A new investment fund dedicated to Bitcoin startups aims to bring digital money entrepreneurs up to speed in two areas where they have proven most vulnerable: network security and compliance.
This month Liberty City Ventures, based in New York, launched the $15 million Digital Currency Fund, which seeks to invest in all types of firms in the Bitcoin ecosystem, including exchanges, banks, brokerages, investment services, insurance, infrastructure, and supporting products and services. It is the largest Bitcoin-related investment fund to date.
As host and sponsor of the monthly NY Bitcoin Startups Meetup, Liberty City Ventures has been involved in the broader Bitcoin ecosystem through mining and currency investing for a number of years. The team is also very familiar with financial services and payment system startups, having recently retained former U.S. Treasury officials and regulators and computer engineers as advisors.
Very few computer security professionals have crossed over into the bitcoin financial realm and the startups have simply not had the capital to replicate the security infrastructure and procedures of a large commercial bank. Even though real-time access to bitcoin is similar to the handling of physical cash, sophisticated management of multiple "hot wallets" (Bitcoin accounts connected to the Internet) and "cold wallets" (coins stored offline, such as in a USB drive in a bank vault) is a relatively new technical skill set.
Hence, Bitcoin-related firms such as InstaWallet have suffered devastating security hacks. And recent government actions against Mt. Gox, the worlds largest exchange for trading bitcoins for government currencies, and Liberty Reserve, which issued its own private currency, underscore the importance of regulatory expertise to companies in this space. (For the record, Liberty City Ventures has no affiliation with Liberty Reserve.)
As TechCrunch said, paraphrasing Liberty City founding partner Charles Cascarilla, "none of the current [investment] options would live up to the type of scrutiny that most real-world banking institutions face." Cascarilla told PandoDaily he sees an opportunity to bring advanced trading technology along with capital to the sector.
Liberty City was founded about nine months ago as the early-stage venture division of Cedar Hill Capital Partners by technology investors Cascarilla, Emil Woods, Andrew Chang, and Dorothy Jean. The fund has already raised capital from high net worth individuals and secured commitments from institutional investors. Additionally, the firm plans to establish a Bitcoin incubator in Manhattan catering to the needs of young digital currency startups.
Since the complex nature of payment systems and surrounding regulation is inherently capital-intensive, the fund's founders recognized that the initial capital required for success will much larger than a social-media or mobile tech startup would need. "Our typical investment size will vary based on the type of startup backed, says Jean, 29 years old. For example, a currency exchange might require significantly more capital than a wallet or eCommerce company."
In addition to companies that are proactive with respect to network security and regulatory compliance, it appears that Liberty City will concentrate initially on New York City-area companies since those are the entrepreneurs the founders know best. However, they are not prepared to announce any angel investments at this time.
The funds current largest competitor is Union Square Ventures, which recently led the $5 million round for the exchange and wallet service Coinbase. Other significant operators investing in the fast-moving space include Barry Silbert's Bitcoin Opportunity Fund, Adam Draper's Boost Bitcoin Fund, Chris Dixon at Andreessen Horowitz, Peter Thiel's Founders Fund, and Tyler and Cameron's Winklevoss Capital Management.
A large fund size and a dedicated focus certainly meet the requirements for the emerging digital currency sector. However, the ability to think globally as a service provider will prove critical for those Bitcoin companies wanting to maintain a leadership role. Liberty City Ventures would be wise to partner with similar investment efforts in other international jurisdictions.
Jon Matonis is an e-money researcher and crypto economist focused on expanding the circulation of nonpolitical digital currencies. His career has included senior posts at Sumitomo Bank, Visa, VeriSign and Hushmail. Currently, he serves on the board of the Bitcoin Foundation. Follow him on Twitter @jonmatonis.