Venture capitalists (VC) have long fueled the tech industry, investing in early-stage companies and allowing for new, untested contenders to soar rapidly. Almost every major tech product you can think of—Uber, Google, Facebook, to name a few—began with funding from hopeful VCs.
You would expect anti-establishment crypto entrepreneurs, on the other hand, to be wary of taking investments from powerful VCs, who often impose their considerable will onto portfolio companies in order to maximize returns.
And yet, the opposite is often true. A great number of crypto projects over the last few years have been funded by VCs (both mainstream and “crypto native”), whose high-risk, high-reward approach to investment suits the volatile industry. Coinbase, Gemini, ConsenSys, Dapper Labs, Solana, Arbitrum, you name it—almost every major product in the crypto world was aided by VC investment. It’s worth understanding how this vital industry works.
How Does VC Work?
Venture capital firms generally invest money in young and promising companies with long-term growth potential, in return for some kind of stake: equity, or—in the case of crypto—tokens. The VC’s goal is an eventual exit e.g., selling off the equity after a private merger or IPO.
Support is generally split into several rounds:
- Pre-seed: the VCs help a project conceptualize its business model
- Seed: the first round of funding to help the project launch
- Early-stage funding: denoted alphabetically (Series A, Series B), these rounds keep the investment afloat until it becomes profitable
Mind that last word: profitable. Given the riskiness of VC investments, a general rule of thumb for VCs is that roughly three out of 10 investments in a given portfolio will actually succeed. If a project fails, the money invested into it is simply written off as a loss. To mitigate such losses, VCs provide additional services, such as bringing projects into their networks of industry contacts and offering advice.
VC in Crypto
After the crypto boom of 2017, VC in crypto took off. Crypto firms in their infancy couldn’t always access capital markets, and venture capital provided a quick and easy way to raise money.
Subsequently, long-established VC firms like Sequoia and Andreessen Horowitz poured money into the space. For instance, Andreessen Horowitz, which was an early investor in Uber and Instagram, backed a number of ultimately successful crypto projects like Coinbase (see below).
Others took a spray-and-pray approach, investing in eccentric projects that often made little money, including the notorious Dentacoin.
Unlike with traditional VC investments, many of these projects were tokens with no real value proposition or business model, and crypto VC fortunes have often risen and fallen in line with hype cycles.
There are also a number of “crypto-native” investors who built their fortunes in the space. For instance, the billionaire Joe Lubin, one of the founders of Ethereum, launched ConsenSys, which, among other things, funneled venture capital into projects on the Ethereum network. ConsenSys was able to sire an entire ecosystem of crypto projects through its incubators, in which projects receive indefinite funding and long-term access to VCs’ resources.
The troubled giant DCG, run by Bitcoin pioneer Barry Silbert, had a similarly influential portfolio that included giants like Grayscale, the now-bankrupt Genesis, and crypto news site CoinDesk.
There are other, more bizarre endeavors that could only exist in crypto: eGirl Capital, for instance, is a VC firm run entirely by pseudonymous Twitter celebrities who got rich as crypto traders. Each partner of the firm is identified by a cartoon avatar with a wacky name, and they are, reportedly, more than willing to turn up to serious business meetings in character.
Due diligence is a vital part of venture investing, and traditional entrepreneurs may balk at the prospect of taking money from a collective of cartoonish, outsized Twitter personalities. That, along with the intense volatility of crypto markets, makes crypto VC a precarious undertaking. Many of the VCs, including funds run by the now-infamous FTX and Three Arrows Capital, have been blown up after market chaos sent their tokenized equity spiraling.
FTX itself raised $2 billion in venture funding mostly from legacy VC firms like Sequoia Capital, rather than crypto companies long embedded in the space. Sequoia had to subsequently write down its multimillion-dollar investment in the exchange to zero.
Who Are Some Notable (and Notorious) Crypto VCs?
- Pantera: Established in 2013, Pantera is one of the major crypto-native VC firms, the “first U.S. institutional asset manager focused exclusively on blockchain technology,” as noted on its website. The firm has $4.1 billion in assets under management, and notable investments include Filecoin, Polkadot, Alchemy, Prism, and more.
- Andreessen Horowitz (a16z): A mighty player in tech before the explosion in crypto assets, a16z began investing in Bitcoin way back in 2013, and later went all in on the emerging ecosystem, financing titans like Coinbase and a large number of smaller, more eccentric projects focused on decentralized infrastructure.
- FTX/Alameda: Though FTX Ventures was the official VC arm of now-defunct derivatives exchange FTX, its sister trading firm, Alameda Research, reportedly made venture investments of its own, accumulating a $5.4 billion portfolio of largely illiquid crypto tokens, as well as stakes in Elon Musk’s SpaceX and Anthony Scaramucci’s SkyBridge Capital. To finance these investments, Alameda took out huge loans, often using the $FTT token, which FTX had invented, as collateral. When malfeasance at the company was revealed, the subsequent collapse of $FTT had a domino effect that impacted the entire portfolio, as well as much of the crypto industry.
- Three Arrows Capital (3AC): Founded in 2012, 3AC had a portfolio that was reportedly worth north of $10 billion across investments including LUNA, BlockFi, Voyager, and others. The collapse of LUNA triggered the bankruptcy of 3AC and many companies it had invested in, leaving the firm owing billions of dollars to creditors.
Crypto VC’s Future
The current tumult in the crypto markets has dramatically slowed the pace of VC investments, and many investors are turning to safer, less flashy bets that won’t be easily blown up by, say, the fraudulent behavior of individual founders. That includes infrastructure for decentralized projects, like exchanges and decentralized finance lenders. Nevertheless, the amount of VC in 2022 was a whopping $22 billion, even as the markets died down. The money tap may be drying up, but there’s still some venture capital sloshing around.