After crypto prices went through the roof in 2017, an eruption of new tokens, companies and products occured. With such a high level of consumer and corporate interest, many promising projects were inevitably lost in the crowd. Fortunately enough, some of cryptocurrency’s biggest names offer their services to a select few projects that are they have deemed promising.
Companies that pick and nurture these future projects are known as incubators. Since mid-2018, many fortunate companies have been guided through their developmental stages by such companies. While being selected by a prominent incubator gives a company a huge advantage over its competitors, it does not always end in success.
So, what is an incubator?
In the modern tech world, there is an enormous oversupply of startups. There are now blockchain solutions for problems that most people didn’t even know existed. But for many startups, being snapped up by a larger company is now the end goal. For crypto-related projects, aside from drawing the eye of a venture capital company, being selected for an incubator is the cryptocurrency equivalent of being bought out by Google at early stage.
Incubator firms scout out promising companies and guide them through the fundamental phases of development until they are robust enough to launch successfully on their own. But incubator firms are not operating out of compassion. The motivation for taking a chance on these companies is usually a significant chunk of equity, something that can transform into a hefty reward should the company become successful at a later date.
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Perhaps the most important resource available to projects through incubator companies is financial capital. Start-ups are famously short on cash, and a significant injection of funding — along with access to a wide variety of financial partners and advisors — can often lead to companies developing at a rapid rate. Aside from funding from the incubator company itself, selection can sometimes open the door to additional support from either government or university institutions.
Incubator companies often attract professionals with a decades-long history of venture capital, those with an eagle-eye for investment potential and are highly specialized experts in their fields. These seasoned professionals often act as consultants to the leaders of projects during the incubation phase.
The chief technology officer of the Interdax trading platform, Charles Phan, explained to CryptoX that while incubators grew out of the 2017 crypto mania, they have developed in 2019 into projects that seek to guarantee quality and revenue in a vastly different market:
“In 2019, launchpads started to gain traction and exchanges introduced these platforms for projects to issue their tokens, market them and also try to guarantee the quality of the project. Launchpads have also provided another stream of revenue for exchanges during the crypto bear market and a unique use case for exchange tokens (as a funding currency for IEOs). The teams behind cryptocurrency projects also gain, as there is certainty that their coin will be listed on an exchange and will receive a lot of exposure.”
In an ideal world, the incubator company swoops down on a rough-around-the-edges, yet promising young company and takes a nice chunk of equity. A little further down the line, the company is launched as a polished, efficient alumnus of the incubator that will attract further investor interest and generate profit for all stakeholders. But, as so often happens in the cryptocurrency sector, things do not always go to plan.
Matic tanks after launch
Matic, an Ethereum-based cryptocurrency payment network that passed through Binance’s now-famous Launchpad incubator, recently strove to quash claims that it manipulated the price of its token after a dramatic 60% plunge in mid-December.
Matic was one of the first alumni of Binance Launchpad but seemed to falter soon after launching. As previously reported by CryptoX, Matic lost value after the initial exchange offering, but saw a reversal of its fortunes in the last week of November. In a blog post on Dec. 10, Matic executives described price manipulation claims as “baseless” and appeared to lay the blame at the feet of an unnamed “FUD account against Matic team.”
According to Coin360 data, Matic/BTC had reached a high of $0.042 on Monday before nose diving to a nadir of $0.014. Since then, Matic has climbed up to $0.0145 at press time.
Price of Matic/USD. Source: Coin360.com
Twitter-happy Binance CEO Changpeng Zhao, known to most of the crypto world as “CZ,” stepped in to defend the project. CZ wrote on Twitter that, while Binance was still investigating the data, he was confident that the Matic team was not involved with the price volatility. CZ did, however, offer a theory on what could have caused such a rapid fluctuation:
“A number of big traders panicked, causing a cycle. Going to be a tough call on how much an exchange should interfere with people’s trading.”
Since launching Matic on April 25, Binance Launchpad has gone on to kickstart the Harmony blockchain project, Elrond, WINk, Perlin, Band and Kava. Just this month, Launchpad concluded a lottery-based token sale of Troy, a broker that specializes in crypto trading and asset management. According to a Binance press release, a total of 15,605 investors took part in the lottery draw, claiming a total of 88,632 tickets. The press release states that 11,949 participants had at least one winning ticket, a 76.57% user win rate.
Who else is at it?
Binance is not the only company that wants a stake in promising new companies. Since 2018, an ever-growing number of incubator companies have popped up, nurturing the next generation of businesses toward the tentative goal of profitability.
Andreessen Horowitz
Founded in 2009 as a venture capital firm in Silicon Valley, Andreessen Horowitz is one of the most renowned incubators working in cryptocurrency today. Although the firm has extensive portfolios in other sectors such as health care, tech, energy and fintech, it announced that it would be “aggressively investing” in crypto, an announcement that drew attention when made during the middle of the so-called crypto winter.
Andreessen Horowitz’s initial foray into crypto began with a $300 million “all-weather” investment fund that the company reported would be implemented over time, regardless of the tumultuous fluctuations of the crypto markets. The fund has consequently come to be known as A16z.
Most recently, together with venture capital firm Polychain Capital, A16z invested $25 million in cryptocurrency payments startup Celo. According to an announcement made by Celo, the two investors purchased $15 million and $10 million respectively. Andreessen Horowitz currently has over 20 crypto-related projects in its portfolio, including exchange giant Coinbase and Facebook’s Libra project.
Coinbase Ventures
As Binance Launchpad clearly shows, some crypto companies have skyrocketed from startups to potential kingmakers in their own right. Coinbase, a crypto wallet provider and one of the world’s largest cryptocurrency exchanges, founded its investment arm, Coinbase Ventures, in 2018.
Despite the downward trend in cryptocurrency as 2019 draws to a close, Coinbase Ventures is still actively investing in the sector. Earlier this month, the firm participated in a $4 million funding round led by Uncork Capital for the cryptocurrency research startup Messari. The firm’s other most recent selection was a $2.1 seed investment in Opensea.io. The funding round took place in November.
Earlier this year, Coinbase Ventures invested in United States-based blockchain firm Near, in which over $12 million was raised in its Series A round. The firm also participated in the same Celo investment round as Andreessen Horowitz.
Y Combinator
Y Combinator is a U.S.-based accelerator that also makes investments into cryptocurrency companies. After a competitive application process, Y Combinator makes small investments in a number of companies twice a year. It’s no secret that money isn’t the be-all and end-all of the incubation process, and Y Combinator makes a point of stating on its website that many of its applicants don’t need funding at all. The firm says that it also offers help to startups to develop their ideas and helping founders deal with investors and acquirers.
The firm recently took part in a $4.2 million funding round for TRM, a digital currency compliance and risk management service provider. TRM is an alumnus of Y Combinator’s startup incubator, and has reportedly offered its services to major banks and brokerage firms around the world. Y Combinator lists a number of cryptocurrency firms among its top exits, including SFOX and Coinbase.
But what do the experts think?
For Andrew Adcock, CEO of crowdfunding platform Crowd for Angels, crypto incubators play an important role in creating a healthy business environment:
“Firstly, they provide knowledge transfer, ensuring the entrepreneur has access to the information they need. Secondly, they provide a key network of investors, service providers and stakeholders to help establish and scale the business. Finally they can also provide a vital source of early-stage finance before a larger round is progressed. As well, a business that enters an incubator can be seen as ‘championed’ and thus create a good foundation for the potential future ahead.”
Although incubators are influential in the success of selected businesses over others, Adcock explained to CryptoX that the nascency of the cryptocurrency sector adds an element of uncertainty to the incubation process:
“One of the key flaws that crypto incubator face, is the infancy of the industry, technology and public understanding. This state of ‘influx’ can create uncertainty and rapid change, which both the entrepreneur and incubator have to adapt alongside. This being said, the industry as a whole has shown great ability to transform and deliver on change.”
Beyond the developing nature of cryptocurrency hindering the work of incubator companies, Jared Polites, a partner at LaunchTeam, an accelerator and management consulting firm that works with crypto companies, said that the restrictions imposed upon entrepreneurs by those giving out the help and funding creates the need for compromise:
“If you take money from an incubator there will likely be a stipulation that a company is built on top of a specific protocol that the incubator has an interest in promoting. This can create a situation where founders bend their original strategies just to chase the money/resources and end up working off of a completely different foundation.”
Interdax’s Phan told CryptoX that, by virtue of their established presence in the crypto world, incubator companies that choose to launch a new product can sometimes initially rely on reputation alone in the early stages of its trading life, as opposed to working for long-term profitability:
“There is the problem with launchpads that they will attract some people that are most likely buying IEO tokens simply because they know that token will trade on a popular exchange. This isn’t too different to the speculative frenzy that occurred with ICOs, which often encourages short-termism — investors will only care about price and not about actual development.”
Separation of ownership form responsibility
In light of the Matic debacle, many commentators have suggested that incubator companies do not do adequate research into the companies they promote other than short-term profit. Adcock, however, told CryptoX that he does not believe companies behind the incubators are culpable unless they have been shown to be working in a fraudulent or illegal manner. Adcock added that instances in which incubator efforts do not pay off could actually be used to learn from in order to avoid once again making the same mistake:
“For an entrepreneur who chooses to ignore an incubators advice and guidance, is not the fault of the incubator. However, this does not mean that the incubator themselves, will simply distance themselves from a mistake, instead, this could be used as a learning opportunity to see how they may better communicate to build a more transparent relationship with the entrepreneur.”
As with all investments, incubator companies are taking an educated guess that the projects they take on will eventually turn a profit. Inevitably, this doesn’t always work out. Phan said, citing data from CryptoRank, that very few projects have returned on their investment to date:
“The average return on investment for all IEO projects are currently positive only for projects that launched with Binance and Gate.io. […] For the other 11 exchanges, the current average return on investment for their IEO projects are negative.”
For Polites, cryptocurrency projects are particularly hard to forecast with regard to when they will turn a profit. Polites outlined his view to CryptoX, saying that as cryptocurrency is still a very young sector, it is unlikely that many of the companies going through development in incubators will see profitability in the short term: “The crypto adoption and use challenge is still the biggest issues along with education.”
