Notes 12/16: Binance’s Venture Funding

In popular myth, Binance has grown organically.

The story goes that Binance conducted an initial coin offering (ICO) in 2017 and raised $15 million. From then on, retail investors are supposed to have powered the company’s profits, propelling it to become the world’s biggest cryptocurrency exchange by trading volume.

This is also a favorite brag of CEO Changpeng Zhao (CZ).

He repeated it most recently during a CNBC interview. “We also actually do not have any VC investments,” he told host Andrew Ross Sorkin. “You can ask any fund or VC.” During the interview, he also called Shark Tank personality Kevin O’Leary a liar for claiming that Binance was responsible for crypto exchange FTX’s downfall.

Binance’s Venture Funding

As it turns out, CZ is the liar. Binance has received substantial help from venture capitalists on its journey to becoming the supposed behemoth it is today.

According to data from Pitchbook, a financial database company, Binance has raised $21.82 million in five rounds from investors. Its fundraising journey started in September 2017 when it received $11.82 million in a Series A round. That was the company’s biggest fundraise. Subsequently, it raised funds in January 2019 and August 2020 for $5 million each.

In between, it was also embroiled in a court case with investment firm Sequoia Capital for breaching an agreement over investing terms. According to Pitchbook’s database, Binance’s investors are spread out across the world and include Vietnam’s CoinTV ventures, Italy’s Iconium, and Dubai-based Almora Capital.

Some investors have exited their investments because Binance’s plans for its operations failed to take off. For example, Vertex Ventures Network exited its investment in Binance Singapore after it withdrew its application to launch a crypto exchange there.        

During Binance’s last fundraise, it’s investors valued the company at $23.53 million. That figure is a significant comedown from its 2019 valuation of $45 million. The exchange was reported to be valued at more than $300 billion in private markets last November.

Questions and More Questions  

Binance’s competitor Coinbase has raised slightly more than $573 million from private markets since its founding ten years ago, according to Crunchbase data. That’s not a figure to sneeze at. But the exchange, which is North America’s biggest exchange, still trails Binance in trading volumes and, apparently, revenues.

As such, Binance’s VC funding figures and valuations raise important questions relating to its operations.

Coinbase is a publicly listed company and reported losses in successive quarters recently due to a debilitating crypto winter. It has fewer monthly transacting users and rising operating expenses.

Meanwhile, Binance seems to have coasted along on its meager fundraise and valuation in the five years since its launch. We don’t have numbers relating to its operations. However, it is listed as being profitable since 2018 in PitchBook. [Unconfirmed reports put the company’s revenues at $20 billion]. Of course, profitability in crypto, as have learned from the FTX case, is a matter of perspective and liabilities. This far, Binance has refused to disclose its liabilities.  

Coinbase has reduced its operating expenses, including the number of employees on its rolls, because of the crash in crypto markets this year. Specifically, it reduced headcount by 5.4% to 4,706 employees at the end of the third quarter of 2022. Binance seems to have thrived during the same period.

In a glowing profile last year, CZ told the Wall Street Journal that Binance had 3,000 employees. PitchBook data tells me it has 7,000 employees (as of 2022). This means that, even as crypto prices and markets were tumbling, Binance was thriving and adding more employees to its payrolls. How?

There’s also the question of money that Binance seems to throw around in the crypto ecosystem. It has put money into venture startups and taken part in Tesla CEO Elon Musk’s Twitter deal. According to official accounts, Binance contributed $500 million to the overall pot in the latter case. Where did it get those funds? “We have enough customer money (to make the investment),” CZ told CNBC earlier this week.

Is his exchange also commingling funds to make ends meet?

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