Given the Contagion and the chaos we’ve witnessed since Sam Bankman-Fried’s FTX cryptocurrency exchange had a sudden multi-billion dollar crisis, you might be tempted to conclude that the entire cryptocurrency industry is heading for the big Chapter 11 bankruptcy filing in the sky, and that no one in their right mind could still have faith in it.
And yet, even in the freezing cold of the Crypto Winter, venture capital continues to pour in for some lucky builders.
Analysts at Pitchbook report that crypto VC investment in 2022 (a brutal year across tech) outpaced that of fintech and biotech, raising $6.5 billion in the past 12 months, up from $879 million in the last quarter.
Just take a look at the last week or the monotonous press releases from the crypto industry. you will see a $4.75 million round for something called Earn Alliance. ONE Raising $70 million for something called the Ramp Network. another $15 million for Roboto Games, $3.1 million for the NFT game Burn Ghost, and a vertiginous $72 million for the Keyrock market maker. There are even dizzying plans by a $2 billion metaverse fund from Animoca Brands, while crypto derivatives exchange Matrixport, led by former Bitcoin mining kingpin Jihan Wu, is shooting for a $100 million raise – at a $1.5 billion valuation.
It’s easy to see why venture capital firms continue to take these risks. VCs are like sharks – they need to keep swimming around investing in crap (sorry, “decentralized technologies”) or they will die, even in a bear market. But why do they keep putting their riches into things that keep failing?
Everywhere you look, the industry seems to be in full crisis. Last month, Multicoin Capital, Kyle Samani’s formerly prosperous and exuberant company, had your assets frozen due to exposure to FTX. Some of the biggest financiers in the space, like Babel Finance, Three Arrows Capital and FTX’s own venture arm, caused some of the biggest blowouts. Star-studded companies like Blockstream, meanwhile, are noting their ratings for orders of magnitudeand the $1.5 billion valuation sought by Matrixport seems positively modest compared to the $32 billion valuation once commanded by its now-deceased competitor.
All this caused an obvious frightening effect. All of the VC companies and projects I’ve spoken to say they’re being much more cautious than before with investments. A Coinbase spokesperson carefully noted that the funding “tightened”.
Meanwhile, Animoca Brands CEO Yat Siu cryptically told me that “some deals may not make as much sense as they did a few months ago due to market circumstances or changes in valuations.”
Ramp Network business lead Paulina Joskow told me that she has heard of several projects that failed to meet the ramp-up requirements, along with several businesses that failed at the last minute. Many projects, she added, don’t expect anything bigger than a Series B before the VC taps are turned off. Kevin de Patoul, CEO of market maker Keyrock, said he has noticed a new emphasis on “due diligence” – totally normal in most other industries, but a groundbreaking shift in crypto.
But eight-figure raises and sky-high valuations are still out there, many of them coming from the usual suspects. These are the well-capitalized companies that know when to cash out and how to manage risk. Its ranks include pedigreed industry players such as Ripple, Coinbase Ventures, Paradigm, Polychain Capital, Pantera and the elephant in the room, Andreessen Horowitz. They are joined by companies in the Web3 sector, such as Animoca Brands, which is raising the optimistic $2 billion Metaverse fund. (There are also some obscure specialists such as venture capital firm “gumi Cryptos Capital”, Argonautic Ventures” and “Harrison Metal”.)
Presumably the main way these companies stayed afloat was simply by not being exposed to FTX. paradigm, which invested in the exchange, managed to stay away from the FTX shitcoin FTT. (Whether this was a result of virtuous investment acumen or luck is up for debate.)
But experience also counts. Animoca’s Siu told me that his company learned a lot from enduring “the much colder and more hostile environments” of the 2017-2019 bear market. Does this mean that “crypto native” VCs have a better chance than companies grown in the financial world comparatively are? Don’t forget, after all, that FTX’s biggest financiers weren’t Animoca or eGirl Capital, but legacy titans Tiger Global, Sequoia and Softbank. Were these non-crypto-native names easily impressed by the SBF song and dance?
It’s also interesting to see where the post-bubble money is going without all the hype behind it. Many of the venture capital firms and portfolio projects I have spoken to since the crash have emphasized a conspicuous and renewed focus on “decentralized” investing.
Chris Perkins of venture capital firm Coinfund said that the multiple calamities of 2022 only confirmed his long-standing wariness of overly centralized crypto companies. He attributes his company’s continued survival to the fact that he avoided these projects.
“As we started to see centralized entities disintegrating, that — and I’m not saying we wanted that — further fueled our thesis that we need to keep the focus on decentralized technologies,” Perkins told me. After the crash, he went so far as to actively prune his portfolio from a series of centralized investments. (Although he said it obliquely: “We take a lot of thoughtful actions to mitigate counterparty risk.”)
It is true that several of the projects receiving funding are critical “infrastructure” projects. Peer-to-peer Bitcoin lending protocol Finterest raised $1.5 million, for example, while Fleek, which hosts digital content decentrally, raised $25 million. And there is a host in other decentralized projects that raised money after the FTX crisis, though not all harmless and uncontroversial: many actually support the infrastructure for things like high-risk decentralized derivatives trading.
The thinking is that decentralized technology is more transparent and less subject to the kind of financial cheating that brought FTX down. (The DeFi degens have been screaming since the FTX meltdown, “This is why you shouldn’t put your cryptocurrency on centralized exchanges!”) But it wasn’t Terra, the algorithmic stablecoin that has buy-in from Coinbase and Galaxy, half decentralized? And it’s not even one polycule, technically, also half decentralized? Type?
It is important to remember that “decentralization” exists on a very long and complicated spectrum – it is never absolute and never confers absolute trust. In some cases, it just lets you watch in real time how the fraud takes place and “transparently” drains your savings.
So it’s worth asking: is the latest Marxist peer-to-peer token harvesting truly “decentralized” VC money, or are its three developers just running each new board proposal through a strange, experimental governance mechanism that is only legal in Estonia? Note that almost every “decentralized” company I contacted had its own internal PR. Will a memory pool send a canned PR quote?
The supposed shift towards decentralization is not an overwhelming trend either, and there are still signs of the old trend towards esoteric crypto. A company called Dogami selling adoptable dogs from space raised $7 million, apparently having demonstrated a strong user base of 200,000. and a blockchain game based on the popular 80’s soccer manga series “Captain Tsubasa” created $15 million.
These projects are not obvious safe bets by any normal standard. In fact, they sound like a lot in the 2017 ICO era. But VCs still believe in crypto.
on a interview with insulted exit The blockthe founder of Dogami emphasized that the VCs did “a lot” of due diligence before shelling out the money.
Animoca’s Siu, who was involved in an earlier Dogami ramp-up, told me that “no matter how eccentric, esoteric, and maybe even whimsical” a project may be, “you need content to drive demand.” He added: “’Build it and they will come’ is a difficult strategy when there is no demand. You need to have both of them so they can feed off each other.”
Or maybe it’s that old-school technological silliness of the 2000s era that these particular projects embody, allowing them to hold their own in the gaudy, more profitable world of Web2. Burn Ghost, which raised $3.1 million and develops casual games with optional NFT prizes, has “a lot of flexibility in how and where we find our players and it’s not just dependent on crypto market conditions,” said its founder and CEO, Steve Curran told me.
Of course, no one is claiming that companies like Burn Ghost and Finterest will be unicorns within the hour. Crypto’s VC manic period is certainly waning, perhaps never to recover. But it’s still surprising how much money, even in these dark times, there is to go around.
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