This Startup Thinks Private Equity-Style Deals Will Kick-Start Crypto Adoption — WSJ
By Marc VartabedianCrypto die-hards have long said that if only more legacy businesses adopted the technology, its benefits would become clear and adoption would spread. A new startup's private equity-style game plan aims to make that a reality.The companyNew York-based Inversion Labs plans to acquire low-margin companies, outfit them with blockchain to juice efficiency and then reap the profits that follow.Founded at the beginning of this year, the company has raised a $26.5 million seed round at a $100 million valuation led by crypto-focused venture firm Dragonfly Capital. Investors including investment-management firm VanEck and crypto venture firms ParaFi Capital, Faction Ventures and Wintermute Ventures participated in the financing."This technology is powerful, but the reality is crypto doesn't have that many active users," Inversion co-founder and Chief Executive Officer Santiago Roel Santos said. "Our North Star is to make crypto invisible to our users. They won't see how the technology works, but they'll feel the impact. It's going to be faster, better and cheaper."The strategyThe capital raised by Inversion will be used to fund Inversion's business operations, not to make acquisitions. To finance the acquisitions, Inversion will raise a fund of at least $500 million held in a separate entity called Inversion Capital, Roel Santos said.Institutional investors have demonstrated early interest in committing capital to finance Inversion's acquisitions, co-founder and Chief Operating Officer Suzanne Dannheim said, in part because their model offers crypto exposure that is less risky than holding coins or investing in crypto businesses."We go to them with a product that they very much understand, which is private equity," Roel Santos said. "But it's not the volatility that you get with crypto — we're buying traditional businesses with a good margin of safety."Beyond its role as an investor in Inversion Labs, VanEck will act in various roles related to fundraising and administrative management, Dannheim said.Inversion will target both private and public companies with large user bases that have internal infrastructure they believe is ripe for a blockchain overhaul, Dannheim said."You can acquire and either bolt in a product that's going to grow revenue or you can rip out a bad, poor operating system and plug in a better one that lives on a blockchain," Dannheim said.Inversion has initially targeted South American telecommunications companies and has submitted several acquisition bids. Blockchain could allow these companies to lower their data purchasing costs, among other improvements, Dannheim said.The pair said they could also seek to acquire payroll service providers, supply chain-related businesses and consumer financial services providers. They hope to make their first purchase within the next year.The contextInversion's business plan combines the classic private-equity model of acquiring and overhauling businesses with a so-called roll-up strategy, where companies buy smaller firms within a sector and "roll up" their technology to create a single, more valuable entity.Roll-up deals involving technology startups focused on overhauling companies with AI have become popular in the venture sector.As more of its companies use its crypto tech, Inversion says its own blockchain network will increase in value, allowing it to further capitalize by issuing tokens.Inversion's financing comes as more companies are moving to snap up other startups. There was roughly $100 billion in mergers and acquisitions for global startups in the first half of this year, a 155% increase from the same period last year, according to analytics firm Crunchbase.Meanwhile, venture funding for global crypto startups soared 268% to roughly $28.6 billion this year through August, relative to the same period last year, according to analytics provider CryptoRank.To be sure, some large companies and financial institutions have experimented with implementing crypto technology for years, sometimes with varying success. A lack of technical know-how is often a hurdle companies face when weighing whether to overhaul their systems with the tech, Dannheim said.Roel Santos was previously a partner at ParaFi and made personal investments in crypto coins. Dannheim previously worked at investment bank Goldman Sachs, where she helped build and lead the firm's crypto business.Write to Marc Vartabedian at [email protected]