Building Better Infrastructure for Digital Assets: Why We’re Excited about FalconX, Blockdaemon, TaxBit & Tesseract
Crypto has once again captured the mindshare of entrepreneurs and investors as the market cap of digital assets eclipsed $2T in April--primarily driven by institutional demand in bitcoin as an inflationary hedge.
Even with notable volatility over the past two quarters, the entrance of large hedge funds and publicly traded companies into the fray has injected confidence and legitimacy into the long-term staying power for the digital asset class. Yet, this growing demand cannot be easily met by legacy financial services firms that were purpose built for equity capital and debt markets, which has created a massive opportunity for next gen infrastructure platforms to step-in to support the demand for this quickly growing (+30% YoY), multi-trillion-dollar asset class.
That’s why we’re excited to back FalconX, Blockdaemon, TaxBit and Tesseract--recent Sapphire investments in the B2B crypto space These emerging market leaders are helping facilitate greater institutional and retail participation in the digital asset ecosystem--whether it’s FalconX as the de facto prime broker for crypto, Blockdaemon as the institutional-grade node management and staking infrastructure provider, TaxBit as the leading cryptocurrency tax and accounting software platform or Tesseract as the liquidity bridge for digital asset lending. What’s more is that these startups are led by talented founding teams on-track to building profitable businesses.
With our entrance into crypto, we’re looking forward to building on our track-record of supporting disruptive technology companies that aim to democratize finance, which include current investments like AvidXchange, Current, Feedzai, IEX, Mercury and Yapily, as well as past investments like Currencycloud, OnDeck, Square and Wise.
FalconX: A bold vision to enable the tokenization of all assets
According to FalconX, trading volume for crypto will reach +$100T by 2022, 80-85% of which will be comprised of institutional activity. FalconX addresses this rapidly scaling marketopportunity with a one-stop-shop that provides trading and credit services with flexible settlement terms and clearing for institutions in the cryptocurrency markets. FalconX’s end-to-end trading infrastructure applies machine learning to aggregate data from trading exchanges, market makers and OTC desks making hundreds of decisions every few milliseconds to optimize the sourcing of liquidity and price discovery for trade execution. In addition to trade execution, clearing and settlement, FalconX also supports a range of offerings like credit, payments and white glove services.
FalconX is led by Raghu Yarlagadda (CEO, Co-Founder). A serial entrepreneur with a unique vision for FalconX to become the prime broker for all tokenized assets. This may seem audacious, but the inspiring duo backs words with action--spearheading the business through an unprecedented period of growth over the past year by growing trading volume by +15x, revenues by 30x and scaling to almost 350+ institutional clients. They have also assembled a top-notch team with relevant experience across leading crypto (e.g., BlockFi, Kraken), technology (e.g., PayPal, Google) and financial services (e.g., Goldman Sachs, JPMorgan, Citadel) companies.
Blockdaemon: Building institutional grade blockchain infrastructure
JPMC recently reported that the staking market may reach up to $40B by 2025, indicating that proof-of-stake is continuing to gain momentum as a formative consensus mechanism among both legacy blockchains (e.g., Eth 2.0 migration), as well as third-generation cryptocurrencies (e.g., Cardano, Polkadot, Solana). As the largest independent node operator that supports staking of +$6B assets across +20 proof-of-stake blockchain networks, Blockdaemon is well positioned to service the burgeoning market demand for staking infrastructure. Blockdaemon also enables developers to build more performant blockchain applications, and recently launched its Ubiquity API--a high performance, multi-protocol API--to easily read blockchain data and submit transactions across multiple protocols.
The battle tested blockchain infrastructure company is led by Konstantin Richter (CEO), whose past experience in the mobile networking space helped him recognize the inherent gaps for growing and managing blockchain nodes across hybrid environments. Konstantin has not only proven adept at recruiting top engineering talent with protocol expertise across 40+ blockchains, but has also recently expanded the executive team with Cecily Mak as Chief Operating Officer and Demetrios Skalkatos as Global SVP of Sales. With a rapidly expanding team, Blockdaemon is building on current momentum, which includes +10x revenue growth since the beginning of the year.
TaxBit: Bringing tax compliance and transparency to all
TaxBit is building market leading cryptocurrency tax and accounting software, which uses digital assets as a wedge to eventually displace $150B of enterprise value for information reporting, according to the company. In short, TaxBit automates compliance across the lifecycle of government, enterprise and consumer tax reporting for the digital asset space. Despite only launching in 2018, TaxBit is on track to issue over 50M tax forms this year with adoption among more than a dozen financial institutions, as well as market leading cryptocurrency custodians/exchanges such as Coinbase, BlockFi, Gemini and FTX (US). Furthermore, to add to its expansion efforts into the UK, TaxBit is also planning to launch an accounting platform later this year that will enable enterprises to monitor, track and report on crypto assets, as well as transactions.
The newly minted digital assets tax software and accounting unicorn is led by the brothers Austin (CEO) and Justin Woodward. With Austin as a CPA and Justin as a JD, the two bring a unique perspective to building solutions that help crypto natives, as well as traditional financial institutions meet evolving tax reporting requirements for digital assets. To add, the boldness of their vision is incredibly compelling, as the founding team aims to turn TaxBit into the marquee tax and accounting software for all tokenized assets spanning equities, real estates, payments, and beyond.
Tesseract: Bridging traditional and digital asset finance for crypto lending
While crypto lending is relatively small (bitcoin accounted for ~$20B in total open interest as of February) compared to other credit markets, we believe that the segment has the potential to become a +$1T asset class over the coming years assuming similar lending penetration as-in traditional finance.
Enter Tesseract, bridging digital capital supply and demand for the crypto credit ecosystem. On the institutional side, Tesseract’s margin lending platform takes an API-first approach, building connectivity infrastructure between value chain partners (e.g., custodians, exchanges, lenders) to streamline the margin lending transaction (reducing a 1-2 day process down to ~10 mins) and to drive improved capital efficiency for institutional clients (e.g., hedge funds, market makers). On the retail side, global retail trading platform partnerships allow consumer focused exchanges, custodians, fiat on-ramps and wallet providers to gain a competitive edge via white-label yield solutions from Tesseract.
This emerging disruptor in the crypto lending space is led by co-founders Yichen Wu (CEO) and Ilkka Salo, a talented duo from Helsinki, Finland. Founded in 2017, they’ve quickly established Tesseract as a leader in the digital asset space, amassing an international client base that extends well beyond the Nordics. To-date, Yichen and Ilkka have achieved impressive business milestones in a short order including, but not limited to, securing notable custody partnerships (e.g., Copper, Fireblocks), reaching +20x revenue growth in the last year and building a profitable foundation for business expansion.
Where We’re Headed
At Sapphire, we believe we’re in the early stages of creating a whole new financial system, which will see the evolution of new technologies to facilitate greater institutional and retail participation in crypto. It’s the ‘picks and shovels’ businesses that excite us the most--innovative companies that are creating the underlying infrastructure for engagement across the centralized and decentralized (e.g., DeFi, Web3) worlds of the crypto universe.
With that in mind, we are thrilled to co-lead the FalconX $200M Series C and join the TaxBit $130M Series B, Blockdaemon $150M Series B and Tesseract $25M Series A rounds. We are humbled by the ambitions of the respective teams to build true companies of consequence and are excited to be partners along their journeys.
Special thanks to Jason Brooke who has been deeply analyzing the crypto space and greatly contributed to the development of this blog.
Disclaimer: Nothing presented within this article is intended to constitute investment advice, and under no circumstances should any information provided herein be used or considered as an offer to sell or a solicitation of an offer to buy an interest in any investment fund managed by Sapphire Ventures, LLC (“Sapphire”). Information provided reflects Sapphires’ views as of a time, whereby such views are subject to change at any point and Sapphire shall not be obligated to provide notice of any change. Nothing contained in this article may be relied upon as a guarantee or assurance as to the future success of any particular company. Companies mentioned in this article are a representative sample of portfolio companies in which Sapphire has invested in which the author believes such companies fit the objective criteria stated in commentary, which do not reflect all investments made by Sapphire. A complete alphabetical list of Sapphires’ investments made by its direct growth and sports investing strategies is available here. Various content and views contained within this article represent those of third party guests, which do not necessarily reflect the views of Sapphire. Such views are subject to change at any point and do not in any way represent official statements by Sapphire. While the Sapphire has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein, which is subject to change. Past performance is not indicative of future results.