Dear Reader,
Yesterday, we looked at how the latest generation of special purpose acquisition corporations (SPACs) have positively impacted early stage companies.
Specifically, they’re giving early stage companies an alternative to round after round of dilution through the typical venture capital (VC) funding cycles.
SPACs give companies a chance to go public early and raise a lot of capital at a small or even micro-cap stage, enabling normal investors to get access early… just like back in the 1990s.
Today, we’ll take a look at the dynamics at an even earlier stage of capital formation – the seed round.
I remember 10–15 years ago, when a seed round used to look like a $1–1.5 million raise. Venture capital firms and wealthy investors with access would give promising founders and entrepreneurs just enough capital to build a prototype or bring an early product to market.
The thinking was to give the company just enough so that if it’s scrappy, smart, creative, and hardworking, it will be able to demonstrate that it’s worthy of a follow-on Series A round, which would typically be around $5 million.
Things have really changed since then. It’s easy to see by how much in the chart below:
What used to be a $1–1.5 million seed round back in the 2005–2010 era has evolved to an average seed round of $4.6 million. And while there are always some massive seed round outliers in the tens of millions, the median round size isn’t far off at $4 million.
There are a couple of things that have happened to cause this dynamic:
Record levels of private capital searching for higher returns in a near zero percent interest rate environment.
Over the last 10 years, there has been an exponential rate of improvement in the tools that are used to create products and services. This includes computing power, cloud-based services, artificial intelligence and machine learning (AI/ML), and even manufacturing technology like 3D printing that accelerates rapid prototyping.
The combination of these two things has enabled early stage companies to innovate and iterate at a pace we’ve never seen before. This allows a company to find a product market fit more quickly than ever.
And once VC firms see a market fit for a product or service, they don’t hesitate to allocate larger amounts of capital.
The industry has become hyper-focused on “leaning in” when something is working. And companies have also learned that doing just one thing really well is a faster way to grow and get additional rounds of funding. Hit it out of the park on one product or service, get more funding, and then expand from there.
And the dynamic that I am most excited about for next year related to seed rounds is what is happening in the crowdfunding space.
It used to be that the Regulation Crowdfunding (Reg CF) deals were limited to a $1.07 million raise. Again, this was around the range of an “old school” seed round raise back in the 2000s.
But it just wasn’t enough capital for a seed round company to invest heavily, innovate quickly, and grow. $1 million was just too short of a runway. In reality, it just wasn’t worth it for most companies to go down that route.
And then, in late 2020, the regulations were changed for Reg CF deals, and the cap was lifted to $5 million. The regulations were implemented earlier this year, and we’ve just started to see a handful of companies taking advantage of these new Reg CF deals.
I’m excited because at $5 million, a Reg CF deal is now on par with what is normal in the venture capital industry for a seed round. And it gives early stage companies enough capital to run fast, iterate, find that product market fit, and lean into the growth.
This single change is a game changer. And the crowdfunding industry is ramping up quickly to support what will be a flood of offerings.
2022 will be a landmark year for the industry. And the best part is that normal investors will have the opportunity to invest at the seed or even pre-seed stage, right where the venture capital firms have been dominant for decades.
We have a lot to look forward to next year. And if you’re interested in learning more about the exciting world of SPACs, you can go right here.
A handful of companies just filed with the Federal Communications Commission (FCC) to launch 38,000 satellites capable of delivering internet service to homes in what’s called the V-band spectrum.
The companies include Amazon, Astra, Inmarsat, Intelsat, SpinLaunch, and legacy incumbents Boeing, Hughes, OneWeb, and Telesat.
This is an absolute land grab. It’s a new kind of space race. And it all comes back to SpaceX and its Starlink project. Elon Musk has done it again.
Historically, the old internet-to-home satellite services operated in the C-band spectrum. This was a lower frequency spectrum that required big and awkward satellite dishes to work.
However, the challenge with operating in the lower C-band frequency is that there’s limited bandwidth. That means speeds are relatively slow and the performance is so-so.
But the challenge with higher frequencies is that the signals are more susceptible to outside influences like the weather. So we need more high-tech solutions to make higher-frequency systems work.
And that’s why we haven’t seen satellite internet services operating in the higher V-band frequency before. Nobody had figured out the physics of dealing with the challenges at those frequencies before.
Until SpaceX…
SpaceX has launched about 1,800 satellites to deliver home internet service in the V-band spectrum. And it has already filed with the FCC to launch up to 30,000 more as part of its Starlink constellation.
So SpaceX has demonstrated that its technology works for satellite internet at higher frequencies. And Wall Street is drooling over the possibility of being able to invest in Starlink, which is intended to spin out from SpaceX at some point in the next couple of years.
Valuations around $30 billion have been murmured. That’s caught the attention of the industry… which is why so many companies are suddenly applying for the V-band spectrum.
Simply put, Musk once again did what the industry thought couldn’t be done. Now competitors are starting to realize just how valuable SpaceX and its Starlink constellation are. And they want a piece of the action.
But here’s the thing – SpaceX is already years ahead of the competition. And it is launching new satellites almost every single month now, sometimes twice a month. From my perspective, it’s going to be impossible for these other companies to catch up.
Still, it’s going to be fun to watch this new space race play out. And if nothing else, this validates just how valuable SpaceX and Starlink are.
Niantic just made some big moves that caught my eye. From following the breadcrumbs, I think this company might be the dark horse candidate to launch the world’s first mass-market augmented reality (AR) eyewear. I’ll explain…
To bring new readers up to speed, Niantic is the company that produced the wildly successful Pokémon Go game. This is the game that pioneered the concept of augmented reality as applied to smartphones. And it has generated over $5 billion in sales for Niantic.
The object of Pokémon Go is for players to find virtual creatures called Pokémon in their surroundings using their smartphone camera. When found, these creatures are displayed on the player’s smartphone within his or her surroundings.
Catching a Pokémon
Source: Panda Security
To follow up on this success, Niantic launched a similar game in 2019 called Harry Potter: Wizards Unite. And so far, this one has done nearly $40 million in sales for Niantic in just over two years. Not too bad, but nowhere near the success of Pokémon Go.
Yet Niantic just announced that it will close down Harry Potter: Wizards Unite in January. This came as something of a surprise to most. But to me, it signals that Niantic wants to focus its resources elsewhere.
Meanwhile, Niantic just launched a new development platform on which AR apps can be built. This will allow third-party developers to make their own AR games and applications based on Niantic’s software.
And to top it off, Niantic just raised $300 million in its Series D venture capital round. This values the company at $9 billion, and it gives Niantic a massive pool of capital to develop its next product.
Put these three things together, and it becomes clear that Niantic is going all-in on its AR glasses. This makes perfect sense, and the timing is fantastic. We can think of this move as a backdoor play on the metaverse trend that’s so hot right now.
After all, if Niantic can overlay graphical images on our real world through its AR eyewear, it can effectively create a perpetual metaverse. The metaverse doesn’t have to be a unique virtual world. Instead, it can be a mix of the real world with interactive graphics weaved into it.
My prediction is that Niantic will come out with a major AR launch next year. That’s why it is making these moves that may seem odd on the surface.
This is an initial public offering (IPO) in the making, or a company that will be acquired by a larger gaming or entertainment company. I certainly hope Niantic stays independent, though.
Its alternative take on a metaverse is something that I want to see play out, and hopefully it’s one we can ultimately invest in.
An interesting dynamic within the digital asset space started this year – lending against digital assets secured on a blockchain. This is a sign of what’s to come…
Investors holding bitcoin, Ethereum, and other digital assets have generated massive returns over the last 18 months.
And rather than sell their holdings, many investors have started to take loans out against them. This has quickly become a big business…
There are now numerous companies operating in the digital asset lending space. These companies allow borrowers to wrap their digital assets into a smart contract that basically serves as an escrow account. The company then lends a percentage of the asset’s value to the borrower – say 50% – in the form of a U.S. dollar stablecoin.
For example, if a borrower wraps $1 million worth of bitcoin in a smart contract, the company might lend $500,000 in the form of a stablecoin like the U.S. Dollar Coin (USDC).
At that point, the bitcoin would be held in escrow for as long as the borrower made the agreed-upon loan payments. Once the loan was paid off, the smart contract would release the bitcoin back to the borrower.
And if the borrower defaulted on the loan, the smart contract would release the bitcoin to the lender, who would then sell it into the open market to cover the loan.
Thanks to smart contract technology, all this happens automatically. No humans need to be involved in the escrow process whatsoever.
We may ask – why would someone with a lot of wealth in digital assets want to do this? Why not simply sell the asset and receive 100% of its value?
The answer to that is twofold.
First, many digital asset investors still see dramatic upside ahead. Selling now forfeits those future gains. They would rather “HODL,” or hold their digital assets for the long haul.
And second, if investors sold their digital assets, they would be on the hook for massive capital gains taxes. On the other hand, borrowing against these assets is a tax-free event.
And think about this – the borrower in the above example could take that $500,000 and buy another asset with it. The returns produced by that asset could then pay off the original loan.
At that point, the borrower would have both the bitcoin and the new asset. This is a technique that wealthy families have used for centuries to grow their wealth in tax-efficient ways.
Borrowing against common digital assets like bitcoin and Ethereum has been happening all year long. And now it seems this practice is spreading to non-fungible tokens (NFTs).
Just in the last few days, somebody borrowed $1.4 million against an Autoglyph NFT. This is a piece of generative art produced by running software code on the Ethereum blockchain. Here it is:
An Autoglyph NFT
Source: thedefiant.io
Borrowing against NFTs works just the same way as it does with bitcoin and Ethereum. And it adds another element to NFT investing. If the NFT goes up in value, investors can tap into that underlying value by borrowing against the NFT.
Of course, the opposite is also true. If the NFT goes down in value, the lender could issue a margin call. That’s when the borrower is required to either pay down the loan or put up more collateral.
So what we are seeing here is the rise of using decentralized finance (DeFi) to provide a very common financial service like lending, all done on a blockchain. We will see a lot more of this happening in 2022 as the digital asset space continues to mature.
And as we can see, there are many interesting use cases and projects developing with blockchain technology. That’s why I’m working hard to make sure my subscribers are in the know about the most cutting-edge investment opportunities in this space.
If you’d like to learn more about how to position yourself for the rise in DeFi, blockchain tech, NFTs, and more, then simply go right here for the details.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
