With the cryptocurrency and blockchain sectors growing at a rapid pace –never mind the current bearish trend in the crypto space- many of these companies are exploring ways to grow and scale their various businesses.
This is not surprising seeing as many of these companies have experienced tremendous growth within a very short while –as is often common in high growth industries. This exploration of growth potential has resulted in these companies largely engaging in exit strategies that often involves them being sold off to other entities or getting absorbed by bigger firms.
The reality is that these companies are often restricted to raising funds or scaling through one or more of the following ways:
Let’s explore these individually.
This is usually one of the best ways to scale. Companies can either buy up smaller companies with their particular requirements or get acquired by bigger companies looking to expand. If it’s the latter, the reality is that it is capable of generating near instant funding.
The downside is that it negatively impacts ownership rights. Companies that acquire smaller firms may either completely absorb them or allow them still run independently, keeping the CEO on and paying him/her an annual salary.
Of course, the CEO or founder can still have a percentage of the equity, but chances are they won’t have the controlling share.
Olga Feldmeier, CEO of Smart Valor, suggests that acquisitions are often the first route that crypto companies take when looking to expand:
The highlight of this week: yet another crypto exchange purchased for ca. 350m USD – Bitstamp. This follows Poloniex acquisition for 400m USD. Meanwhile Coinbase is off to the stratosphere with 8 billion valuation,… As the first generation of crypto exchanges is celebrating its successes, what will it look like in several years’ time with second generation of platforms focused on tokenized assets and security tokens[?]
Poloniex, one of the biggest crypto exchanges was recently acquired by Circle early this year, while BitStamp was acquired by NXMH, a Belgium based investment firm. Another major acquisition that might happen in the near future is that of EXMO –one of Europe’s largest crypto exchanges- by GoverMedia Canada Corp.
Interestingly, acquisitions aren’t just done by companies looking to invest in the industry as seen in Coinbase’s scenario. Coinbase has started acquiring smaller crypto companies and exchanges, including Paradex, and Cipher Browser.
Acquisitions are quite popular probably because the process is pretty simple, and provides the founders an opportunity to grow. Besides, these companies often happen on these opportunities, often without any previous plans. For instance, Bitstamp’s acquisition was unforeseen. According to Nejc Kodrič, Bitstamp’s CEO,
the sale wasn’t planned. There was no active effort to go around and solicit buyers. The vibrant industry last year sparked potential interest from buyers to make a footprint in the industry. We started to get approached by buyers in the middle of last year
While Nejc Kodrič still maintains a 10 percent equity in the company, his partner sold out completely giving up his 30 percent equity in the company.
Acquisitions often provide a simple solution to most of the growth problems bedeviling these companies, and offers an easy way out for CEOs and founders looking to move on to something else.
The benefits too are quite significant as stated by President of TeqAtlas, Ruslan Gavrilyuk. He said:
the benefits of [acqisition] include receiving valuable intellectual property and the talented employees of the acquired company – those are precious resources that can help companies grow quickly. Communities and a new user-base are also precious resources the acquirer gets after the deal,
In the end, the three main sources of value from an M&A deal are new technologies and data, people, and end users.
But, he also explained that it’s no cakewalk as it can present its own challengers.
But of course, there are certain challenges to the approach… It is difficult to make a proper valuation of a company that previously raised capital through an ICO – no decent models exist yet.
Many cryptocurrency projects are avoiding the acquisitions options and instead, choosing to create their own native tokens and raising funds by offering those tokens to the public. This way, retail and institutional investors can get some equity in exchange for their cash.
These native or utility tokens can often be used for trading on these platforms or held as a store of value, depending on the project.
Another benefits of tokenization is its provision of liquidity on any cryptocurrency exchange platform. The continual use and demand accompanying these tokens often results in its value appreciation, thus serving another use as a store of value.
A good example of this is Binance’s native token, Binance Coin (BNB) which has seen significant growth in value, since it was introduced last year –rose to over $22 per BNB at the height of the bullish run.
The only downside of tokenization is that often times, the majority of these tokens are only useful within their ecosystem. Outside, you probably wouldn’t be able to exchange them for anything.
Another tokenization strategy is the creation of equity from the exchange or blockchain firm itself. So, owners of the representative token would essentially own an equity stake in it.
Quite a few crypto exchanges and blockchain startups are adopting this strategy and using it to raise funds for their growth and expansion. Examples include Neufund, Science Blockchain, and Blockchain Capital.
While many blockchain and crypto companies are exploring either option, the truth is that ICOs are still an uncharted territory, legally speaking. Right now, there are no regulations and too many controversies surrounding it.
Companies willing to go this route must understand the attendant risks as well as the implications of any legal fallouts. Gavrilyuk explained the risks well when he said,
as a rule, an investor has no voting rights, doesn’t partake of the company’s profit and doesn’t receive any equity. Instead, he gets tokens that participate in the project economy in a way defined by the token economy,… many investors–including high-volume and institutional investors–may have quite a bit of skepticism when it comes to participating in ICOs, and may want to avoid them
There’s also the risk of investors not being adequately committed to the project and only investing in the ICO for the purpose of buying low and selling high.
These “disincentivized investors [dumping] tokens just after listing, which will drop the price to the floor.” Gavrilyuk said. This happens far more frequently than you’d think. Which is why ICO issuers need to take the appropriate measures when issuing tokens through ICOs.
That being said, ICOs are generally a fantastic and pretty simple way to generate the needed funds for growth and expansion, without necessarily giving up a significant part of your ownership rights. Gavrilyuk reiterates this when he said,
Thus, an ICO may be an answer when the project needs a community of early adopters spread worldwide and the founders are ready to deal with the risks of the emerging industry, which is mainly speculative in its current state
While it’s not as popular as ICOs and acquisitions, quite a few companies are opting for initial public offerings as a means of raising some more capital for their businesses. One crypto company that did this well is Argo Mining, which raised $32.5 million in August this year.
The company which is currently listed on the London Stock Exchange, is also listed on the Toronto Stock Exchange. While Argo Mining is the pioneer publicly listed crypto based company, others are working towards that. The more popular of these companies are Bitmain and Coinbase –two major players in the space.
Two notable companies that are planning to perform IPOs are Coinbase and Bitmain – both crypto giants – one being a regulated crypto-exchange and the other the operator of the largest Bitcoin mining pool and producer of its own specialized mining devices called ASICs,
Of course, this is not without its cons. In fact, Gavrilyuk points out that
the main disadvantage is the time and expense of going through such a process – usually it takes 6-9 months or longer, and the costs are pretty high. Moreover, when the company goes public, it must maintain transparency in its internal processes and satisfy the needs of its shareholders.
As more companies swoop into action, cracking down on the unregulated cryptocurrency space, many crypto and blockchain companies are opting for private funding to help with their growth and expansion.
A few examples include Theta, Nucleus Vision, Nexo, Coinbase and TaTaTu. These companies and many others raised a lot of money from their private funding rounds in 2017In fact, Coinbase’s last funding round saw its valuation jump to $8 billion. Gavrilyuk goes to explain that,
This approach gives companies the opportunity to have support from investors who will share their non-monetary resources, first of all, their network and any related experience, as they have interest in the success of the project
Of course, this comes with its own downsides as clarified by Gavrilyuk:
On the other hand, the company is forced to give up ownership of part of the company to investors through the pre-defined share in equity. Companies have to pay attention to their cap tables – it should be organized in a way that there is no concentration of excess power in undesired hands.
Interestingly, some firms have adopted a mixture of both approaches –mostly a combination of private token sale and ICOs. One of these is the encrypted messaging company called Telegram.
According to Richard Fellman, PhD researcher at the London School of Economics,
During the first round of private sale, the company secured $850 million from a global base of investors. The second tranche of $850 million was one of quickest fundraising events in the recent tech history
This strategy isn’t devoid of its demerits too, seeing as it has a major con of tokens being centralized. Fellman clarifies,
A small number of parties end up holding a large number of tokens, and if the project is based on a utility token use case, this can be problematic for true application of the platform due to price speculations.
At the end of the day, the truth is that crypto and blockchain company founders looking for viable exit strategies have quite a few options to choose from.