Crypto Is Bad, But VCs Keep Pouring Money

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Given the contagion and chaos we’ve witnessed since crypto exchange Sam Bankman-Frieds FTX had a sudden multi-billion dollar coronary, you might be tempted to conclude that the entire industry of crypto is headed for the big Chapter 11 bankruptcy filing in the sky, and no one in their right mind could possibly believe it yet.

And yet, even in the freezing cold of Crypto Winter, venture capital continues to pour in for some lucky builders.

Pitchbook analysts report that crypto-VC investments in 2022 (a brutal year across all technologies) outpaced those in fintech and biotech, bringing in $6.5 billion in the past 12 months, of which 879 million in the last quarter.

Just take a look at the last week or so lackluster press releases from the crypto industry. You will see a round of $4.75 million for a thing called Earn Alliance. A $70 million raise for a thing called Ramp Network. Another $15 million for Roboto Games, $3.1 million for the NFT Burn Ghost game and a dizzying $72 million for market maker Keyrock. There are even dizzying plans for a $2 billion metaverse fund by Animoca Brands, while crypto derivatives exchange Matrixport, run by former bitcoin mining kingpin Jihan Wu, is aiming for a $2 billion boost. $100 million for a $1.5 billion valuation.

It’s easy to see why venture capitalists continue to take these risks. VCs are like sharks, they have to keep swimming investing in crap (sorry, decentralized tech) or they will die, even in a bear market. But why do they keep putting their wealth into stuff that just keeps failing?

Everywhere you look, the industry seems to be booming. Last month, Multicoin Capital, Kyle Samanis, a previously high-flying and exuberant firm, had its assets frozen due to its exposure to FTX. Some of the biggest backers in the space, like Babel Finance, Three Arrows Capital, and FTX’s own venture capital arm, have caused some of the biggest blowouts. Meanwhile, star-studded companies like Blockstream are writing their valuations in orders of magnitude, and the $1.5 billion valuation sought by Matrixport looks positively modest compared to the $32 billion valuation once commanded by its competitor today. now deceased.

All this caused an obvious paralyzing effect. All the venture capitalists and all the projects that I have spoken to say that they are much more cautious than before when it comes to investments. A Coinbase spokesperson carefully noted that funding has tightened.

Meanwhile, Animoca Brands CEO Yat Siu cryptically told me that some deals might not make as much sense as a few months ago due to market circumstances or changes. in valuations.

Ramp Network’s business manager, Paulina Joskow, told me she’s heard of a number of projects not meeting the raise requirements, as well as a number of failed deals at the last minute. Many projects, she added, are expecting nothing bigger than a B-series before the VC taps close. Kevin de Patoul, CEO of market maker Keyrock, said he noticed a new emphasis on due diligence that is quite commonplace in most other industries, but something of a revolutionary change in crypto.

But eight-figure increases and sky-high valuations are still there, largely from the usual suspects. It’s the well-capitalized companies that know when to cash in and how to manage risk. Their ranks include pedigree industry participants like 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 raises this bullish $2 billion metaverse fund. (There are also a few obscure specialists like venture capital firm gumi Cryptos Capital, Argonautic Ventures, and Harrison Metal.)

Presumably, the main way these companies stayed afloat was simply not to be exposed to FTX. Paradigm, which invested in the exchange, managed to stay away from FTX FTT shitcoins. (Whether this is the result of a keen sense of virtuoso investment or luck is up for debate.)

But experience matters too. Animocas Siu told me 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 cultured companies in the relatively sane financial world? Remember, after all, FTX’s biggest backers weren’t Animoca or eGirl Capital, but legacy titans Tiger Global, Sequoia, and Softbank. Were these non-crypto-native names too easily swayed by SBF song and dance?

It’s also interesting to see where the post-bubble money goes without all that hype behind it. Many of the venture capital firms and portfolio projects I’ve spoken with since the crash have emphasized a clear and renewed focus on decentralized investing.

Chris Perkins of venture capital firm Coinfund said the multiple calamities of 2022 have only confirmed his longstanding mistrust of overly centralized crypto companies. He credits his company’s continued survival to avoiding these projects.

As we started to see centralized entities fall apart, that and I’m not saying we wanted to, but it further fueled our thesis that we need to stay focused on decentralized technologies, Perkins told me. After the crash, he went so far as to actively prune his portfolio of a number of centralized investments. (Although he phrased it obliquely: we have taken many thoughtful steps to mitigate counterparty risk.)

It is true that a number of the projects funded are essential infrastructure projects. For example, peer-to-peer bitcoin lending protocol Finterest raised $1.5 million, while Fleek, which hosts decentralized digital content, raised $25 million. And there are a host of other decentralized projects that raised money after the FTX crisis, but not all of them tame and uncontroversial: many indeed support the infrastructure for things like decentralized high-stakes derivatives trading. .

The idea is that decentralized technology is more transparent and less prone to the kind of financial chicanery that brought down FTX. (DeFi degens have been screaming since the FTX collapse, this is why you shouldn’t put your crypto on centralized exchanges!) But Terra, the algorithmic stablecoin that gained Coinbase and Galaxy’s buy-in, was- it not somehow decentralized? And isn’t it even a polycule, technically, also a bit decentralized? Kinda?

It is important to remember that decentralization exists on a very long and convoluted spectrum, that it is never absolute, and that it never confers absolute trust. In some cases, this simply allows you to watch the fraud unfold in real time and transparently drain your savings.

So it’s worth asking: Is the latest VC-money-raising peer-to-peer Marxism token really decentralized, or do its three developers simply manage each new board proposal through a mechanism? strange and experimental governance system that is only legal in Estonia? Note that almost all decentralized companies I contacted had their own internal PR. Would a mempool send a canned PR quote?

The so-called shift to decentralization is not an overwhelming trend either, and there are still signs of the old trend of crypto esotericism. A company called Dogami selling adoptable dogs from space just raised $7 million, after apparently demonstrating a user base of 200,000. and a blockchain game based on the popular 80s football manga series “Captain Tsubasa” has raised $15 million.

These projects are not obvious safe bets by any normal standard. They actually sound very 2017 ICO era. But VCs still believe in crypto.

In an interview with reviled outlet The Block, the Dogamis founder pointed out that the VCs did a lot of due diligence before coughing up the money.

Animoca’s Siu, who participated in a previous Dogami surge, told me that no matter how crazy, esoteric, and maybe even whimsical a project can 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 so they can feed off each other.

Or maybe it’s that old-school 2000s technological silliness that these particular projects embody, allowing them to keep their toes in the garish, more profitable Web2 world. Burn Ghost, which has raised $3.1 million and develops casual games with optional NFT prizes, has a lot of flexibility on how and where we find our players, and isn’t just dependent on crypto market conditions, but it’s not just about the crypto market. said its founder and CEO, Steve Curran. .

Of course, no one is claiming that companies like Burn Ghost and Finterest will be unicorns within the hour. The Cryptos VC manic period is certainly in decline, perhaps never really recovering. But it’s still surprising how much money, even in these very dark times, there is to be made.

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