We recently represented Andreessen Horowitz as lead investor in a $25 Million Series B financing for Coinbase. This represents the largest investment to date in a Bitcoin company and is also significant in that Andreessen Horowitz is among a handful of the most elite VCs in the market. This bodes well for the future of the Bitcoin community and indicates we are near a tipping point where others will start to discover how mainstream Bitcoin has become just over the last several months.
So, what can you do to position yourself for funding?
Venture Capital has long been focused on team, team, team as the single biggest driver for attracting investors. In some respects, that is even more important than ever when it comes to Bitcoin investments since we are seeing banking relationships established on exactly this type of subjective criteria. The Andreessen deal will make it easier for young Bitcoin companies to recruit professionals to join the team.
Another significant factor, which is not true of most other industries, is the regulatory game plan. You need to have your regulatory ducks in a row before a major VC is going to put their reputation at risk by backing you. This means having solid legal counsel, but equally importantly it means having a culture of compliance with the tone set from the top. The solutions to the regulatory issues are out there.
Naturally, it is important to have a very strong business plan, including a short executive summary and even shorter teaser paragraph as standard tools you need to have to get introductions and meetings. In the current environment, with strong demand for Bitcoin, the business end may be the easiest part to show. Many of you will be able to credibly make the argument that you only need $2M total funding to get to profitability, which is a staggering reality. It means that VCs could theoretically put up what amounts to angel-size money for a venture-size return with no further dilution in between. That’s powerful, if true.
Finally, and this has been the most challenging issue to date, you need to have a strong banking relationship, if nothing else to pay your expenses denominated in fiat currency. The promising news here is that there are some banks following Bitcoin closely. BofA issued an investment analyst report recently and JPMorgan filed a patent related to digital currency. There are clearly a few operating Bitcoin companies that have banking relationships. The banks are going to start to feel the pressure of both a lost opportunity and the threat of losing a significant VC client once VCs begin to support Bitcoin companies. Since the regulatory piece is solvable, in many cases, banks are simply being overly conservative and only need enough motivation to actually do the due diligence they need to get comfortable. This may be the last piece to fall into place for many companies in that the funding by a VC may be the key to actually convincing a bank to support the company. This gives VCs further reason to look hard at this space. There is an unnatural resistance from banks which can be overcome once the VC gets involved which means the VC can bring far more value to the table, from the portfolio company’s perspective, than just their dollars. This creates a very positive valuation opportunity from the VC’s perspective!
It’s time to get ready for the coming wave of funding by the venture community. The next Bitcoin convention in Austin just before South by Southwest should be exciting.