As venture capital firms focused on the cryptocurrency and blockchain sector raise billions, their investments have declined. But how much of that is caution and how much is investing fewer dollars for more value as the crypto market itself shrinks is still a looming question.
It’s easy to take crypto investor David Pakman’s Wednesday (Aug. 17) announcement of the launch of CoinFund, a $300 million venture capital fund focused on Web3 projects, as a sign of confidence in an industry stuck deep in the heart of a crypto winter.
Mostly because the announcement today isn’t all that unusual.
Because while retail cryptocurrency investors are either fleeing or hibernating as bitcoin led most other cryptocurrencies by declining more than 65% since its November all-time high — witness Coinbase’s announcement that trade volume declined 38% in Q2 — there has been a distinct lack of pullback by venture investors.
That includes some mammoth new funds, starting with the $4.5 billion crypto fund Andreessen Horowitz announced in May, with $3 billion earmarked for venture investments and the other third to seed funding. That more than doubled its digital asset funds to $7.6 billion, Bloomberg reported.
Others include FTX Ventures, the $2 billion fund crypto exchange FTX’s CEO Sam Bankman-Fried raised in January; Andreessen Horowitz veteran Katie Haun’s $1.5 billion Haun Ventures raise in March; Electric Capital’s $1 billion raise (between two funds) in February; and in July Multicoin Capital announced last month that it will be directing another $430 million into crypto startups.
That included some huge rounds, including institutional digital asset custody firm Fireblocks, which raised $550 million at an $8 billion valuation in January, and March’s $450 million raise at a $4 billion valuation by Yuga Labs, the NFT firm and would-be metaverse builder behind top collectable project Bored Ape Yacht Club.
Up or Down?
Still, how good a year it’s been for crypto depends on whether you’re looking at VC raises or investments.
Crunchbase reported on July 15 that just $9.3 billion had been invested in crypto companies in the first half of the year. That’s well off the $12.5 billion invested in the first half of 2021, and off pace from that whole year’s $23.5 billion.
However, CrunchBase noted that the number of venture, seed and pre-seed deals made in the first half of 2022 — 534 — substantially outpaced the same period in 2021, when there were 456 deals.
In part, this decline in value, despite a rise in volume, was due to a fall-off in deals on the high end of the spectrum, CrunchBase said. They pointed out that, in Q1 2022, there were six rounds in which at least $400 million was raised by a crypto firm. That number declined to just one round in Q2, as it became clear that a crypto winter and likely a broader recession were in the foreseeable future.
“We’ve seen this story before,” Jordan Nof, a co-founder and managing partner at Tusk Venture Partners, told CrunchBase. “If you believe this is a fad, you probably are leaving the market but we are not hearing that anymore.”
Buy the Hype
A hot funding area is Web3, the movement to build a new World Wide Web on blockchain infrastructure. It’s a segment that also includes the very hot metaverse and blockchain gaming industries.
That is the target of CoinFund, Pakman said in the announcement.
“Tech entrepreneurs and venture investors are taught to look for architectural transitions that disrupt past models and create new ground for companies to build enormous value,” he said. “In my 30 years in tech, I have never seen a bigger opportunity than crypto and web3.”
This is a sentiment shared by many VCs. Among them crypto investor Variant, which announced $450 million for a fund that will put $300 million behind existing portfolio projects and $150 million into Web3 seed funding in July.
What’s more, VC funding seekers know it, Ethan Kurzweil, a partner at Bessemer Venture Partners, told VentureBeat in May.
“Many founders are hastily re-writing their pitches to include a Web3 element,” he said “Given enough time, Web3 seems to work its way into every gaming pitch these days — whether it truly fits or not. I’m not sure whether it’s VCs pushing the Web3 zeal or the other way around but the Web3 pendulum has indeed swung all of the way to the limit.”
It’s happening enough that Block CEO Jack Dorsey had a high-profile Twitter conversation with Tesla CEO Elon Musk about venture capital firms endangering the free-from-corporate-control vision of the movement to build a new World Wide Web on a blockchain infrastructure.
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