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A word from the Prime Minister in 2014: Entrepreneurship by the masses, innovation by all! Suddenly there are CEOs, co-founders, and tens of thousands of investment institutions (VCs) all over the street. China's venture capital industry has entered a period of explosive growth. According to statistics from the Asset Management Association of China, there are 23,000 registered private equity fund managers (venture capital institutions), and about 70,000 funds have completed filing.

This is the most stringent new financial regulation in history and has a huge impact on the entire venture capital industry. The overall logic of the new regulations is to break rigid exchange, reduce financial leverage, and reduce investment risks and costs. This makes it very difficult for banks to raise funds, and it is even more difficult for traditional RMB funds to raise funds.

The partner of Fund A told us: A VC raised a fund of RMB 1 billion in 2015, because O2O projects were very popular at that time, and the position of the fund at that time was to mainly invest in O2O, and everyone can imagine the result. At present, there are only a few O2O projects left in the market. Ele.me, one of the largest, was acquired by Alibaba, and Meituan is a life service platform directly under Tencent. The fund's 1 billion yuan in this phase has been in vain, and it is still relying on a huge listed company behind it, so it is currently unable to raise the second phase of the fund.

In addition, the partner also said: Fortunately, the agreement with the bank was signed before the end of 2017, and the new round of fundraising was completed only after all the payment procedures were completed before the guidance came out. The market conditions in 2018 are very poor this year, and we have started to cooperate with P2P wealth management companies to sell private equity products to raise funds for new funds. They are also looking for cooperation with government funds of funds in various places; although the funds of government funds of funds are sufficient, they have strict requirements on investment direction, investment projects, and company landing. Every foreign investment needs to pass the verification of the fund of funds.

More venture capital institutions established since 2014 failed to raise the second fund when the income of the first fund was not satisfactory, or they were waiting to see and not invest in projects, and the funds were gathered in more late-stage stars on the project. For new fund partners, fundraising is the top priority. In the past, the returns of funds were not good. Now it is even more difficult to raise funds for LP dad. In the past, in the double innovation period, once the investment in the early projects was completed, there would be big bosses to follow up to take over the project, but now it is often no one cares about it.

To add insult to injury, LP's father also got to know a lot of new funds after paying the tuition fees for the past few years, and gradually their funds gathered in top VCs, such as Sequoia, IDG and other big institutions. There is no need to worry about not being able to raise funds at all, and the new funds worth billions of dollars, LP fathers always bring money to the door. Besides, LP's father also learned a set of theories from VC, and began to invest in some unlisted "unicorn" companies by himself. The chaos of equity investment in recent years has spawned many proxy investors, who acquire options from some unlisted companies to conduct transactions. So at every turn, I can hear some LP dads around me say: I voted for QQ Music today, I also watched Didi, and I also bought some UBTECH.

Mass entrepreneurship and mass innovation have become a thing of the past. Even VC (venture capital institutions) have no funds, and early entrepreneurs are even less likely to live well. Just in the first quarter of 2018, Tencent invested in 53 companies, Alibaba invested in 21 companies, and Baidu invested in 16 companies. The Internet giant BAT has become the three big mountains in front of small and medium-sized VCs. Among them, Tencent has a greater influence on VC. Basically all the traffic and public opinion are controlled by Tencent, and the investment style is more early-stage. If you only look at the number of early-stage investments, it is already the first in the industry. Currently VCs are already looking for various small programs to invest in.

To put it simply, small and medium-sized VCs in the market can’t raise money, entrepreneurs can’t raise capital, and the winter of VCs and entrepreneurs is coming at the same time.

digital currency

If you want to take the crown and bear the burden first, first briefly introduce the development of the digital currency market.

According to the statistics of coindesk, in the 2017 global return on investment list, digital currency ranked first, reaching 4.48 times, and the second place was Bitcoin (still a digital currency), with a return rate of 1.81 times. Share the deeds of two friends: From September 4, 2017, multiple departments in China jointly issued a regulatory notice prohibiting domestic ICOs. After the exchange was closed, USDT from different exchanges at home and abroad began to be manually moved (using the Bitcoin blockchain to trade The difference between the price difference between legal currency and tokens), earned tens of millions of RMB from scratch before 2018; another deed is that in the second half of 2017, my friend left the FA industry and entered a digital currency fund. Show me at the end of the year His bank account, 9-digit RMB.

Although the rate of return of digital currency is very high, the risk is also very high. It is currently in an unregulated state. After experiencing the madness in 2017, take Bitcoin as an example. At the end of 2017, the price reached 19,700 US dollars per coin. However, after just over two months, the price continued to drop to 6.7 thousand USD/coin, evaporating nearly 70% of the market value.

From the above figure, it can be seen that there is a positive correlation between Bitcoin mining difficulty, price, blockchain wallet users, and daily transaction volume. The bitcoin generated with the block increases with a mechanism of halving every four years: when the first genesis block appeared in 2009, 50 bitcoins were generated with the block; in 2013, 25 bitcoins were generated per block; in 2017 The current stage is that only 12.5 bitcoins are generated in each block; and so on, by 2140, the bitcoins generated with the block will be reduced to 0, and the total amount will reach about 21 million, and will not increase.

China has mastered 80% of the global bitcoin computing power, and the top five mining pools in the world: BTC.COM, AntPool, ViaBTC, Libito mining pool BTC.TOP, and F2Pool are all Chinese mining pools, while the global The ASIC chip, the first dedicated chip for mining, was also developed by the Chinese company Avalon (Jianan Zhizhi). Even V God, the founder of ETH, is worried that the application of ASIC chips in ETH mining will seriously affect the distribution of computing power, and is considering whether ETH will fork for ASIC chips. It can be seen that these early blockchain players in China are focusing on mining to make money.

Back then, equity crowdfunding fell in the vigorous entrepreneurial tide. Now ICO has appeared again, and countless geeks who really understand technology and scammers who don’t understand technology have gathered in this wave. Is it a devil or an angel?

• ICO (Initial Coin Offering) means initial coin offering, and its essence is consistent with that of equity crowdfunding and product crowdfunding; but equity crowdfunding investors get equity, and product crowdfunding investors get Is the product, and ICO investors get the commitment of the founding team to build a blockchain-based product/service.

  A blockchain project usually prepares a white paper (WhitePaper, similar to a business plan) when it is established to explain the project's usage scenarios, vision, technical feasibility, team, etc.; The tokens (Token) raise funds for the development of the project. ICO generally involves a relatively large amount of money, which is equivalent to the IPO of traditional entrepreneurial projects. After the ICO, the founding team also needs to maintain the market value of the Token issued by itself, which is similar to the traditional secondary market listed companies.

• Token (token) is the proof of rights and interests in the blockchain ecosystem, and is usually considered to be a digital currency circulating in a specific blockchain ecosystem, such as Ethereum and Bitcoin. Token is strictly implemented in accordance with the white paper, the introduction of the ICO and the blockchain code.

The logic of traditional entrepreneurial project financing before ICO financing is based on team, business model, technology, background, market and other aspects for analysis and investigation. Entrepreneurial projects start from seed financing, angel round financing, A round financing, B round financing from investment institutions VC to C, D, E or merger/listing IPO; each round of financing in the middle has a longer period of time. Time interval, each round of financing requires a quantitative change to a qualitative change, business model implementation, technological breakthroughs, and income breakthroughs to allow VC or PE to invest funds in entrepreneurial projects. Each round requires great efforts to win Higher valuations for startups.

From the seed to the later stage of financing, the shares released in each round will not be particularly large, and the proportion of each round is mostly between 5-20%, and the amount obtained varies from millions to tens of millions.

The ICO financing almost makes the financing of blockchain projects in place in one step, which is basically equal to the amount of listing/IPO. The project party can obtain a considerable amount of specific virtual currency through ICO on the digital currency exchange. Fangfang ETH or Bitcoin BTC to purchase Token issued by the project party.

ICO allows blockchain projects to have more capital and imagination than traditional entrepreneurial projects. But at the same time, after obtaining a huge amount of digital assets, it also needs to bear more responsibilities. For example: it is necessary to regularly disclose the project to the outside world, do market value management and maintenance, and monitor public opinion. Basically, the ICO market is also imitating the routines and functions of the traditional primary and secondary markets, and there are various similar service organizations.

If a huge amount of funds can be controlled by a team that does practical things, the market value of the project can soar all the way. Some projects that are not optimistic about traditional VC can also use the funds raised to make their own vision and projects come true and be recognized by the market. But from another perspective, there are also greater risks.

Compared with the traditional venture capital logic, it is equivalent to giving a project in the seed stage a sum of funds for listing and cashing out. Whether the idea and vision in the white paper can be fulfilled depends entirely on the morality and awareness of the founding team. Knowing that there are risks, why are they so crazy? It is because there are not a few people who have obtained a hundred times the return, a thousand times the return, or even tens of thousands of times the return.

Generally, it takes no more than 3 months from the start of the project to the ICO, and there will be roughly four fundraisings from the cornerstone round to the ICO. And the market value (valuation) of these four fundraisings will not be as big as the valuation gap between the seed round of traditional entrepreneurial projects. Generally, the cornerstone round is raised in thousands of Ethereum, which mainly accept investment from digital currency funds and individuals with very strong resources, and the replacement ratio of Token is relatively more favorable, that is, if the Token replacement ETH is 1 during the ICO :1, the Token replacement ETH ratio of the cornerstone round can reach 1.5:1 or even 2:1.

In the subsequent institutional rounds, targeted invitation rounds and community replacements, qualified investors and digital currency funds will be invited to invest through a mandatory invitation system. Similar to the terms of venture capital, the earlier the investor or institution is, the longer the Token will be locked after the ICO, which is the same as the logic of the traditional secondary market.

In my country, ICO is completely banned, mainly because of the protection of speculators by the China Banking Regulatory Commission and the China Securities Regulatory Commission, and to prevent criminals from using scams to harm the interests of the public and form group incidents. However, the complete ban on ICO will also cause certain problems: the outflow of talents and funds. After September 4, 2017, all digital currency exchanges have withdrawn from China and cannot be accessed through Chinese networks and IPs. On April 23, 2018, the People's Bank of China issued a statement: All ICO platforms and Bitcoin transactions have been safely withdrawn from the Chinese market.

By the end of 2017, the global ICO fundraising has reached 11.11 billion US dollars. The ICO issued by Telegram (TON) in 2018 is currently the largest fundraising, with a financing scale of 1.7 billion US dollars.

Starting from Q2 in 2017, global blockchain project-related financing and the amount raised by ICO financing have begun to grow in a blowout manner. In Q1 of 2018, it was even 11.7 times that of equity financing.

The concentrated outbreak of ICO was concentrated in Q2 of 2017. It is difficult to compare traditional entrepreneurial projects with ICO projects. At least ICO projects were publicly issued and listed at the beginning, and a large amount of funds were gathered before the technology and model development. Update iterations.

At present, 36% of the global blockchain project segments are concentrated in the United States, and only 5.2% of the projects are in China. This is related to the previous prohibition of ICO and strict control in the country. At present, local governments (Hangzhou, Shenzhen) have already With the establishment of a blockchain fund of funds and a high-tech industrial park, coupled with Mr. Xu Xiaoping’s remarks at the beginning of 2018, the WeChat group at three o’clock in the blockchain, and the rapid deployment of investment leaders, domestic blockchain projects will appear Exponential growth.

Domestic blockchain projects are still mainly distributed in first-tier cities such as Beijing, Shanghai, Shenzhen and Hangzhou. It is worth paying attention to Shenzhen and Hangzhou, both of which are equipped with blockchain industrial parks and government funds of funds. In particular, Shenzhen not only has a large number of blockchain projects, but also has a large number of nodes and a mature hardware industry chain. Most of the mining machines and chips are produced in Shenzhen.

Looking at the direction of global and Chinese blockchain projects, the first is the financial industry, the second is communication and social networking, and the third is the development of underlying technology & infrastructure. Financial blockchain projects are the closest to money, and the usage scenarios are most suitable for the actual situation.

From 2013 to Q1 (first quarter) of 2018, among the top 10 investment institutions investing in the most blockchain projects, most of the VCs started their layout in 2017. Invest with the strategy of "one in a hundred" and frequently invest in the teams and directions you care about.

Blockchain industry map

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Traditional VC rescue rules

What are the advantages of digital currency funds compared with traditional VC? For investing in digital currency and ICO, the main advantages are as follows:

• Short project exit cycle: The time from establishment to ICO of a blockchain project generally does not exceed 3 months. Compared with traditional investment projects, at least one RMB fund cycle is required from establishment to acquisition or listing. More than 5 years.

• Portfolios are more diversified: For blockchain projects, most digital currency funds invest with the strategy of "pressing the track" and "betting on one out of a hundred", so they will not concentrate their chips on a single project as intensively as traditional VCs among. Often an ICO project will have dozens of digital currency funds participating in the investment behind it. Moreover, in addition to investing in ICOs, digital currency funds can also invest in some more mature currencies that have undergone ICOs, such as Litecoin, Ripple, Bitcoin, Ethereum, etc., and are not limited to investing all funds in ICO projects.

• New funds are better raised: Due to the short exit cycle, there will be more successful cases, and the IRR may be much higher than traditional VC, and it is easier to convince LP dad to continue investing in new funds.

• Simple and transparent fund establishment and management: As long as the investment company can be registered overseas, the managed digital currency wallets are the digital wallets of institutional partners, as long as the approved LP father is willing to pay and sign the agreement, and there are no stronger government supervision and tax requirements. Subsequent LPs have various channels to monitor the flow of funds in this digital currency wallet. At present, there are also blockchain projects that manage digital currency funds. In the future, the establishment of funds and the sale/transfer of fund shares can be carried out according to the conditions agreed in the smart agreement. It is as simple and convenient as creating a WeChat official account.

• Bear market is good for mining: For digital currency funds, the cold winter of capital is not terrible. Instead, mining can be carried out at this time (using mining machines as miners to obtain digital currency) to reduce investment risks. The hoarded digital currency is sold for a profit.

The specific process of digital currency investing in an ICO project is shown in the figure above. A simple summary is that the time is short and the efficiency is high, but the risk is relatively high.

Compared with digital currency funds, traditional VCs have the following difficulties in entering blockchain investment or ICO:

• Subjects without overseas investment: Since ICO is prohibited in our country, and all ICO platforms and exchanges have withdrawn from China, it is impossible for traditional VCs without overseas investment entities or VCs with state-owned backgrounds to participate in ICOs and digital currency asset investments.

• No digital currency/USD: Since ICO is prohibited in China, and the project is traded on overseas exchanges, a large amount of digital currency or US dollars is required.

• There is no way to audit the financial aspect: If you invest in an ICO project through RMB, what you get is the Token given by the project party, and the Token is exchanged in the exchange for digital currency or U.S. dollars. Traditional domestic VCs have no way to audit their finances. The withdrawal of funds is a non-compliant asset in the existing financial and taxation system, and the AMAC and the China Securities Regulatory Commission/CBRC may supervise it.

• Digital Currency Wallets Without Institutions: Because digital currency wallets belong to individuals, there are no institutional digital currency wallets.

If the above problems can be solved, traditional VCs can participate in ICO and digital currency investment. Presumably the government is also thinking about corresponding solutions. After all, digital currency and ICO are a major challenge to the existing financial system.

So are there any methods that can be tried for traditional VC? After thinking about it, there are:

• Equity+Token: Based on the difficulty of financing and listing in the primary market, many early projects will establish their own overseas parallel subject companies (SPV), hoping to raise funds through ICO. At this time, the traditional VC can obtain equity by investing in the domestic subject of the entrepreneurial project and sign an agreement to obtain a fixed proportion of Token when the company conducts ICO in the future, and the Token will be used by the team to repurchase the VC at an agreed price. equity.

• Equity + usufruct: The specific method is similar to the previous one, but the difference is that the ICO subject provides the domestic parallel subject with the right to generate income from commercial interests and distribute profits.

• Debt to Token: The specific method is similar to the first one, and the method is not elaborated.

After the digital currency turmoil in early 2018 and the ICO market calming down, the market will eliminate a large number of fraudulent projects and air coins (referring to virtual coins that have no real landing and application scenarios). The investment in ICO projects will more and more follow the logic of traditional venture capital. Each financing interval before ICO will be lengthened, and each stage needs to have corresponding results to attract investment.

ICO investment will return to the investment logic of analysis and investigation based on team, business model, technology, background, market and other aspects. Coupled with the fact that governments around the country are actively promoting the implementation of blockchain funds and technologies, it is now a good opportunity for digital currency funds and VCs to deploy blockchain tracks. Blockchain is an opportunity that truly belongs to geniuses and technicians, and blockchain + AI is promoting the sharing of technological progress.

Bitcoin-based transactions are currently in a stage of rapid growth, and because the block capacity has reached its peak, the transaction network often appears blocked and loses coins. In the future, Bitcoin transaction fees will become higher and higher, and in the future Bitcoin Coins will receive higher computing power support.

Compared with the historical price of Bitcoin, every time the number of Bitcoins generated with the block is halved, its price has experienced an exponential growth, corresponding to the growth at the end of 2013 and the end of 2017. Year-on-year at the next time when Bitcoin is generated with the block, it will likely start the next round of surge, which will be at the end of 2021. It will not be lower than the cost price of its mining.

In the future, there will be more and more blockchain entrepreneurs and entrepreneurial projects, and more VCs will participate, and the blockchain will not only change the entire way of starting a business, but may also subvert For some VCs, this is an era that keeps pace with the times. If you don’t keep up with the pace of the times, you may be eliminated in the next second. More and more companies will establish their own Token mechanism at the beginning of their establishment and use it in their own ecology. Any builder who participates in the ecology will receive the corresponding Token as a reward.

In the end, during the gold rush in the United States, it was not necessarily the miners who really made money, but the merchants who sold shovels and jeans. Regardless of the development of the blockchain, a lot of hardware support is always needed. In addition to mining machine companies, chip companies, hard disk companies, and graphics card companies are all worthy of attention.

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