European VCs arrived late for the crypto night. Are they ready to go wild?

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Only a small circle of investors discovered the secret of Sorare, today one of the largest startups in Europe, very early on.

In just over a year, the Paris-based company has grown from a small fundraiser to a $ 4 billion giant, seeking to become the home of non-fungible tokens (NFTs).

Sorare has been dismissed as an obscure blockchain experiment by countless investors. But the VCs who jumped on the bandwagon very early – including London’s Tiny VC and Seedcamp – have seen Sorare’s valuation soar 636 times in less than two years. NFTs are experiencing a boom time, leaving those who supported Sorare when it was worth a few million laughing to the bank.

New to cryptography? Consult our guide (for members)

Maybe Sorare and his supporters were lucky; it may be a short-lived success. Regardless, the meteoric rise of the startup has helped highlight digital assets for European VCs.

Are you no longer afraid?

Mainstream VCs in Europe have undoubtedly picked up the pace of their crypto investments over the past 18 months.

German Speedinvest made its first crypto bet at Bitpanda last April, having passed it on to its seed in 2016; Dawn supported Copper; Atomico has supported a scaling solution for Ethereum called Starkware; and Anthemis made their crypto debut at Tesseract over the summer, followed by Gemini.

Most recently, HV was an initial investor in Rvvup, betting that the London-based startup would become the “third generation” payment tool to link fintech and crypto. Balderton has also reportedly backed Ramp, the European version of MoonPay. Scout programs like Hedosophia’s have also been quietly making crypto offers in recent months.

“The market capitalization of crypto assets around the world is now $ 2.5 billion (gold is at $ 10 billion)… The temperature [among VCs] feels very strong “

“We are at this tipping point [in Europe] where most VCs have accepted that crypto is here to stay, ”says Itamar Lesuisse, CEO of Argent, a decentralized finance (DeFi) wallet for consumers.

“100%, a lot of them are warming up… This has changed dramatically from 18 months ago. “

In fact, Lesuisse says the next Argent A-series will be led by a traditional European VC – although he declined to confirm which one.

David Nunn, founder of Rvvup, has also seen traditional VCs heat up to crypto. After announcing his startup plans on LinkedIn, he says he got inflows from 22 serious European funds, including venture capital banks.

“[These funds] definitely seem to be aware that crypto is happening, ”Nunn told Sifted. “They’re just seeing the numbers, which are pretty explosive. The market capitalization of crypto assets in the world is now 2.5 billion dollars (gold is at 10 billion dollars)… The temperature [among VCs] feels very strong.

Picks and shovels

Infrastructure players like Rvvup are particularly attractive, providing the so-called pickaxes and shovels for the Gold Rush. “Crypto-adjacent” bets like NFTs also offer Europeans a less complicated entry point to crypto, says Ramp co-founder Szymon Sypniewicz.

“The startups coming out now aren’t as scary as the protocols,” he explains. “Investors don’t need to own tokens to invest.”

Generalist funds like Mosaic, which was an unusually early investor in crypto, also say they are seeing their traditional peers joining the fray.

“[VCs are] subscribing to this new religion, at least in part. They dabble “

“[VCs are] subscribing to this new religion, at least in part. They are dabbling, ”says Toby Coppel of Mosaic, who made his first crypto bet in 2014 with blockchain.com.

Indeed, the annual crypto investment in Europe now stands at 2.7 billion euros, compared to 141 million euros in 2019, according to Dealroom. This means that crypto startups have taken almost 10% of the total fintech investment in Europe this year.

The result is that the number of pro-crypto VCs in Europe is slowly increasing, joining the collection of specialist funds in Europe. These specialists include Semantic, BlueYard Capital, Libertus, Outlier Ventures and Fabric Ventures, as well as crypto venture branches like Kraken and Blockchain.com.

There are also more funds in the works, with Blue Lion Capital – led by Manu Gupta – which will be crypto-intensive when it launches.

Other fintech VCs have also started investing by proxy, with Entrepreneur First partnering with the Tezos Foundation to attract blockchain founders to its accelerator.

“They educate themselves [by investing]», Agrees Kristina Walcker-Mayer, general manager of Nuri. “A lot of people invest in companies like ours just to figure it out. ”

Nuri’s table of hats includes Earlybird, Draper and other European investors who were very early on the scene.

Obstacles to overcome

Traditional funds may have started to support crypto, but check sizes are still small. European fundraising is only a fraction of that of the United States, where crypto startups raised 9 billion euros in 2021.

Institutional know-how is also still lagging behind in most European funds to make larger investments at an advanced stage.

“There is no crypto expert in all of the major VCs in Europe,” explains Lesuisse. “I have not seen in Europe a large VC who has [in-depth] agreement.”

As an example, when Sifted interviewed Jan Hammer of Index Ventures earlier this year, he said he didn’t know what “DeFi” was.

Funding in crypto startups, compared across geographies. Source: Trading room

Lesuisse points out, moreover, that Europe does not yet have the equivalent of Andreessen Horowitz or Union Square Ventures – traditional funds that have built serious cryptographic weapons.

Meanwhile, few European fintech investors have a serious thesis on the space, and many have deep reservations about it.

“It’s largely a scam,” says Anthemis’ Amy Nauiokas (although Anthemis made a handful of crypto bets).

It’s hard to blame them – crypto adoption is still relatively nascent, European regulators are nervous, and digital assets have had bad press, including outages in the Solana blockchain and UK regulators banning the lending of Celsius tokens .

“If I were LPs in these big fintech funds, I would ask serious questions if they weren’t looking at crypto at all”

These hiccups will do nothing to lessen the conservatism of European VC. Cautious LPs won’t want their funds to double in crypto, especially given regulatory issues.

In short, not everyone is ready to take the step yet, says Rvvup’s Nunn.

“We will have real avant-garde, but the mass market will think ‘we’ll see how it goes’. Many will think, ‘oh this will be a fad’ … maybe they will wait until the explosion.

The crypto pitch

Digital assets still have their issues, but it’s clear that they’ve grown too important to ignore – even regulators and your grandparents are being forced to take them more seriously.

Indeed, VCs – especially those focused on fintech – that don’t yet have a crypto thesis are “sloppy,” in the words of Copper founder Dmitry Tokarev.

At least because it’s possible crypto will disrupt fintech someday, he says.

Alokik Advani, investor at Fidelity Ventures, agrees: “If I were an LP [in a fintech fund], I would explicitly ask if they were studying crypto. Otherwise, I would look for an exhibition specializing in cryptography. “

“Do I think it’s smart that they are learning about this?” Yes. Will all this learning definitely pay off? No. Are they paying too much? Yes of course”

Still, that doesn’t necessarily mean that a blind crypto rush is advisable.

Investing in digital assets will ultimately require hiring venture capitalists, says Mosaic’s Coppel.

“Do I think it’s smart that they are learning about this?” Yes. Will all this learning definitely pay off? No. Are they paying too much? Yes of course, ”he says. “You have to be very careful – you really need some technical training… I don’t think people have thought about that at all. “

Another strategy, for investors who want to get started, could be to follow companies like Fintech Collective, which has an entire crypto division doing due diligence on its crypto transactions.

Or they could start by participating by learning how to bet, lend and vote on different blockchains. Others may want to invest, but avoid anything that involves risk to the consumer, like Dawn did.

The crypto boom in Europe is starting without a doubt, but there are limits to what VCs can go for. “It’s not easy. Safety is a major issue here. People forget that,” Coppel notes.

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