KnCMiner Raised USD 15 Million - Essay Example

Venture capitalists continue investing in bitcoin mining company KnCMiner, despite several lawsuits filed against it by customers.

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Stockholm-based KnCMiner raised $15 million in a Series B round led by Accel Partners. Existing investors Creandum, GP Bullhound and angel investor Martin Wattin, also participated. Creandum led a $14 million Series A investment in the company last year.

“We believe in the long term attractiveness of the bitcoin ecosystem,” said Michiel Kotting, partner in Accel’s London office, who’s taking a board seat at KnCMiner.

The firm invested out of its London fund, he said. Accel Partners’ Palo Alto, Calif.-based fund is behind another bitcoin company, Circle Internet Financial.

KnCMiner’s main business is to serve as a bitcoin miner, using its powerful machines gathered in a data center in the Arctic Circle to verify bitcoin transactions and to receive bitcoin as a reward.

Mining is a crucial function in the bitcoin system and will be necessary regardless of how bitcoin ends up being used, Mr. Kotting said.

The investment, he said, doesn’t depend on the particular application of bitcoin that takes off, for instance as a currency or as a layer on which other applications are built.

Mining will still be necessary to verify each transaction. The investment is only “predicated on the market growing a lot.”

Although KnCMiner is now largely mining bitcoin for itself, it had launched in June 2013 with a different business.

It originally sold bitcoin mining equipment to customers, who had paid thousands of dollars per machine months in advance of receiving the equipment.

Some of these customers have filed lawsuits against the company in Swedish courts, alleging the company delayed shipment, sent faulty equipment, according to attorneys representing the plaintiffs. Those customers are demanding refunds.

“We looked into it and we found there was no impropriety going on…They had acted above board in their past dealings, and their current business model is very different,” said Mr. Kotting. He added that “we looked into it, and it was being taken care of in the right kind of way.”

“KnCMiner disputes, and will continue to dispute, all refund claims regarding the Titan miners. We believe that there are very strong legal grounds for KnCMiner’s position,” wrote Per Widman in an email to VentureWire.

Mr. Widman, an attorney with Advokaterina Liman & Partners AB, represents KnCMiner in the lawsuits. The reference to “Titan” in Mr. Widman’s statement has to do with the name of one of the types of machines that KnCMiner was selling.

Suits include 15 individual cases on behalf of customers, all represented by Joakim Strignert, founder of the law firm Din Ratt, filed in Stockholm District Court (Stockholms Tingsratt) over the course of several months starting last year.

Mr. Strignert said his clients believe that KnCMiner took their money and used it to invest into its own data center. “They are using my clients’ money and machines to build a mega datacenter that will compete with my clients,” Mr. Strignert said. “It’s a scam.”

Representatives of KnCMiner didn’t respond to this allegation.

Magnus Daar, an attorney at law firm Nova in Stockholm, said he filed a class-action lawsuit on behalf of a group of 50 customers of KnCMiner claiming $1.2 million in aggregate.

When KnCMiner launched the company took in $6 million pre-orders within four days, according to previous statements by its founders.

In the first year, it made $70 million in sales. It had more than $100 million in revenue to date since launch, according to a press release.

Some customers, however, were unhappy with both the quality of the equipment and late delivery times. They requested refunds.

In an interview with VentureWire in September, Sam Cole, chief executive of KnCMiner, said the company would honor refund requests.

The economics of mining bitcoin changed substantially since KnCminer launched. It got more expensive to mine bitcoin, even as the price of bitcoin fell from highs around $1,000 per bitcoin in late 2013 to around $254 now.

This left many customers with a very different financial situation from the one they had expected.

Mr. Kotting, of Accel, blamed customer aggravation on this changed situation rather than on KnCMiner.

“Of course if you buy something and you think you can make $1,200 and you make $400 or less and the difficulty rate has gone up.

That was a speculative risk that people took,” Mr. Kotting said. “I don’t see this as a case where they screwed a lot of people to build up their own business.”

Mr. Kotting said KnCMiner is generating substantial cash flows, but much of it is being reinvested into upgrading its equipment, and maintaining its data center.

The company said it will invest $150 million more in the next 18 months. Given a shift in the market to favor large, well-capitalized miners, the company needs external capital, he said.