2021 has been an explosive year for blockchain, and venture capitalists have also bet big on crypto startups, pooling more than USD 27 billion globally as of November 2021 – more than the previous decade combined.
Sequoia Capital, one of the most successful venture capital firms in Silicon Valley, has been quick to get in on the action. Last year, Sequoia made 21 investments in crypto-focused startups, which represents 25% of its total new investments.
In December 2021, Sequoia India and Sequoia Capital revised their profiles and added a lot of cryptocurrency and metaverse wordings, stating they want to build decentralised autonomous organizations (DAO), which seems to solidify Sequoia’s determination to lead the cyber revolution.
But will the same strategy work for its China division, where regulators have banned crypto trading and mining, and proposing stricter supervision for NFTs and the metaverse?
Since entering China in 2005, Sequoia Capital China has already supported the development of over 150 companies. Some of its most successful exits include well-known blockchain gaming company Animoca Brands, China electric vehicle pioneer Nio, e-commerce giants like JD and Meituan, and livestream video platform Kuaishou.
In an earlier discussion, Sequoia China founder Neil Shen said he would be “all in crypto”, according to Sina Finance.
However, the overall sentiment towards blockchain projects in China remains unpredictable and uncertain. In the past few years, China had harshly cracked down on cryptocurrency, but embraced blockchain technology simultaneously.
In 2013, China prohibited banks from handling transactions related to bitcoin. In 2017, it banned initial coin offerings (ICOs) and services catering to token-based fundraising activities. In 2019, China labeled bitcoin mining as an “undesirable” industry as it is said to be highly polluting. Last year, China declared all crypto transactions as illegal.
Meanwhile, China has launched the Blockchain Service Network (BSN) in 2019, which allows the country to unify different blockchain projects while maintaining control. In 2020, China set up a national blockchain committee consisting of experts from government, universities and tech companies to develop standards for blockchain applications across different industries.
Despite the relatively challenging regulatory environment, Sequoia Capital China was described as building its “blockchain empire” in the country as it has reportedly more than 14 investments in the blockchain sectors, from mining machines manufacturers to crypto exchanges.
The firm also invested in blockchain funds by becoming a strategic partner of Dragonfly Capital, a US-based venture capital firm focusing on the blockchain industry, in January 2021.
Here are some companies cherry picked by Sequoia Capital China.
Huobi is regarded as the top three biggest crypto exchanges established in China. It was founded in 2013 by former Oracle Corporation coder Leon Li.
Huobi is positioned as a global blockchain asset services provider of exchange, trade, wallet, and storage. Based in East Africa, it now has offices in Singapore, Japan, South Korea, United Kingdom and Hong Kong to serve millions of users in more than 130 countries.
Only one year after its debut, Huobi received funding from Sequoia China and ZhenFund, one of the largest angel investors in China co-founded by Sequoia China. It was reported that Sequoia invested some USD 10 million, which is said to be the firm’s first public disclosed investment in the crypto space.
Huobi also disclosed in 2018 that Sequoia China’s equity share was 23.3%, making it the second largest shareholder beside Li Lin, the founder of Huobi. Dated to November 2021, Huobi reached USD 140 billion in trading volume. In 2020, Huobi’s management told Bloomberg that retail traders from China accounted for 20% of the platform’s trading volume.
Huobi was once the world’s largest digital asset exchange with a 50% global share, and one of the rare Chinese born crypto platforms that maintained a close relationship with the Chinese government, but it still could not escape from its hometown’s claws.
After China’s crypto ban in 2017, Huobi set up operations in Singapore and Malta and offered over-the-counter trading and crypto-to-crypto transactions to its Chinese users. In September 2021, after China declared all crypto-related transactions as illegal, Huobi stopped new registrations for traders using mainland China mobile numbers.
The platform’s strategy right now is to focus on global expansion, as co-founder Du Jun told Bloomberg that “there’s no room for discussion” with regulators when it comes to operating legally in China. For the year ended 30 September 2021, Huobi Group recorded revenue of HKD 610.7 million, a 120.8% increase compared to the same period in 2020.
The Chinese crypto mining giant was founded in 2013 and designs and manufactures high performance computing chips and software. Bitmain has raised a total of USD 764.7 million in three rounds of funding.
Sequoia China first joined its series A funding round with IDG Capital and Sinovation Ventures in 2017 which raised USD 50 million. Again in 2018, Sequoia led the series B funding round and raised USD 292.7 million in total.
2018 was a successful year for Bitmain as it rose to become the world’s largest designer of application-specific integrated circuit (ASIC) chips for bitcoin mining. At the time, the company also ran BTC.com and Antpool, two of the largest mining pools for bitcoin, although it spinned off both pools in 2021.
Following its success, the company filed for a Hong Kong IPO in 2018 but later gave up on the world’s supposingly largest crypto-related IPO. The company recorded a net profit of USD 742.7 million in 2H 2018 and was valued at USD 40–50 billion, but it was faced with a USD 391 million unsold inventory in 2Q 2018, as well as fierce competition from other crypto IPO plans and tight regulations in China.
Similar to Huobi, Bitmain is said to have suspended its sales in mainland China due to the Chinese government’s ban on crypto activity in September 2021.
Previously being one of Taiwan Semiconductor Manufacturing Co’s five largest customers,
Bitmain is reportedly reducing 20,000 unit orders of TSMC’s 5nm node process in 2021Q4, which is USD 300 million in value. Although the 7nm technology is still the pinnacle of the bitcoin mining industry, 7nm and 5nm chips are said to have better power efficiency, and are anticipated to be materialized in the near future.
3. BIT Mining
BIT Mining Limited (NYSE: BTCM), formerly known as 500.com, is a cryptocurrency mining company that owns the world’s top blockchain browser, BTC.com. It provides various currency mining services including BTC, BCH, ETH and LTC.
Before 500.com went public in the US, Sequoia China purchased USD 20 million of convertible notes and USD 15 million of Class B ordinary shares in a private placement. Dated to 31 December 2021, Sequoia China is its largest equity shareholder.
In April 2021, BTIT entered into a definitive agreement to acquire 7 nanometer (nm) cryptocurrency mining machine manufacturer Bee Computing.
In October 2021, the company announced that its mining pool subsidiary, BTC.com, would completely exit the China market, which may result in a decrease of 10% to 20% in revenues for the three months ending December 31, 2021.
However, it expects that its continued growth in international markets will help balance its losses in China. For Q3 2021, the mining pool business recorded revenues of close to USD 397.8 million.
4. Babel Finance
The Hong Kong-based cryptocurrency crypto lender and asset manager was established in 2018. It began as a lender to crypto miners in China, but the startup now aims to serve high-net-worth individuals and institutional clients with crypto lending, crypto asset management and crypto prime financing.
The company has more than 500 institutional clients around the world. Dated to the end of February 2021, its outstanding loans stood at USD 2 billion, with a monthly trading volume of USD 8 billion, up from USD 380 million in March 2020.
In September 2021, it raised USD 40 million in a series A funding round led by Zoo Capital, Sequoia Capital China, Dragonfly Capital and other investors. Babel Finance said the inclusion of BAI Capital and Tiger Global Management in this round was a sign of growing investor interest in Asia’s cryptocurrency players.
In the same month, Babel Finance expanded into Singapore by setting up Babel Asia, which is independent of the Hong Kong office. It is in plans to apply for relevant regulatory licenses.
5. Nervos Network
Nervos Network is an open source, non-profit, public blockchain ecosystem founded in China in 2018. Approved by China’s governors, it is positioned to solve the biggest challenges in blockchains.
In 2019, the company partnered with China Merchants Bank International (CMBI) to develop decentralised applications for financial services, which can serve the bank’s retail customers.
In 2020, Nervos became the first public blockchain to integrate with China’s Blockchain-based Services Network (BSN).
The design of its Nervos CKB (Common Knowledge Base) is said to be a secure, permissionless and decentralized Layer 1 blockchain that is built to scale with Layer 2 solutions. It can provide an encrypted economic network for enterprises, which they do not have to maintain the blockchain infrastructure themselves.
Just around half a year after its debut, Sequoia China led a private offering of USD 28 million with Wanxiang Blockchain. The funding round was also joined by cryptocurrency investor Polychain Capital, token angel fund 1kx, Blockchain Capital, Multicoin, and Matrix Partners China, Ceyuan Ventures, imToken and more.
Founded in 2014, the Chinese fintech company is dedicated to blockchain development. Founders Da Hongfei and Erik Zhan previously established NEO, a blockchain-based platform, where they found that various enterprises were looking for private blockchain solutions. Therefore, they founded Onchain to assist with the financial and legal frameworks of the enterprises.
Onchain runs independently from NEO, which is funded publicly, while Onchain is backed by Fosun, one of China’s biggest conglomerates. Sina Finance reported that Sequoia China partnered Fosun to back up Onchain’s seed funding round in 2017.
The founders of NEO and Onchain hope to achieve cross-chain interoperability in the future. As such, its main product, Distributed Networks Architecture (DNA), is designed to help enterprises quickly create public and private blockchains.
While a cross-chain system requires trust and security, NEO’s regulatory-compliant nature can act as a foundation, because everyone operating on the NEO platform is required to have a digital identity that can be verified.
Moreover, these features may help NEO and OnChain to survive in China, where the central government is concerned about the financial risks brought by crypto. Indeed, Onchain’s DNA has already been endorsed by the government of Guiyang, the capital of Guizhou province.
Compared to the 825 investments that Sequoia Capital China has made so far, its 14 investments on the blockchain sector is relatively small in scale. So far the firm has diverted its portfolio by investing in different parts of the blockchain industry, from mining to crypto exchanges.
But the risky part is that Sequoia China appears to focus on crypto-related companies, which are in the crosshairs of China’s crackdown, and China’s recent promotion of its digital yuan. Although several of the above companies, like Huobi and Bitmain, still have large international businesses, China’s crypto ban has hit them hard.
It is safer for investors to identify companies that focus on blockchain technology in China for now, such as Nervous network or Onchain. Investors can also pay attention to founder Neil Shen’s take on NFTs and metaverse in the near future, as these areas have not yet been the focus of Chinese regulators.