CoinDesk they are now working more closely with banks and are focusing their investments on projects that use the bitcoin blockchain or alternative distributed ledger technologies, such as payment rails or distributed databases.

Bart Stephens, managing partner of Blockchain Capital (formerly Crypto Currency Partners), said the industry has gradually realized the importance of blockchain.

Stephens told CoinDesk:

“There’s a recognition that blockchain is an incredible technology layer that has applications beyond that, and you’re seeing it expand beyond financial services to how it’s used for identity management, smart contracts, international trade.”

Eden Shochat, a partner at Aleph Venture Capital, whose portfolio companies include blockchain technology company Colu, said the company would be more interested in distributed ledger applications.

Marc van der Chijs of Trans-Pacific Capital (CPC) was more direct, saying:

“We expect more blockchain startups, rather than pure bitcoin payment companies like wallets and exchanges.”

Van der Chijs suggested that Transpacific Capital is looking at international remittance applications and distributed database applications. However, not all investors agree.

For example, Lightspeed Venture Partners partner Jeremy Liew told CoinDesk he believes that store of value remains the most interesting application in the short term.

Wall Street's interest

Elsewhere, Stephens interviewed major banks about their interest in blockchain technology, with the report stating that he has heard from board members of around 15 major banks.

“Two years ago, banks were looking at Bitcoin and were scared by the concept. They thought it was dangerous and were afraid to do business with Bitcoin,” he said. “Fast forward a few years and we see banks paying more and more attention to blockchain.”

Stephens said he has spent a lot of time introducing Blockchain Capital’s portfolio companies to mainstream banks. Currently, Blockchain Capital has invested in 37 companies in the industry, with the main ones being Blockstream, Chain, Circle and Xapo. He continued:

“Banks also have blockchain projects and they say ‘we need to learn more about blockchain technology’ and we provide a matchmaking service.”

Given the recent interest of mainstream banks in Bitcoin and blockchain technology, many investors believe that financial institutions will soon begin acquiring companies within the Bitcoin and blockchain industry.

“I think banks are unable to innovate, and once they realise this, they will start acquiring bitcoin and blockchain startups,” van der Chijs said, adding that some banks will buy intellectual property, while others will buy experienced teams.

“This will be the first wave of exits for bitcoin (companies),” he believes, though he also notes that this is unlikely to happen within the next four to five years.

Shochat disagrees, arguing that banks can use their existing knowledge to help startups solve their value chain problems.

Liew, an investor in Blockchain, BTCC (Bitcoin China) and Ripple Labs, is less concerned about the role played by banks, believing that these groups are unlikely to replace the role of venture capital in the ecosystem.

Investment Amount

Although venture capital investment in the bitcoin and blockchain industry declined in the third quarter of 2015, most investors said this did not mean that venture capital's interest in the industry had weakened.

For example, Shochat said Aleph typically invests in only 3% of the companies it sees in various industries, and is currently actively looking for Bitcoin startups. Van der Chijs echoed this sentiment, noting that CPC’s focus has shifted from early-stage companies to growth companies, and now the firm is focusing on later-stage investments.

Most of the respondents said they did not believe the industry was facing a significant tightening of venture funding, despite the lack of major Series B and C rounds, which Stephens attributed to the venture capital industry as a whole.

“Typically, you see a lot of seed-stage companies, but once you get past seed, it’s challenging to get to Series A and B,” Stephens said. “Bitcoin is kind of out of favor. The price of Bitcoin has dropped 65%-75% in the last 15-16 months.”

Stephens said he believes savvy investors will continue to measure factors in the ecosystem, such as wallet growth and GitHub engagement.

“VCs in general are very focused on the price of Bitcoin,” Liew echoed. “The Bitcoin price issue has caused investors’ interest to decline.”

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