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The Bigger Blockchain Space: Venture Capital Flows Not to Bitcoin Startups Alone

Reading Time: 4 minutes by on April 5, 2016 Business, Commentary, Finance, News

Bitcoin startups appear to be making way for a new class of innovators vying for investment capital. While venture capital firms are still excited about the blockchain, they are also increasingly interested in Ethereum as more and more developers are attempting to transform the internet with a decentralized network of uncensored applications and web platforms.

Early angel investors and venture capital firms that began with a passion and determination to assist Bitcoin startups in reaching mainstream adoption have pivoted their focus, to varying degrees, from Bitcoin to alternative blockchain networks, such as Ethereum and to alternate digital currencies. Most notably, Boost VC, a startup accelerator which had promised to fund 100 Bitcoin startups by 2017, announced in February that the firm will also start investing in products and applications built using Ethereum.

Boost VC co-founder Brayton Williams explained that one major factor — “actually the LARGEST deciding factor” — which has convinced venture capital firms and accelerators to look into Ethereum is the extent to which existing Bitcoin and blockchain startups are beginning to use the Ethereum network themselves to deploy decentralized applications.

Besides its technical strengths, Ethereum’s strong leadership and direction has also been one of its man draws.

As Anthony Di Iorio of Decentral has said, “Bitcoin’s problem right now is that it can’t come to consensus because there’s no leader; it was made not to have any leader. With Vitalik [Buterin], Ethereum has a structure; people rally behind him. There is guidance.”

“I believe the Ethereum team and contributors will continue to work together and deliver results, allowing Ethereum to thrive as a platform to allow others to build meaningful companies,” said Williams.

The Impact of the Banking and Financial Sectors

Because of the banking and financial institutions’ growing interest in blockchain technology, more blockchain and Bitcoin startups are altering their previous business models to optimize traditional banking and financial systems.

Recently, the world’s largest banks including Wells Fargo and JP Morgan have joined the R3 consortium to develop a permissioned or a centralized blockchain network that can be shared among banks and financial establishments. The collaborative project, based on the Ethereum blockchain, involves Chain and Eris Industries, two examples of blockchain startups that focus on serving financial institutions and banks rather than everyday consumers and the general population.

Over the past few months, venture capital firms, multinational corporations such as Microsoft and the world’s leading financial institutions and establishments have begun to support these companies that work with the world’s largest financial establishments or that have the potential to change the existing financial infrastructure.

In one of the most significant recent developments, ConsenSys announced at that it has collaborated with Microsoft to integrate the Ethereum code base, Solidity, into Visual Studio as a Decentralized Application project type so millions of developers can easily write blockchain applications.

Statistically, it is fairly evident that the venture capital investment trend has changed significantly since the emergence of Ethereum and other blockchain networks. According to the data provided by CB Insights and the Economist, blockchain and Ethereum-based startups have raised three times more investment from venture capital firms than Bitcoin-based startups did, as of the first quarter of 2016.

Ryan X. Charles, renowned blockchain engineer and the founder of DATT, states that the number of startups pivoting towards Ethereum will grow larger in the short term.

“Ethereum, at a protocol level, is arguably more advanced than bitcoin,” he said in a blog post. “Since it is Turing-complete, it has solved [1] the limitation of the scripting language built into bitcoin.”

Furthermore, Charles stated that newly emerging startups and exchanges are either implementing both Ethereum and Bitcoin, or terminating Bitcoin operations completely and switching to the Ethereum network.

“Roughly speaking, Bitcoin companies have three options: 1) Increase technical complexity of their platform by adding Ethereum support to their Bitcoin support; 2) Drop their assets in the Bitcoin space but keep complexity limited by switching from Bitcoin to Ethereum; 3) Solve the hard problems in bitcoin by designing and building complicated systems.”

Currently, established startups and VC-backed Bitcoin companies, like 21, Blockstream, OB1 and Onename, seem to be taking the third option by working around the Bitcoin network and creating complex applications, coding and protocols. Onename in particular has always had the easier option to move their assets onto the Ethereum network, which is far more efficient for identity storage systems, due to its smart-contract enabled network. However, Onename also continues to collaborate with Bitcoin developers to develop a secure Bitcoin blockchain-based social media identity platform.

As Charles says, more Bitcoin startups will pivot towards the Ethereum network and naturally, venture capital firms will follow the same road. When assessing venture capital trend, it is crucial to understand that investors always seek profit. As of now, the challenge for Bitcoin startups, with exception of large service providers such as BitPay and Coinbase, is to generate multi-million dollar revenues. However, due to the emergence of the R3 Consortium and Microsoft Azure, Ethereum startups could generate substantially larger revenues from a premium clientele consisting of banks, financial institutions and establishments.

It is definitely difficult to speculate on the venture capital trend throughout 2016. However, statistically, it is evident that venture capital firms will continue to pursue platforms and applications with the potential to generate larger revenues and have a bigger user base. Thus, at least for a few months, it is highly likely that we will see a shift in venture capital to Ethereum and other blockchain startups.

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