A new bitcoin unicorn is about to be born. After days of rumors flying around the cryptocurrency industry, investigation firm Chainalysis confirmed exclusively to Forbes it expects to raise $100 million venture capital at a $1 billion valuation as soon as next week. Led by Tiger Global alum Lee Fixel’s newly founded venture capital firm, Addition, the Series C round is expected to be joined by previous investors Accel, Benchmark, and Ribbit.
Though Chainalysis CEO and co-founder Michael Gronager declined to share the actual revenue generated by the firm, Forbes estimates it made $8 million in 2018, and Gronager says its revenue increased by about 96% over the past year. With revenue expected to double next year and again in 2022, the investment is further evidence there’s more money to be made in crypto than by just buying low and selling high. In addition to helping the U.S. Department of Justice track down more than $1 billion worth of bitcoin and other cryptocurrencies that was seized earlier this month, Chainalysis now counts 350 total customers, including state governments and private institutions.
As bitcoin today reached $18,600, its highest point in nearly three years, Chainalysis and its philosophy of compliance by code, is becoming a symbol of both the obstacles that investors have to overcome to gain exposure to the alternative asset, and the opportunity those same investors face. “We’ve really shown that, that it’s possible to build a world class business to business software as a service company by serving data in the crypto space,” says Gronager, 50. “And really owning the data part of crypto.”
The Series C, which which has been signed by all the counterparties and is awaiting final paperwork, will follow on an extended Series B just four months ago, bringing the total investment to $166 million. As part of the investment, the company that currently employs 200 people plans to nearly double its staff over the next year, including hires in international policy, sales and marketing and research and development. Last July Forbes named Chainalysis the first cryptocurrency company on its Next Billion Dollar Startups list. Co-founder Jonathan Levin is a member of the the Forbes Europe 30 Under 30.
Currently, the firm has offices in New York, Singapore and Tokyo, and pending an increased ability to travel as Covid restrictions are hopefully lifted, has plans to expand its presence internationally and in DC, where U.S. regulatory demand is peaking. In fact, the demand has reached such a scale that in July, U.S. President Trump’s former sanctions chief, Sigal Mandelker, joined Chainalysis’s advisory board as part of the Series B investment.
But perhaps most importantly, the company says it raised so much more money than it did in its Series B because it expects to have an opportunity to purchase another firm. “We think that the timing, the market, and the maturity of the crypto space will offer some consolidation, where there might be some inorganic growth that might be on the table,” says Gronager.
250 of Chainalysis customers are in the private sector, including companies like payments giant Square, with the remaining 100 clients coming from 30 jurisdictions in the public sector, including the U.S. Internal Revenue Service. Chainalysis’ total customers have increased 65% over the past year. While most startups growing at a rate of 40% or more are far from profitable, Gronager says Chainalysis current burn-rate is “basically non-existing” and the company is on track to be profitable soon. “We have like extremely low burn and very high efficiency in the company,” says Gronager. “So, we are almost on the edge of profitability today.”
Of course, the simple fact that Chainalysis, a security firm helping identify fraud, money laundering and other illegal and illicit practices of cryptocurrency users is among the industry’s first unicorns, is further evidence of why so many institutional investors remain reluctant to put skin in the game. In spite of a number of high profile firms including JP Morgan and Citibank recently taking a positive tone towards bitcoin, others, like hedge funder Ray Dalio remain skeptical, if not increasingly open to changing their minds. Lead investor, Lee Fixel, described Chainalysis in a statement as “the financial regulatory platform for the future of digital assets,” adding: “The firm’s data, technology, and network are foundational to the blockchain ecosystem.”
Also today, Chainalysis published a report calling 2020 the year of institutional adoption of bitcoin, specifically mentioning hedge fund manager Paul Tudor Jones and Square as examples. Earlier this week financial advisor DeVere Group said that 73% of its approximately 700 millionaire clients who responded to a cryptocurrency survey said they are already invested in cryptocurrency or will invest in it by 2023. That’s an increase of 68% since last year. “As more mainstream businesses like Paypal start to offer crypto services,” said Accel partner and returning Chainalysis investor, Philippe Botteri, in a statement, “we expect even more massive acceleration ahead.”
Increasingly, security firms like Chainalysis, Elliptic and up-and-comer Clain, based in Russia, are doing more than just helping identify crime after the fact, but are helping prevent it. In August 2019 Chainalysis launched KYT (Know Your Transaction) to simplify blockchain analysis, and in July 2020 it launched Market Intel for analyzing cryptocurrency exchanges and more. Collectively, these two services, compromise what Gronager calls “compliance by code,” making it easier to discourage fraud, and perhaps helping lay the foundation for more institutional adoption.“The way you make things scale today in a compliance department is not by adding ten people,” he says. “But it’s by adding one developer.”