Private market valuations


Join thousands of others who receive this daily analysis of crypto markets & news in their inbox every morning - subscribe now.


How are private company valuations affected by the crypto bear market?

This question continues to surface in conversations with institutional investors who are trying to wrap their heads around different investment opportunities in crypto. The liquid markets are easy to measure, require greater reliance on trading strategies (less attractive to institutions), and have seen an 80%+ decline in prices.

The private market is much more opaque. There are no minute-by-minute price tickers and many times companies won’t announce funding rounds or valuations. Recently, Jalak Jobanputra (founder of Future Perfect Ventures) gave an interview to Fortune that said “given how much the volumes have decreased in the last year, I wouldn’t be surprised if we are seeing valuations come down on the secondary markets for some of these companies.”

These comments were specifically talking about privately held companies, where investors own illiquid equity, that have business models based on trading volume of different cryptoassets. Many of these companies (Coinbase, Gemini, Circle, Kraken, etc) have multiple revenue streams, including exchange fees, OTC trading, and other infrastructure-related fees. While Jalak’s comments are directionally correct, there are a few outliers that have successfully weathered the bear market.

Take Coinbase for example — the largest exchange by trading volume in the US was able to capture ~$1 billion in revenue in 2017. The company only offered trading of Bitcoin and Ethereum, with reports surfacing that almost $400 million of top line revenue came in the heart of the 2017 mania (Q4). With prices and volume dropping so aggressively throughout 2018, you would expect revenue to fall off a cliff, but that didn’t necessarily happen. 

My guess is that Coinbase actually made more money last year, than in any previous year. They likely did this by increasing the number of assets they had listed, while also expanding the geographies that they serve. Essentially, if volume from existing customers is decreasing, you have to combat that by bringing new customers to the platform and giving them the option to trade a wider variety of assets.

Private market valuations are not only affected by bear markets in late stage companies though. The early stage market saw insane valuations in the tens of millions of dollars for pre-product, pre-revenue companies throughout 2017. The last 12 months brought those valuations down drastically, but it is not uncommon for me to see $7-10M pre-seed round valuations right now.

Even though valuations have come down for the youngest companies, they are still fairly overvalued. Just 2-3 years ago it would be common to see $3-5M pre-seed valuations, regardless of the industry. In my opinion, the early stage valuations reveal much more about the frothiness of a market because at that stage, every company has the same thing — a team and an idea.

As the liquid market continues going sideways in 2019, it wouldn’t surprise me if private company valuations, especially in the earliest stages, continue to decrease. Some of this will be crypto related and some will be a more macro force across all venture capital.

Either way, we should start seeing more semblance of normal in the months to come.

— Pomp


The “Off The Chain” podcast has been downloaded 500,000+ times in 160 countries. You can listen to the latest episode now: Click here for Off The Chain podcast


THE RUNDOWN:

A Startup Using Ripple’s xRapid for Remittances Just Raised $1.7M: The World Bank estimates that in 2016 migrant workers sent $575 billion in remittances, $429 billion of which went to developing countries. On average, these workers paid 7% in remittance fees. Those over $40 billion in fees went straight into the pockets of remittance service providers such as Western Union and MoneyGram. SendFriend is looking to lower the cost of high remittance fees. Started by David Lighton, a former World Bank employee, SendFriend is a remittance service that aims to deliver solutions that are 65% cheaper than the industry average. The startup raised $1.7 million in capital from MIT Media Lab, MasterCard Foundation, Barclays and Ripple. Read more.

A California Asset Manager Has Come Up With a Clever Way to Include Bitcoin in an ETF: A California-based asset manager has figured out a way to sneak bitcoin in an exchange-traded fund, and the CEO says it’s the best way to get a crypto fund approved by the Securities and Exchange Commission. Reality Shares, the firm behind one of the first ETFs to track the blockchain market, filed a prospectus to list a fund of currencies, which would include exposure to bitcoin futures. If approved, it would be the first fund to offer direct exposure to the spine-tingling cryptocurrency market. It would list on NYSE Arca, an exchange operated by the New York Stock Exchange. Read more.

IBM Partnership Uses Blockchain, IoT to Combat Drought in California: A collaborative IBM project using blockchain and the Internet of Things to tackle drought is underway in the United States state of California. IBM Research and sensor tech provider SweetSense have reportedly partnered with non-profit organization The Freshwater Trust and the University of Colorado Boulder to use blockchain and IoT technology to sustainably manage groundwater use in what they describe as “one of the largest and most at risk aquifers in North America” — located in northern California's Sacramento-San Joaquin River Delta. Read more.

FDA Commissioner Suggests Using Blockchain for New Supply Chain Open Pilot: The Commissioner of the United States Food and Drug Administration has suggested the use of blockchain for an open pilot scheme for the pharmaceuticals industry. The pilot focuses on improving supply chains and was announced in a notice published Feb. 8. The Pilot Project Program Under the Drug Supply Chain Security Act, which aims to ingratiate industry players with emerging innovative technologies, will accept applications through March 11. Read more.

Fake MetaMask App on Google Play Store Hosted Crypto Malware: A form of malware that replaces victims’ cryptocurrency wallet addresses has been discovered for the first time in an app on Google Play Store. Security firm ESET published a blog post on Friday, saying that the malware, known as a “clipper,” intercepts the content of the clipboard and, if it finds the addresses of online cryptocurrency wallets, can replace them with addresses owned by the attacker. Read more.


If you enjoy reading “Off The Chain,” click here to tweet to tell others about it.

Nothing in this email is intended to serve as financial advice. Do your own research.