2019 Review: Thoughts on the Token Sale Market and Industry Fundraising Data
Smith + Crown has long maintained one of the industry’s most comprehensive databases of industry financings, including the amounts and various forms they have taken over the preceding years. As in previous years, the end of 2019 serves as a useful occasion to consider the year’s fundraising events and to reflect upon the observations that emerge.
- Total industry fundraising fell in 2019, both in relation to 2018 and throughout the year itself, across all funding instruments. Token-based fundraising was dominated by Initial Exchange Offerings (IEOs) that gathered momentum in early 2019 but fizzled out as the year closed.
- Equity-based fundraising fell too but not as drastically as token-based activity and has emerged as the predominant fundraising vehicle in the industry–a role it has played historically.
- Despite the decrease in fundraising, corporate and public sector interest in developing blockchain technology continues to be an important focus of activity.
As most will be aware, by nearly all prominent metrics the year’s fundraising activity declined considerably from the levels of preceding years. Given this reduced activity, it is unsurprising that there is perhaps a somewhat smaller set of meaningful observations that emerge from an examination of the data. Nevertheless, as in prior years a careful consideration of the data can still yield important, and often easily overlooked, insights into different trends within the industry.
Total Industry Funding Falls
Several factors combined to influence the lackluster direction of industry fundraising throughout 2019. One was likely the result of the enthusiasm-sapping impact of Bitcoin’s wavering price action throughout 2019–a somewhat ironic impact given that BTC more than doubled over the year and was amongst 2019’s best performing assets across all markets. Another headwind emerged via the impact of various elements of regulatory risk and uncertainty surrounding the blockchain space that marked the year, a climate of legal uncertainty that deterred both fundraising efforts and potential investors. Finally, the strong, broad-based positive returns seen in many of the world’s mainstream investment classes can equally be seen as a deterrent to more substantial fundraising activity in the blockchain industry.
The below graph of fundraising events illustrates how the decline that began in 2018 continued into 2019.
Total funding levels have fallen significantly during the ‘Crypto Winter,’ driven by a variety of developments.
Initial Exchange Offerings (IEOs), the first of which was held on Binance in late 2017 when Gifto raised $30 million, rose to prominence in early 2019. Ultimately, 108 IEOs would raise more than $1.67 billion in 2019. IEOs closely resemble their differently named predecessors, ICOs, with several minor differences.
In 2019, IEOs grew in popularity, with more than 34 completed in April alone, and leading to Bitfinex’s ICO-like billion dollar raise in May. But as the year progressed, many IEO-issued tokens were trading below their issuance price, and by year end IEOs appear to have rather decisively fallen out of favor, with only four IEOs completed after August. Whether they return, as IEOs (or IGOs, if the naming convention follows a linear pattern) return remains to be seen, but given the seeming failure of IEOs to address the underlying weaknesses of ICOs, from questions of compliance to investment fundamentals, it could be perhaps considered unlikely, short of significant efforts to address these lingering issues and to develop new structures for token sales.
Though funding levels across all instruments fell, the drop in equity-based funding was considerably less severe than for other fundraising mechanisms. While token-based funding in 2019 was only 8% of 2018 levels, equity fell only 43% relative to 2018 levels, resulting in the majority of funds raised for blockchain going to equity-based project stakes, the condition that prevailed in the industry’s earlier years of 2014, 2015, and 2016.
Regulatory developments gave some mixed signals. In the United States, the Securities and Exchange Commission (SEC) continued to periodically issue injunctions against token-based fundraising, and the ongoing Kik-SEC dispute might emerge as the most high-profile fight over the legitimacy of the ICO-style fundraising. In addition, most token-based fundraising occurred through IEOs, all of which are barred to US persons, suggesting high degrees of caution in the face of SEC scrutiny. For instance, Blockstack employed the Reg A+ exemptions from the Securities Act to conduct the first compliant ‘utility token’ sale, raising $23 million in September from a wide variety of investors and illustrating one manner of how compliant utility-token issuances can be conducted.
Another fundraising trend that appeared poised to impact the industry in 2019 was the rise of companies in the sector completing traditional IPOs as both fundraising mechanisms and means to acquire public listings. Unfortunately the impact of IPOs, at least through year end, was ultimately to be underwhelming, much as with IEOs. For instance, Bitmain, manufacturer of widely used Bitcoin mining machines, originally announced plans for a 2018 IPO in Hong Kong, but ultimately had to pull the offer. In 2019 Bitmain undertook to complete an IPO in the United States, before internal issues at the company led to the proposal again being pulled. Amongst companies that did complete IPOs, Canaan Creative, another maker of mining hardware, raised $90 million in late 2019, but this was considerably below the $400 million the company had originally sought. Equally troublesome was that following the listing the Canaan’s shares traded down to as little as 50% of the original listing price, before rebounding modestly towards year end. The other significant IPO in the sector, crypto-focused Silvergate Bank, sold 3.3 million shares at $12 during its November offering. Silvergate stock has since traded up around 25% through the end of the year. While not conclusive, Silvergate’s limited success may serve to attract wider interest from more traditionally-focused investors.
Finally, it is worth noting that corporate activity in blockchain increasingly represents a real deployment of capital that is not captured in the above numbers. Afterits widely-noted presentation, LIBRA has lumbered along and emerged as the somewhat problematic face of corporate adoption of blockchain technology. Other activities included a wide variety of announcements related to logistics, supply chain, and trade finance initiatives, but despite the apparent growth of such efforts, these are arguably unlikely to be the catalysts for wide public interest in blockchain technology. Likewise, the Synaptic Health Alliance represents a consortium of healthcare companies, including insurers, working to bring blockchain technology to some challenging data collection, validation, and reconciliation tasks. While the real and meaningful impacts of such an initiative between erstwhile competitors might not have broad public visibility, the industry was teased by Nike’s initial trademark and then patenting of a ‘Cryptokicks’ system for blockchain-secured digital shoes. As a well-known, global consumer brand, Nike could be a major driver of increased public interest in the sector, but until more details about the project become public it is difficult to speculate what the project will ultimately resemble and what the impact may be.
Finance and Information Industries Drove Activity
Another useful metric in terms of thinking about fundraising activity in 2019 concerns the distribution of funds raised by industry. As the below bars illustrate, the composition of fundraisings during 2019 largely mirrored distributions seen in preceding years. The exception, however, can be seen in the cases of the “Information” and “Finance” sectors. Note that, according to Smith + Crown’s industry classification system, the “Information” industry includes blockchain projects themselves, and this group has historically represented the largest portion of this classification, even as this industry itself represented the largest fundraising component of the broader blockchain space. In 2019, however, the “Finance” industry, which has traditionally been the second largest element of the industry in terms of funds raised, received the largest amount of funds.
A number of potential explanations may account for this. One may be a certain maturation of the industry, where fewer large fundraisings are associated with new blockchains, and instead funds are focused more on particular applications within the space. A second potential explanation may simply lie in the relatively small amount raised in 2019, $5.6 billion dollars versus $21.8 billion in 2018 and $9.8 billion in 2017, which represents a considerably smaller sample set. Within this smaller set, that the largest single fundraising event of the year, Bitfinex’s $1 billion raised for its LEO token in May of 2019, represents nearly 20% of the year’s total fundraisings suggests how this can easily represent a bit of a distortion in the overall sample set.
Whether the larger role played by finance in industry financings in 2019 represents a lasting shift or merely an aberration will become clear over time. Given the relatively widespread discussions of and enthusiasm for ‘DeFi’ that were seen throughout 2019, some of which appeared genuinely warranted given some of the meaningful growth seen in the space, there may be reason to suspect this shift could prove to be a lasting one. But regardless of how that will unfold, another trend can be clearly identified as remaining consistent with prior years, and this would appear to bode well for the industry’s future. This trend is the role of equity-based venture capital investing as representing a major portion of the industry’s fundraising. That this activity on the part of professional investors continues to represent a meaningful portion of funds coming into the space is encouraging, for venture investing has long been a large percentage of the industry’s fundraisings. While this was overshadowed by the enthusiastic participation of a largely retail audience during the Token Sale/ICO boom of 2017 and 2018, the pace and size of venture investing continues to be substantial, and arguably represent a more stable and sustainable foundation for the industry’s future. Further, these trends have an intersection: two of the most notable DeFi projects of the year, Compound and Uniswap, raised funds through VC equity financing and have not issued a token.
The above graph captures the state of equity-based investing (the vast majority of which was driven by venture capital) in the blockchain space since 2011. While the levels have declined over the prior 18 months, they remain above levels seen into 2017, suggesting that professional investors continue to see meaningful opportunities in the space. While the modest uptick in average financing size is perhaps not significant enough to identify as a substantial trend change, this ongoing role for venture investing is likely to be seen in retrospect as crucial funding allowing the incubation and early growth of projects likely to emerge as both foundational and significant in the years ahead.
Conclusion: Sources of Momentum
Exactly what logics underpin this sustained interest in early-stage financing opportunities in the space even in the face of 2018’s steady price declines of virtually all cryptoassets and 2019’s mixed, directionless markets represents a critical question in understanding likely evolutions of the sector. One explanation for continued interest in early-stage equity investments may simply be an assessment of the favorable risk/return profiles of those projects on an individual basis. Realistically, however, given the lack of real returns (IPOs or other exits) in the space to date this may be a questionable assertion.
Another, perhaps more likely reason may be a sense that the sustained corporate interest in blockchain-related projects that marked 2019– one might cite Facebook’s Libra project, IBM’s wide range of projects, the variety of supply chain and logistics projects that enrolled a wide range of recognizable corporate names–the trend itself seems clear. This may be creating a sentiment that the broader blockchain space is set to expand considerably and that exposure to early-stage projects is a good way to gain exposure to the sector in the event that does unfold. An additional macro impetus behind these sustained early-stage investments in the space may be continued public-sector interest in cryptocurrencies, particularly central bank digital currencies. While Facebook’s Libra project has generated considerable criticism and doubts from public officials, official considerations of how central banks may deploy the technology continues to be discussed, most notably in regard to China. This too may be encouraging a view that the sector is poised to expand considerably.
A third alternative, one that lies between the public sector and corporate interest, has been the expansion of DeFi projects and the general growth of the DeFi ecosystem that marked 2019. This growth has created a view in certain quarters that the blockchain and crypto space is likely to continue to expand from the ground up, arguably even in opposition to or without regard for corporate or public sector interest. While this view is perhaps debatable, it is also arguably the easiest to link with continued venture-stage investment in the sector. While predictions for the year ahead are always fraught, one suspects that a core narrative of 2020 will be the interaction of these three trends, and that the nature of the interaction may well have an outsized influence on how the sector evolves throughout the year.