Europe’s Crypto funding gap
The European blockchain ecosystem is increasingly critically undercapitalised if it is to maintain the hard fought global leadership role established over the last decade. Despite London, Switzerland and Berlin when combined being home to roughly a third of the worlds blockchain startups, it has just 22% of the investment compared with the US and China at 33% and 21% respectively. And this situation is likely about to get worse.
One of the central causes is the structure of the venture market here in Europe with the large majority of capital coming from a fragmented angel and family office ecosystem, highly dependent on their wider business portfolio’s health, with many now likely severely impacted by Covid. But even in good times this investor group has always had an inherent inability to follow on investments into later larger rounds creating an especially severe valley of death between seed and series A. And this is a problem that compounds, fewer investors are prepared to risk their own capital into what might be classed as ‘deep tech’ if they feel a startup is more likely to run out of money.
And the gap is growing. When compared to the US, which now has several dedicated funds acting as lead investors from; Pantera to Polychain, Blockchain Capital, DCG, Mulitcoin, Coinfund and most recently A16z’s new dedicated $515 million ‘crypto fund for networks and businesses’, Europe has no equivalent that comes close to being able to write big cheques, let alone follow on to make sure they thrive locally. Now this gap of course has always been generally true for venture where despite a record $34bn of European venture investment back in 2019 it was still only half the amount invested in Asian companies and just a third of the US. But at least there have been comparable lead investors in ecommerce, social, gaming or health like Index, Lakestar or Balderton.
The problem of undercapitalisation is also true not just true in blockchain but also AI; where US based Artificial Intelligence companies received around two-thirds of all private investment (between 2011 and 2018) and the Chinese took 21% compared to Europe’s 10%. With Brexit promising to depress these figures further with UK-based companies accounting for 55% of private European AI investments. But what’s the relationship between these two seemingly unrelated technology domains?
Ironically, Europe alone seems to have made the connection, back in late 2019 announcing a €2bn Euro Blockchain + AI fund focused on the strategic importance of these two fields both individually, but most importantly when combined. This is something we at Outlier Ventures termed ‘convergence’ back in 2016, and was recently central to a report published this year by the EU Blockchain Observatory and Forum themselves.
Speak with European civil servants like Peteris Zilgalvis, Head of Digital Innovation and Blockchain for The Digital Single Market, and it is an explicit goal and mandate of the fund to foster a more decentralised web. One that is more secure, privacy preserving and which furthers their mission around a new fairer data economy with GDPR and anti-monopoly stances against silicon valley platforms. He and his colleagues intuitively get a more decentralised Web means more decentralised AI, where the gains are more evenly distributed across society and a wider startup ecosystem currently starved of not just cash but data.
Equality, at both the Commission level and at national levels, when compared to the US or Asia, Europe has by far the most progressive, permissive and innovation ‘first approach’ to crypto as a means to both finance and govern blockchains as a new Web, or Web 3, of distributed global public utilities and decentralised applications to counter the Googles, Facebooks and even Tik Toks of the world.
The EIF are acutely aware of all the problems I’ve raised and are desperate to deploy capital. This ambitious fund is expected to invest around €300-€400m in 2020, with €100m of that money coming from the EU and EIF, and the rest from independent venture capital funds. And from 2021 the plan is to scale up the fund to €1bn to €2bn under the InvestEU Programme.
But they are stuck with the dlimena that those GP / LP funds that understand Web 3 and are active, will more often than not report poor recent financial performances taking a hit from the crypto crash of 2018 and ‘19, comparable to the Dot Com of 2000. Or, like in our case as an LLP, they have been successfully deploying their own private capital but would technically be classed as a first time LP fund. Meanwhile, larger more established funds which might be seen as a safer pair of hands either have an outright aversion to anything blockchain, and especially crypto related, or are unable to price these new exotics or comprehend their emergent business models.
It is because of this I would argue Europe doesn’t just need a lead blockchain investor it needs a distinctly European blockchain lead investor who is big enough to work alongside the A16zs of the world but philosophically aligned with it’s uniquely ‘citizen / user centric’ view of the web, versus the extractive ‘surveillance capitalism’ of the West Coast or the increasingly encroaching ‘digital statism’ of Asia. To champion not just a Web 3, but a 3rd Way for the Internet. However, to be effective this lead needs to be able to bridge the UK, Swiss and EU Single Market’s venture ecosystems.
And this mission has never been more important or urgent not just for Europe but the world, as Corona and debates around privacy of tracing apps have shown. Web 3 startups will hopefully continue to come to Europe to innovate but it requires a strong venture champion to back them and inform their direction positively beyond purely shareholder supremacy.
Jamie Burke, CEO & Founder of Outlier Ventures
For further information visit outlierventures.io