As crypto's last bear market was drawing to a close, 1kx, a crypto fund that’s backed Matter Labs, Gnosis and Qredo, held an invite-only crypto summit as part of 2019’s Berlin Blockchain Week.
1kx founding partner Lasse Clausen extended an invitation to most of the venture capitalists he knew, aiming to school them on blockchain technology. Only one showed up.
“European VCs completely slept on blockchain,” says Clausen, “That meant most VCs didn’t have the mandate from their limited partnership agreement to buy tokens”
Kicked into gear by last year’s bull market, European VCs are finally beginning to roll out crypto funds and taste token exposure as the size of Europe’s blockchain scene continues to swell.
Europe surpassed Asia in the global share of blockchain venture funding raised in the second quarter of this year, jumping by 25% as other regions slumped, according to The Block Research.
And despite having less capital to hand, Dealroom data show that this year European venture firms are neck-and-neck with the U.S. in terms of the number of blockchain deals successfully completed.
The region’s web3 native venture firms have been gaining ground too. Late last year, Greenfield One closed a $160 million crypto fund with Dutch firm Maven 11’s $120 million fund following suit.
In April, The Block reported that Fabric Ventures is set to close two web3 funds worth $245 million. And last month, Fasanara Capital, a London-based investment firm that launched a liquid digital asset fund in 2019, closed a $350 million fintech and crypto VC fund.
The advances have come even as Europe’s limited partners — as the backers of venture firms are known — have stuck with their notoriously cautious approach.
“We talk to family offices and investors [in Europe] and rarely do they have private equity or VC in their portfolio — let alone crypto,” says Nicolas Priem, managing director of Tioga Capital, a Brussels-based web3 venture capital firm that launched its first $70 million fund in December.
But LP hesitancy hasn’t stopped Germany’s Cherry Ventures from launching a $34 million fund in February. And over the summer, Aglaé Ventures, a firm backed by LVMH CEO Bernard Arnault, set up a €100 million ($98 million) web3 fund that aims to invest in tokens and equity, according to people familiar with the matter.
Successful capital raises from American LPs also allow European firms to bypass anxious Europe-based backers.
“Our LPs are very interested in crypto as an asset class,” says Ophelia Brown, founding partner of London’s Blossom Capital, which earmarked a third of its latest $431 million fund for tokens and NFTs such as Bored Apes and CryptoPunks. “75% of our investors come from the U.S. so most of our LPs already have exposure.”
A problem as old as gold
In some jurisdictions, however, venture firms still face a problem as old as money itself: custody.
“There are very few solutions not only in France but also in the EU that are in the legal and business capacity to open an account for tokens,” says Kramer Levin lawyer Hubert de Vauplane, who co-leads the firm’s alternative investment management practice in Paris.
Most banks refuse "as they consider it too risky in terms of anti-money laundering,” continues de Vauplane. “Not only are they refusing but usually when they see one of their clients doing a [token] capital raising, they close their account.”
The custody crunch is a particular pain for French VCs, since under European Union legislation for alternative investment funds, they are allowed to have just 20% exposure to tokens.
It’s a problem that U.S. firms actively looking at European crypto companies don’t face. Previously shackled by their own 20% limit on token allocation, firms such as Andreessen Horowitz and Sequoia legally restructured to registered investment advisors.
Yet there is a regulatory workaround. The €100 million Ledger Cathay Fund was set up as an unregulated special purpose vehicle, meaning they don’t need to have an EU custodian, says de Vauplane.
France’s issue could also soon be remedied. Societé Generale, the country’s third-largest bank, is still plowing ahead with its digital asset offering. In other jurisdictions such as Germany there are four crypto custodian providers authorized by regulators.
The UK has had its web3 venture scene hampered by slow approval from regulators wary of crypto, says Tom Grogan, co-lead of the blockchain group at law firm Mischcon De Reya.
“It hasn’t been viable for a long time to launch any kind of crypto business from the UK,” he says. “That’s why you get some complex structuring around somewhere like Guernsey or Gibraltar.”
A crypto-friendly culture?
Despite these challenges, most of the investors The Block spoke to say the European crypto venture scene is set to flourish in the coming years.
Blossom’s Brown says that Europe’s crypto scene has “really come alive” in recent years. She claims that there’s no systemic reason why we don’t see billion-dollar crypto funds in Europe. Indeed, she thinks Europe’s crypto investors are gradually catching up to the U.S.
It’s true the lack of LP-approved cash toward token warrants has resulted in mostly exchanges and custodians reaping the big-buck raises and valuations so far.
But as these startups mature in the region, so will the funds that back them, says Tioga’s Priem. He believes that soon early-stage web3 startups in Europe will start to raise Series C and D rounds, which will warrant larger dedicated crypto funds.
Europe’s firms are still continuing to raise amid the downturn and have raised a record $20.1 billion in the first half of this year.
UK firm Northzone, which raised a €1 billion fund fund last month, said in an interview with The Block that it would be open to investing in DAOs and tokens.
There are also other crypto funds set to be announced. Swisscom Ventures, the venture fund of a partly publicly owned telecommunications company, is set to debut a web3 fund next year, according to an email from the firm’s spokesperson.
Custody concerns and nervous LPs might hamper the speed of Europe’s venture firms, but Europe out-competes the U.S. in regulatory clarity, says Priem.
This week, a committee of the European Parliament passed its Markets in Crypto-Assets (MiCA) regulation, which will aim to bring digital assets under the wing of institutional regulation across the bloc. Following another vote, this could become law in two years.
“I think we’re ahead in Europe versus the U.S. with MiCA coming to the market in 2024 but in the U.S., it’s still state-by-state,” he says. “It’s going to provide clarity for investors and in the coming years, that’s going to be our competitive edge.”
© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.