No year was fatter than 2021 
1. One are companies in competitive businesses, such as cybersecurity, instant delivery and fintech, which suffer from an “oversupply of venture capital”, says Asheem Chandna of Greylock Partners, one more vc firm. “Any time something starts working, vcs will go and fund ten of these,” he adds. The winners could do well. Middling firms may struggle to survive.
Category Archives: Research
After the Feast, The Fast: The great Silicon Valley shake-out
The Economist | Jun 28, 2022
No year was fatter than 2021
According to cb Insights, a research firm, global tech startups raised $621bn in 2021. That is twice as much as the year before and ten times more than in 2012. Then the music stopped. First to feel it were publicly traded firms.
- nasdaq Composite index has fallen by 30% from its peak last November.
- PitchBook reckons more than 140 vc-backed firms that went public in America since 2020 have market capitalisations lower than the total amount of venture funding they raised over their lifetimes.
- Faraday Future, an American maker of electric cars that had raised more than $3bn, is now worth just $710m.
- Grab, a Singapore-based super-app, raised $14bn before its going public at a valuation of $40bn. Today its market value is $10bn.
Fundraising has slowed sharply
The techno beatlessness is now spreading to the private markets. Fundraising has slowed sharply compared with the second half of 2021. Between March and May the number of funding rounds was down by 7% in America, compared with the same period last year, according to PitchBook. In Asia it declined by 11% and in Europe by 19%.
Things are almost certainly worse than those numbers suggest. A delay in reporting means they lag behind the reality on the ground by a few months. vc investors say that hardly any deals are being inked these days. Fewer startups are also “exiting”, vc lingo for being listed or sold on to other investors.
See: Q2’22 Private Market Global Venture Funding – Is the Party Over?
The Economist estimates that a basket of 12 big startups worth $1trn at the start of this year is now worth about $750bn. That list includes Stripe, a fintech star, which has seen its secondary-market share price collapse by 45% since January, and ByteDance, TikTok’s Chinese parent company, the shares of which trade at a quarter below their value six months ago.
Trimming the fat
To avoid having to raise capital in a rush at a depressed valuation, founders are busy trimming the fat. “Last year one dollar of growth was all the same, whether it cost 90 cents or $1.5 to acquire it,” says Hilary Gosher of Insight Partners, a vc firm. Nowadays the watchwords are capital-efficient growth. The average cash-burn rate has fallen in the past year for all types of startup, from the youngest to the more mature, according to Brex’s data. One way startups are containing costs is by cutting staff.
Three types of firms at higher risk
2. The second higher-risk group are unlucky companies that did not raise money in 2021, when investors were generous and valuations sky-high.
3. The third category are firms most sensitive to consumer demand.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Small Businesses Incur Greatest Loss of Cyber Attacks | 67% Suffer Repeat Attacks Within 12 Months
CPO Magazine | Alicia Hope | Jun 23, 2022
Two-thirds of companies that suffered cyber attacks were hit again within a year, according to a global Cymulate Data Breaches Study. According to the report, 40% of the businesses were attacked within 12 months, with an average of 1.3 cyber attacks per year. However, 10% of the firms experienced ten or more incidents within a year.
Employees and connected partners are the main gateways for cyber attacks
- Most cyber attacks originated from end-user phishing (56%) and hacking third parties with corporate network access
- Direct cyber attacks on the enterprise network by threat actors accounted for 34% of incidents
- Insider threats were responsible for 29% of incidents
See: Lex Fridman Podcast with Brett Johnson: US Most Wanted Cybercriminal
Businesses responded differently after cyber attacks
- 39% handling everything internally, without hiring experts, public relations, or mandatory reporting
- 35% of the cases, the company responded by hiring security consultants
- 12% hired public relations consultants to protect their reputation
- 12% responded by dismissing their current security staff, while 4% dismissed the executives
According to the report, security teams needed to involve a legal, finance, or executive staff to deal with the aftermath of cyber attacks in 39% of the cases.
Multi-factor authentication remains the most preferred mitigation for cyber attacks
- The top types of incidents reported were malware (55%), followed by ransomware attacks (40%), and DDoS attacks (32%)
- Two-thirds (67%) of the respondents preferred multi-factor authentication (MFA) to mitigate cyber attacks, followed by proactive corporate phishing and awareness campaigns (53%), well-planned and practiced incident response plans (44%), and least privilege (43%).
See: 90% of IT Managed Service Providers Experienced a Successful Cyber-Attack (in the Past 18 months)
Small businesses incur more losses from cyber attacks
More than half (57%) of large businesses reported that disruptions after cyber attacks lasted for a short time, while 40% reported minor damage. In contrast, only 33% of small businesses reported short-lived disruptions and low-level damage (27%).
The larger the company, the more resources they are likely to have to recuperate
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Research: Ownership of Top 10 Web3 DAOs is Surprisingly Concentrated
Chainanalysis | Team | Jun 27, 2022
Decentralized autonomous organizations (DAOs) are a staple of web3. Internet-native and blockchain-based, DAOs are intended to provide a new, democratized management structure for businesses, projects, and communities, in which any member can vote on organizational decisions just by buying into the project.
At a high level, this is how DAOs work:
- DAO founders create a new cryptocurrency, known as a governance token;
- They distribute these tokens to users, backers, and other stakeholders;
- Each token corresponds to a set amount of voting power within the organization. Each token also corresponds to a price on the secondary market, where it can be bought and sold at will.
See: Sounds like a DAO, Looks like a DAO: Introducing the Modern Digital Organization
While this process is often described as a way to decentralize power, governance token data suggests that DAO ownership is highly concentrated.
The concentration of governance token holdings
By analyzing the distribution of ten major DAOs’ governance tokens, we find that, across several major DAOs, less than 1% of all holders have 90% of voting power.
This has meaningful implications for DAO governance:
- For example, if just a small portion of the top 1% of holders worked together, they could theoretically outvote the remaining 99% on any decision. This has obvious practical implications and, in terms of investor sentiment, likely affects whether small holders feel that they can meaningfully contribute to the proposal process.
- Overly concentrated voting power in DAOs can result in decision-making that seemingly contradicts the tenets of decentralization on which web3 is built.
See: Blockchain-based replacement for traditional crowdfunding: DAOs
- For instance, in June 2022, the DAO governing the Solana-based lending protocol Solend faced a problem: Solana’s price was dropping, and if it fell much further, the protocol’s biggest whale user would face a margin call that could render Solend insolvent and send roughly $20 million worth of Solana onto the market, potentially tanking the asset’s price and upending the entire Solana ecosystem. The DAO called a vote to take control of the whale’s account and liquidate its position through OTC desks, rather than the open market.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Analysis of Centrality in Canada’s Innovation Entrepreneurship System
Systemic Design | Ryan Murphy | Apr 10, 2016
Using the power of systems & data science to identify policy and program leverage points.
The following metrics are considered in the design:
- Reach Efficiency
- Indegree
- Torque
- Betweeness
- Closeness
- Size
- Leverage
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Justin Hartzman: Unveiling the Celsius and 3 Arrows Capital implosions
Justin Hartzman on Medium | Jun 22, 2022
The markets have been absolutely brutal. Over the last month, we have seen a stablecoin provider, a leading lending provider, and one of the biggest crypto hedge funds implode entirely. We have discussed Terra’s implosion in the past. Today, let’s focus on Celsius and 3 Arrows Capital (3AC). The truly remarkable thing here is that we are in entirely uncharted waters as far as crypto is concerned.
We have never seen so many institutes implode at the same time. Strangely enough, I believe this could be good for the market in the long term. We will get to that later. However, first a quick intro.
What are Celsius and 3AC?
So let’s start with Celsius. Founded in 2018, Celsius was one of the biggest lending platforms in crypto. In May 2022, they had more than $8 billion lent out to clients and $12 billion in assets under management. What made them truly attractive was the incredible APR they offered on collateral. Celsius has been using client funds on various DeFi protocols like Lido, Curve, and — wait for it — Terra’s Anchor Protocol — to generate this yield. On-chain analytics platform Nansen has already identified the wallets that made these trades. When Terra imploded, Celsius CEO Alex Mashinsky quickly pointed out that they had pulled their position safely out of Terra.
See: Terra’s crash shakes confidence leaving some other stablecoins on shaky ground
On the other hand, 3AC is one of the most well-known venture capitals in the crypto space, founded by Su Zhu and Kyle Davies. 3AC is known for being one of the biggest borrowers in DeFi. During the market’s peak, 3AC had holdings worth $10 billion, including Lido, DYDX, Bitcoin, Ethereum, and….yup… Terra. 3AC borrows from every major lender out there, like — BlockFi, Genesis, Nexo, and Celsius. Inevitably, they are all going to suffer due to 3AC’s implosion.
There is one more interesting thing happening in the background that we need to look into before proceeding.
What is stETH?
As you know, you can stake your ETH in the beacon chain to be a validator. Each entity must stake at least 32 ETH to become a validator in Ethereum PoS. There are two ways that you can do this. Buy 32 ETH and stake it. Or create a pool and stake 32 ETH.
The DeFi protocol, Lido Finance did something super smart. They took ETH from their users to stake on the beacon chain. In return, they issued a new token called stETH (staked Ether), pegged 1:1 with ETH, and gave it to the user. This strategy worked very well for Lido, making it the most dominant entity in PoS Ethereum. stETH is a popular token in DeFi applications. Both Celsius and 3AC had significant exposure to stETH.
However, just a few weeks back, the stETH:ETH peg broke.
See: Vitalik: Designing Principles-based Stablecoins that (may not) collapse
The reason this peg broke is because of stETH relative liquidity when compared to ETH. The max addresses holding stETH never exceeded 65,000. Obviously, this is a low number when compared to addresses holding Ethereum.
As such, the daily trading volume for stETH is significantly lesser than ETH, making it a more illiquid asset. Now, if some whales decide to dump their stETH, the lack of liquidity could bring the asset’s price down. This is precisely what happened when some players chose to sell off their stETH. For example, Alameda — a major trading firm with close ties to FTX and SBF — dumped $88 million worth of stETH.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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How Unadjusted Currency Transaction Reporting Leads to Invasion of Privacy and More Compliance costs
Cato Institute | Nicholas Anthony | Jun 10, 2022
The hidden tax of inflation has been a little less hidden lately. From grocery stores to gas stations, people are seeing prices rise before their eyes. Yet it’s not just our wallets that are paying the price. For 50 years, inflation has helped the U.S. government increase financial surveillance under the Bank Secrecy Act by silently increasing the activities banks must report in their effort to counter financial crime.
See: NCFA Response to FINTRAC’s ‘Knee Jerk’ Regulations Requiring Donation Crowdfunding Platforms to Register and Comply with AML/ATF Legislation
One of the key requirements of the 1970 Bank Secrecy Act was that banks must report to the government any time a customer’s financial activity crosses any number of thresholds. For instance, banks are required to file currency transaction reports (CTRs) whenever a customer makes a cash transaction over $10,000 or multiple cash transactions in a single day that add up to $10,000.
The result of the law is that thousands of reports are filed every day against Americans for merely using their own money.
So what does inflation have to do with the reports?
The $10,000 threshold was set 50 years ago. If it were adjusted for inflation all this time, the threshold would be nearly $75,000 today. So while it may have been politically feasible to set a “high” threshold of $10,000 in the 1970s when you could buy two brand new Corvettes for that price, the threshold should have been designed with an adjustment for inflation so it would change to reflect changes in the economy (Figure 1 above).
See: Will The ECASH Act be the Answer to Privacy and Virtual Currency in the U.S.?
Without that adjustment, as JP Koning has described:
This means ever more invasions of privacy and higher costs of compliance. Each year with inflation is another year that the government is granted further access to people’s financial activity.
Yet it is not just an issue of unjust surveillance and rising compliance costs. The artificially low threshold also forces the Financial Crimes Enforcement Network (FinCEN) to face an ever‐expanding workload––something the cash‐strapped agency cannot afford to engage in.
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Q2’22 Private Market Global Venture Funding – Is the Party Over?
CB Insights | May 19, 2022
Following a cool down in global funding in Q1’22, global venture investment has continued to decline in Q2’22 so far, with quarterly falls in dollars, exits, and unicorn births in sight.
Global venture funding fell to $142.4B in Q1’22, down by a fifth from the previous quarter’s total.
See: Osler Deal Points Report: Insights into Venture Capital Deals and Financings
As economic uncertainty lingers on and investors tighten their belts, the private market’s downward trajectory appears to be continuing full force in Q2’22. In fact, at the current pace of activity, global funding for the second quarter is projected to decrease by 19% quarter-over-quarter.
Deal activity is trending down as well — deals are on track for a 22% drop from Q1’22, a 7-quarter low for global venture deals.
Scott Galloway's 'chart of the week' version:
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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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