Given the contagion and chaos we have witnessed since Sam Bankman-Fried’s crypto exchange FTX had a sudden multibillion-dollar coronary, you may be tempted to conclude the entire crypto industry is headed for the great Chapter 11 bankruptcy filing in the sky, and that nobody in their right mind could possibly still have faith in it.
And yet, even in the frigid cold of Crypto Winter, venture capital continues to pour in for certain lucky builders.
Analysts at Pitchbook report that crypto VC investment in 2022 (a brutal year across all tech) has outweighed that of both fintech and biotech, pulling in $6.5 billion over the last 12 months, $879 million of it in the last quarter.
Just take a look at the last week or so of drab crypto industry press releases. You’ll see a $4.75 million round for a thing called Earn Alliance. A $70 million raise for a thing called Ramp Network. A further $15 million for Roboto Games, $3.1 million for NFT game Burn Ghost, and a vertiginous $72 million for market maker Keyrock. There are even giddy plans for a $2 billion metaverse fund by Animoca Brands, while crypto derivatives exchange Matrixport, led by former Bitcoin mining kingpin Jihan Wu, is gunning for a $100 million raise—at a valuation of $1.5 billion.
It’s easy to understand why venture capital firms continue to take these risks. VCs are like sharks—they have to keep swimming by investing in crap (sorry, “decentralized technologies”) or they’ll die, even in a bear market. But why do they continue to put their riches into stuff that keeps failing?
Everywhere you look, the industry appears to be in full tail-spin. Just last month, Multicoin Capital, Kyle Samani’s previously high-flying and exuberant firm, had its assets frozen due to exposure to FTX. Some of the biggest funders in the space, like Babel Finance, Three Arrows Capital, and FTX’s own venture arm, caused some of the biggest explosions. Star-studded companies like Blockstream, meanwhile, are writing their valuations down by 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 now-deceased competitor.
All of this has caused an obvious chilling effect. Every VC firm and project I spoke to says they are being far more cautious than before with regard to investments. A Coinbase spokesperson noted carefully that funding has “tightened.”
Animoca Brands CEO Yat Siu, meanwhile, told me cryptically 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 a number of projects failing to meet raising requirements, along with a number of deals falling through at the last minute. Many projects, she added, don’t look forward to anything bigger than a Series B before the VC taps shut off. Kevin de Patoul, the CEO of the market maker Keyrock, said he has noticed a fresh emphasis on “due diligence”—utterly unremarkable in most other industries, but something of a groundbreaking shift in crypto.
But eight-figure raises and sky-high valuations are still out there, much of it coming from the usual suspects. These are the well-capitalized firms that know when to cash out and how to manage risk. Their ranks include pedigreed industry participants like Ripple, Coinbase Ventures, Paradigm, Polychain Capital, Pantera, and the elephant in the room, Andreessen Horowitz. They are joined by firms from the Web3 sector, such as Animoca Brands, which is raising that optimistic $2 billion metaverse fund. (There are also a few obscure specialists like the VC 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 did invest in the exchange, managed to stay away from FTX’s FTT shitcoin. (Whether that was a result of virtuosic investment acumen or luck is up for debate.)
But experience counts, too. Animoca’s Siu told me his company learned a lot from enduring “the much colder and more forbidding environments” of the 2017-2019 bear market. Does that mean “crypto native” VCs stand a better chance than firms cultivated in the comparatively sane financial world? Don’t forget, after all, that FTX’s biggest funders weren’t Animoca or eGirl Capital, but legacy titans Tiger Global, Sequoia and Softbank. Were those non-crypto-native names too easily impressed by SBF’s song and dance?
It is also interesting to see where the post-bubble money is going without all that hype behind it. Many of the VC firms and portfolio projects I spoke with since the crash emphasized a conspicuous and renewed focus on “decentralized” investments.
Chris Perkins, of the VC firm Coinfund, said the multiple calamities of 2022 only confirmed his long-standing wariness of overly centralized crypto companies. He attributes his company’s continued survival to having avoided those projects.
“As we started watching centralized entities fall apart, it—and I’m not saying we desired it—but it further fueled our thesis that we need to stay focused on decentralized technologies,” Perkins told me. Following the crash, he went so far as to actively prune his portfolio of a number of centralized investments. (Though he phrased that obliquely: “We took many thoughtful actions to mitigate counterparty risk.”)
It is true that a number of the projects getting funding are critical “infrastructure” projects. Peer-to-peer Bitcoin lending protocol Finterest raised $1.5 million, for instance, while Fleek, which hosts digital content in a decentralized way, raised $25 million. And there are a host of other decentralized projects that have raised money post-FTX crisis, though not all tame and uncontroversial: many indeed support infrastructure for things like high-stakes, decentralized derivatives trading.
The thinking is that decentralized tech is more transparent and less liable to the kind of financial chicanery that brought down FTX. (DeFi degens have shouted since the FTX collapse, “This is why you shouldn’t put your crypto on centralized exchanges!”) But wasn’t Terra, the algorithmic stablecoin that got buy-in from Coinbase and Galaxy, sort of decentralized? And isn’t even a polycule, technically, also kinda decentralized? Kinda?
It is important to remember that “decentralization” exists along a very long and convoluted spectrum—it is never absolute, and it never confers absolute trust. In some cases it just allows you to observe in real-time as the fraud takes place and “transparently” drains your life savings.
So it’s worth asking: Is the latest peer-to-peer Marxism token reaping VC money really “decentralized,” or do its three developers just run each new board proposal through a weird and experimental governance mechanism that’s only legal in Estonia? Note that almost all of the “decentralized” companies I reached out to had their own in-house PR. Would a mempool send out a canned PR quote?
Neither is the purported shift to decentralization an overwhelming trend, and there are still signs of the old tendency toward crypto esoterica. A company called Dogami peddling adoptable dogs from outer space just raised $7 million, having apparently demonstrated a 200,000 strong user-base. 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 in fact sound very 2017 ICO era. But VCs still believe in crypto.
In an interview with reviled outlet The Block, Dogami’s founder stressed that VCs did a “lot” of due diligence before coughing up the cash.
Siu of Animoca, which was involved in an earlier Dogami raise, told me that “no matter how kooky, esoteric and perhaps even whimsical” a project may be, “you need content in order 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-era tech silliness that these particular projects embody, allowing them to keep their toes in the gaudy and more credibly profitable Web2 world. Burn Ghost, which raised $3.1 million and develops casual games featuring optional NFT prizes, has “a lot of flexibility on how and where we find our players, and is not solely dependent on crypto market conditions,” its founder and CEO, Steve Curran, told me.
Of course, nobody is claiming companies like Burn Ghost and Finterest will be unicorns within the hour. Crypto’s VC manic period is certainly on the wane, perhaps never to truly recover. But it’s still surprising how much cash, even in these very dark times, there is to go around.