Following the 2018 encryption crash, up to 90% of Chinese blockchain-focused venture capital companies left the market.
Now, as China's central government seeks greater adoption of the blockchain, some are returning and business flow is increasing.
Surviving funds are reshaping and diversifying in fields such as secondary trading and bitcoin mining.
Chinese venture capital firms are reviewing the blockchain again. Following the 2018 encryption crash, up to 90% of blockchain-focused VCs left the market. Now, as China's central government pushes for greater blockchain adoption, some are coming back.
During the first six months of 2019, Chinese blockchain startups raised $ 368 million through 71 financing deals, according to Chinese financial data tracker 01Caijing.
VCs are finding it easier to raise money. Hong Kong-based Kenetic, which started at 2016 with some partners trading their own capital, is on track to close an eight-digit fund next month, said managing partner Jehan Chu. NEO Global Capital, a fund backed by the NEO encryption project, has also been raising a second fund of about $ 50 million since June.
It is among the numerous funds that are raising new vehicles this year because of a renewed sense of optimism. At the same time, VC companies are diversifying from startups in areas such as secondary trading and bitcoin mining.
This includes Sora Ventures, an early stage blockchain investment firm that entered the secondary market earlier this year. Its trading activities include swap, mostly conventional cryptocurrency futures, which account for about 20% of its assets under management, said founder and managing partner Jason Fang.
Fundamental Labs, a $ 500 million blockchain fund under management that supported Coinbase, Canaan Creative and Binance, invested $ 44 million in bitcoin miners in May, which could increase the total bitcoin hash rate by at least 1.000 peta hashes per second (PH / s)
And Parallel Ventures, a blockchain VC founded by Yizhou Zhu, a former chief investment officer at FreeS Capital, has also invested in bitcoin mining equipment this year through a separate unit. The investment has a computing power of about 300 PH / s, worth about $ 15 million. FreeS supported Chinese and US technology startups, including Uber. He also manages assets for other investors interested in the encryption space and completed the acquisition of a new 200 million yuan (US $ 28 million) blockchain fund in August.
Still, the business flow is not what it was in 2018. The 71 trades in 2019 represent a 67% drop in dollar value compared to 2018, and a 47% drop in turnover. And there are far fewer companies than there used to be.
“Probably less than 10% of Chinese encryption investment funds have survived today [since 2018's inception],” estimates Howard Yuan, managing partner of Fundamental Labs.
By Yuan's count, there were probably almost 1.000 early stage blockchain investment funds during the 2018 peak, including individual non-institutionalized vehicles and informal pool of cryptocurrency capital. Of these, 150 and 200 were of significant size and focused on early-stage investments, according to research by Frank Li, chief investment officer at venture capital block firm Node Capital, which supported the Huobi stock exchange.
“There are currently about 20 to 30 blockchain venture funds [in China] today,” estimates Consensus Lab's Ren, adding:
“At blockchain parties in Beijing last year, you could see people from over 50 backgrounds mingling. Now I can count all the funds in Beijing with less than my two hands. "
The Fundamental Lab Yuan repeated this sentiment, estimating that there are only “dozens of funds left”. Bonnie Cheung, a venture partner at 500 Startups, tells Coindesk that early stage funds from less than 50 blockchain are based in China, while Yizhou Zhu of Parallel Ventures puts the number at "about 20."
Many funds were established by blockchain veterans who made money from mining, trading and operations. Their risk vehicles used to be additional resources. Going back to mining, trading and trading is natural to them.
Other investors are simply staying on the sidelines. Junfei Ren, Redbank Capital's founding partner and former founder of Huobi Labs, said his newly created investment fund is only storing value in bitcoin, before investing in any start-up that makes use of the underlying technology.
Investment firm Blockchain Consensus Lab is focused on incubating only five to six projects at the moment. “We no longer think of venture investment as an isolated business. It must be combined with other companies to leverage our unique capabilities to create an array of products that can support the bear market, ”said company partner Kevin Ren.
Funds are struggling to find good investment targets despite falling ratings from blockchain startups. Simply relying on stock or token investments this year would mean the funds are probably stalled.
“We have only invested in a few new token projects in the last two months. At the peak of last year, we were making one to two investments a week, ”said Jehan Chu of Kenetic.
Business size is also shrinking as startup ratings shrink and investors are becoming more cautious. Consensus Lab's Ren told CoinDesk that the average size of business in China is about $ 100.000 this year, while deals worth half a million dollars are rarely found. Token deals, on the other hand, have grown quieter, except for some shiny pockets such as those issued by handbags.
Following the baptism of the last cycle of the market, Chinese blockchain companies are maturing and evolving to find more sustainable paths, investors say. Valuations are becoming more reasonable and speculative participants have left the market.
Funds are becoming more professional, said Jason Fang, managing partner of Sora Ventures. When his fund began at the end of 2017, he was among the first institutionalized funds in China with a recognized administrator and auditor. This practice is now more standard.
“Prior to the market collapse, investors were not carefully evaluating projects because token prices kept rising,” said Xin Jiang, investment manager of Fenbushi Capital, one of China's first and largest venture funds, based in 2015. “Now investors need to really find value through more vigorous research and due diligence. "
Return expectations are becoming more realistic. “Analysts are spending a lot more time researching and checking startups among themselves,” said Frank Li, who previously worked at Node Capital and recently joined Parallel Ventures. He added:
“The investor mindset is also longer term as no one [now] expects to return in a matter of months. The horizon is most likely years ahead. "
Building a sustainable future will take time. “We strive to set a reasonable investment logic and it's hard to explain how we should value startups,” said Consensus Lab's Ren. “It's a deep paradox, because in investing we're not sure where the future direction is.”
Chu from Kenetic is more optimistic. “Equity in blockchain startups will never be cheaper than it is now,” he said. “We are excited about companies in China, especially on encryption, infrastructure and space defi [decentralized finance] trading platforms.”
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