Bitcoin mining firm KnCMiner raises $15 million amid litigation

Despite several lawsuits filed against it by its customers, Bitcoin mining firm KnCMiner continues to attract investment from venture capitalists, reported the Wall Street Journal’s Venture Capital Dispatch blog.

Based in Stockholm, KnCMiner announced Tuesday it raised $15 million in a Series B round led by Accel Partners with participation from existing investors Creandum, GP Bullhound, and private investor Martin Wattin.

KnCMiner said in the press release about the investment that it plans to use the new capital, along with cash generated through operations, to increase its Bitcoin mining capacity and continue to build the Bitcoin-processing infrastructure of the future.

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

KnCMiner’s main business is to operate as a Bitcoin miner, using its machines located in a data center in the Arctic Circle to confirm Bitcoin transactions and to receive the digital currency as a reward.

Kotting said mining is a crucial function in the Bitcoin system and will be necessary irrespective of how Bitcoin ends up being used. He told Venture Capital Dispatch that the investment does not depend on the particular application of Bitcoin that takes off; mining will still be needed to verify each transaction. The investment is only “predicated on the market growing a lot.”

The blog noted that although KnCMiner is now largely mining Bitcoin for itself, it had launched with a different business in June 2013, initially selling Bitcoin mining equipment to customers who had paid thousands of dollars per machines in advance of getting the equipment.

Some of these customers have launched lawsuits against KnCMiner in Swedish courts, accusing it of delaying shipment and sending faulty machines, according to attorneys representing the plaintiffs. Those customers are seeking 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 Kotting to Venture Capital Dispatch. He added, “We looked into it, and it was being taken care of in the in the right kind of way.”

In an email to Dow Jones VentureWire, whose editors produce the Venture Capital Dispatch blog, Per Widman, an attorney with Advokaterina Liman & Partners AB who represents KnCMiner in the lawsuits, said, “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.” The reference to “Titan” in Widman’s email has to do with the name of one of the types of machines KnCMiner was selling.

Venture Capital Dispatch said lawsuits include 15 individual cases on behalf of customers, who are represented by Joakim Strignert, founder of the law firm Din Rätt, filed in Stockholm District Court over the course of several months starting in 2014.

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

KnCMiner representatives did not respond to this allegation, the blog report.

Magnus Daar, an attorney with the Stockholm law firm Nova, told Venture Capital Dispatch, that he filed a class-action lawsuit on behalf of 50 KnCMiner customers claiming $1.2 million in aggregate.

When KnCMiner launched, the company received $6 million in pre-orders within four days, according to previous statements by its founders. Within the first year KnCMiner made $70 million in sales. The company has more than $100 million in revenue to date since its launch, said the press release about the Series B round.

But some customers were unhappy with both equipment and late delivery times and are seeking refunds.

In an interview with VentureWire last September, KnCMiner chief executive Sam Cole said the company would honor requests for refunds.

Venture Capital Dispatch reported that the economics of Bitcoin mining have changed significantly since KnCMiner launched. It has become more expensive to mine the digital currency, even as the price of Bitcoin dropped, leaving many customers with a very different financial situation from the one they had anticipated.

Kotting told the blog that he blamed customer aggravation rather than KnCMiner on this changed situation.

“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,” said Kotting. “I don’t see this as a case where they screwed a lot of people to build up their own business.”

He said KnCMiner is generating substantial cash flows, but much of it is being allocated to equipment upgraded and data center maintenance. KnCMiner said it will invest $150 million more in the next 18 months. Kotting said that given a shift in the market to favor large, well-capitalized miners, the firm needs external capital.