Although Europe’s venture industry has struggled to create large crypto funds comparable in size to those in America and Asia, this is changing. We have seen significant capital raises not only from the region’s web-native venture firms, but also generalist funds over the past year. There are still issues: Some jurisdictions struggle to custody tokens, and slow regulators have hindered rollout.
As crypto’s bear market was coming to an end, 1kx, a crypto-fund that has backed Matter Labs and Gnosis, hosted an invitation-only crypto summit as part of 2019’s Berlin Blockchain Week.
Lasse Clausen, 1KX founder partner, extended an invitation to all the venture capitalists that he knew. He wanted to teach them about blockchain technology. One person showed up.
Clausen says that European VCs “completely slept on Blockchain” and “That meant most VCs did not have the mandate in their limited partnership agreement to purchase tokens.
European VCs have been energized by the bull market last year and are now able to launch crypto funds and get token exposure as Europe’s blockchain scene grows.
According to The Block Research, Europe outperformed Asia in terms of the global share of Blockchain Venture Funding raised in the second quarter. This was a 25% increase over other regions.
Dealroom data shows that, despite less capital available, European venture firms are at the top of the list for the number of successful blockchain transactions.
Web3 native venture firms in the region are also growing. Greenfield One closed its $160 million crypto fund in late 2017. Maven 11 followed suit with their $120million fund.
The Block reported in April that Fabric Ventures was set to close 2 web3 funds totaling \$245 million. Fasanara Capital, an investment firm based in London, closed a $350m crypto VC and fintech fund.
These advances came even though Europe’s few partners, as venture fund backers are known, have remained cautious.
Nicolas Priem is the managing director of Tioga Capital in Brussels, a web3 venture capital firm. It launched its first $70 million fund in December.
However, LP hesitancy didn’t stop Germany’s Cherry Ventures (HTM0_) from launching a $34million fund in February. According to sources familiar with the matter, Aglae Ventures was backed by Bernard Arnault, CEO of LVMH. It set up a EUR100million web3 fund to invest in equity and tokens.
American LPs are able to raise capital in a successful manner, allowing European companies to bypass the concerns of Europe-based investors.
Ophelia Brown, founder partner at London’s Blossom Capital, says that LPs are very interested in crypto as an asset type. She earmarked a third of its latest \$431 million fund to tokens and NFTs like CryptoPunks and Bored Apes. “75% of our investors are from the U.S., so most of our portfolio LPs have already been exposed.”
Venture firms in some jurisdictions still have to deal with the same problem as money: custody.
Hubert de Vauplane from Kramer Levin, who co-leads Kramer Levin’s alternative investment management team in Paris, says that there are “very few solutions” not only in France, but also in Europe.
De Vauplane says that most banks won’t accept it because they see it as too risky for anti-money laundering. They are not only refusing to do so, but they also close accounts when they see a client doing [token] capital raisings.
French VCs are particularly affected by the custody crunch, as they can only have 20% token exposure under European Union legislation.
Companies in the U.S. are looking at European crypto firms as they don’t have to deal with this problem. Firms like Andreessen Horowitz or Sequoia, which were previously bound by their 20% token allocation limit, have legally restructured themselves to become registered investment advisors.
There is an alternative. De Vauplane says that the EUR100million Ledger Cathay Fund was created as an unregulated special-purpose vehicle. They don’t need an EU custodian.
France’s problem could also be addressed soon. Societe Generale is the third-largest bank in France. It continues to work on its digital asset offering. There are also four authorized crypto custodians in other jurisdictions, such as Germany.
Slow approvals by regulators wary about crypto have hampered the UK’s web3 venture scene, according to Tom Grogan, head of Mischcon De Reya’s blockchain group.
He says, “It’s not feasible for a long period to launch any type of crypto business out of the UK.” “That’s why there is some complicated structuring around places like Guernsey and Gibraltar.
A crypto-friendly cultural?
The Block spoke with many investors who believe that the European crypto-venture scene will thrive in the future despite these difficulties.
Blossom’s Brown claims that Europe’s crypto scene “really came alive” in recent times. She asserts that there is no reason why Europe shouldn’t have billion-dollar cryptocurrency funds. She believes that Europe’s crypto investors are slowly catching up with the U.S.
True, the shortage of LP-approved cash towards token warrants has led to most exchanges and custodians securing big-buck valuations and raises.
Tioga’s Priem says that these startups will mature in the region and so will the funds supporting them. He predicts that European early-stage web3 startups will soon raise Series C or D rounds. This will allow for larger dedicated crypto funds.
Europe’s companies are still raising funds despite the downturn. In the first half of this year, they raised a record $20.1 trillion.
Northzone, a UK company, raised a EUR1billion fund last month. In an interview with The Block, it said that it was open to investing in DAOs or tokens.
Other crypto funds are also expected to be announced. According to an email sent by the spokesperson, Swisscom Ventures, a venture fund of a partially publicly-owned telecommunications company is expected to launch a web3 fund next spring.
Although custody and nervous LPs may slow down the pace of Europe’s venture companies, Europe is more competitive in terms of regulatory clarity than the U.S., according to Priem.
A committee of the European Parliament approved the Markets in Crypto-Assets regulation (MiCA). This regulation will bring digital assets under institutional regulation throughout the bloc. This could be law within two years after another vote.
He says, “I believe we’re ahead of the U.S. in Europe with MiCA coming on the market in 2024, but it’s still state-by-state in the U.S.” It will provide investors with clarity and, in the future, it’ll be our competitive advantage.