Cryptocurrencies do badly, but VCs keep pouring money
zk humor column
given that infection and the chaos we've seen since Sam Bankman-Fried's FTX cryptocurrency exchange had a sudden multibillion-dollar coronary, you might be tempted to conclude that the entire cryptocurrency industry is headed for major Chapter 11 bankruptcy in heaven and that no one is right the mind could still have faith in it.
Yet even in the freezing cold of the Crypto Winter, venture capital still pours in for a few lucky builders.
Pitchbook Analysts relationship that investment in crypto VC in 2022 (a brutal year for all tech) surpassed that of fintech and biotech, earning $6.5 billion in the past 12 months, $879 million in the most recent quarter.
Check out the last week or so of sleazy cryptocurrency industry press releases. You will see a $4.75 million round for something called Earn Alliance. A $70 million raise for something called the Ramp Network. A further $15 million for Robot Games, $3.1 million for NFT Burn Ghost and dizzying game 72 million dollars for market maker Keyrock. There are also dizzying plans for a $2 billion Animoca Brands metaverse fund, while crypto derivatives exchange Matrixport, led by former Bitcoin mining boss Jihan Wu, is shoot for an increase of $100 million, at a valuation of $1.5 billion.
It's easy to see why venture capital firms continue to take on these risks. VCs are like sharks: they have to keep swimming 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 swing. Just last month, Multicoin Capital, Kyle Samani's feisty and feisty company, had its assets frozen due to exposure to FTX. Some of the largest lenders in the industry, such as Babel Finance, Three Arrows Capital and the venture arm of FTX, have caused some of the biggest explosions. Stellar companies like Blockstream, meanwhile, are writing their ratings orders of magnitudeand the $1.5 billion valuation Matrixport seeks looks positively modest compared to the $32 billion valuation once commanded by its now-defunct competitor.
All this caused a clear chilling effect. Every firm and VC project I've talked to says they're much more cautious about investments than before. A Coinbase spokesperson noted closely that funding has "tightened."
Animoca Brands CEO Yat Siu, meanwhile, 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."
Paulina Joskow, business leader at Ramp Network, told me she's heard of a number of projects that don't meet the raise requirements, along with a number of deals that fell through at the last minute. Many projects, she added, are looking forward to something bigger than a B-series before the VC faucets turn off. Kevin de Patoul, CEO of market maker Keyrock, said he has noticed a new emphasis on "due diligence," which is meaningless in most other industries, but something of a game-changing shift in cryptocurrencies.
But the eight-figure raises and sky-high valuations are still out there, largely coming from the usual suspects. These are the well-capitalised companies that know when to cash out and how to manage risk. Their ranks include industry participants with such pedigrees as Ripple, Coinbase Ventures, Paradigm, Polychain Capital, Panther, and the elephant in the room, Andreessen Horowitz. They are joined by companies in the Web3 sector, such as Animoca Brands, which is raising that optimistic $2 billion metaverse fund. (There are also some obscure specialists like VC firm "gumi Cryptos Capital," Argonautic Ventures," and "Harrison Metal.")
Presumably the main way these companies stayed afloat was by simply not being exposed to FTX. Paradigm, that invested in the exchange, managed to stay away from FTX's FTT shitcoin. (Whether this was the result of virtuous investment acumen or luck is up for debate.)
But experience also counts. Animoca's Siu told me his company learned a lot enduring "the much colder and hostile environments" of the 2017-2019 bear market. Does this mean that "crypto-native" VCs stand a better chance than relatively sane financial-world-grown firms? Don't forget, after all, that the biggest funders of FTX weren't Animoca either 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's also interesting to see where post-bubble money is going without all that hype behind it. Many of the venture capital firms and portfolio projects I've spoken to since the crash have emphasized a conspicuous and renewed focus on "decentralized" investing.
Chris Perkins, of venture capital firm Coinfund, said the multiple calamities of 2022 only confirmed his longstanding wariness of overly centralized crypto firms. He attributes his company's continued survival to his avoidance of those projects.
"When we started to see centralized entities fall apart, I'm not saying we wanted to, but it further fueled our argument that we need to stay focused on decentralized technologies," Perkins told me. After the crash, he went so far as to actively thin out his portfolio of a number of centralized investments. (Although he put it obliquely: "We've taken many thoughtful actions to mitigate counterparty risk.")
It is true that a number of projects that receive funding are critical '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 guest Of Other decentralized projects that have raised funds since the FTX crisis, though not all of them tame and uncontroversial: many do in fact support infrastructure for things like decentralized trading of high-risk derivatives.
The thinking is that decentralized technology is more transparent and less prone to the kind of financial shenanigans that brought FTX down. (DeFi degens have been shouting since the FTX crash, "This is why you shouldn't put your crypto on centralized exchanges!") But it wasn't Terra, the algorithmic stablecoin that got the buy-in from Coinbase and Galaxy, some kind of decentralized? And it's not even a polycule, technically, even a little decentralized? Guy?
It's important to remember that "decentralization" exists along a very long and convoluted spectrum: it's never absolute, and it never confers absolute trust. In some cases it only allows you to observe in real time how the fraud takes place and "transparently" drains your life savings.
So it's worth asking: Is the latest peer-to-peer Marxism token that raises VC money really "decentralized" or its three developers simply manage each new council proposal through a strange and experimental governance mechanism that is only legal in Estonia? ? Note that almost every "decentralized" company I contacted had their own internal PR. It would be a mempool send a canned PR quote?
Nor is the alleged move towards decentralization an overwhelming trend, and there are still signs of the old trend towards crypto-esotericism. A company called Dogami that sells barely adoptable dogs from space raised $7 million, having apparently demonstrated a strong user base of 200,000. and a blockchain game based on the popular 80's soccer manga series 'Captain Tsubasa'. raised $15 million.
These draws are not obvious safe bets by any normal standard. Indeed they ring a lot in the ICO era of 2017. But VCs still believe in cryptocurrencies.
In a interview with insulted outburst The blockThe Dogami founder pointed out that the VCs did "a lot" of due diligence before blowing the money.
Animoca's Siu, who was involved in a previous relaunch of Dogami, told me that "no matter how quirky, esoteric, and maybe even wacky" a project might be, "you need content to drive demand." He added, "'Build it and they'll come' is a difficult strategy when there's no demand. You must have both so they can feed 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 flashy and more believably profitable Web2 world. Burn Ghost, which raised $3.1 million and develops casual games with optional NFT rewards, has "a lot of flexibility in how and where we find our players and it's not solely dependent on cryptocurrency market conditions," its founder and CEO, Steve Curran, Tell Me.
Of course, no one is arguing that 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 money, even in these very dark times, there is to go around.
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