Investing in Crypto like a VC

In 2021 alone, 43 crypto-native companies reached $1 billion valuation, however the number of “crypto” companies in the public market is still very limited.

According to the Galaxy Digital Global Research Venture Capitalists invested more than $33bn into crypto/blockchain startups in 2021, more than all prior years combined. $22bn of that total (67%) went to fundraising rounds with deal sizes above $100m. 

AI and Fintech are still leading the way, but crypto investing is catching up. 

Crypto/blockchain startups received almost 5% of venture capital deployed in 2021.

Companies offering trading, investing, exchange, and lending services to digital assets investors led the pack with more than 41% of the capital share, but startups building in the NFT, Web3, DAO, and Metaverse sub-sectors came in second with 17% of the capital allocation.

Today public market investors can also invest in the GlobalX Blockchain ETF (NASDAQ:BKCH) which was formed in mid-2021 and is designed to allow investors to gain exposure to an entire basket of blockchain stocks with a single investment.

Other options to invest in crypto stock are Coinbase (COIN), and “bitcoin stock” such as Riot Blockchain (RIOT), MicroStrategy (MSTR), Marathon Digital Holdings (MARA), focused on the blockchain ecosystem and bitcoin mining. 

Thanks to a new category of protocols new investment opportunities are also emerging – the DeFi protocols; DeFi today accounts for around 1% of the global banks’ market cap. The total capital locked in DeFi services, a measure of liquidity, has grown by more than 1,700% over the past year to a whopping $247 billion. (More at THE INEVITABLE DEFI WORLD).

Where are Venture Capitalists investing their money in crypto?

Strong signal of the growing maturity of the space is the gradual decrease of investment at early stage, and a consequential increase of later stage deals.

Even if the number of deals and VC money allocated to crypto companies is growing, getting access to “HOT” deals in the space is today extremely challenging. 

We will probably see more competition around deals moving forward; the general access to capital will slowly become more challenging for founders as new category leaders will emerge and consolidate in the long term. 

After visiting a number of crypto events, I can also attest that the lack of technical talent is increasingly becoming an issue for newly formed companies.   

The overall startup market valuation reached all-time highs in 2021, and crypto/blockchain startups’ medium-pre money is 141% higher than the rest of all the deals across all VC investments. 

The Crypto/Blockchain categories: 

In terms of category, we can also attest the maturity of the industry and a gradual verticalization / specialization of the ecosystem in well defined “crypto native” categories.

One of the most complete guides to the Web3 stack was shared by Coinbase Ventures a few months ago.

The Web 3 stack

Protocol Layer

Infrastructure / Category Primitives

Use Case Layer

Access Layer

The complexity and speed of evolution of the crypto/blockchain ecosystem is constantly channing, and we will see new emerging categories going from zero to billion dollars in the coming years. 

Crypto venture capital is a different game than traditional venture capital

First of all, Venture funds are exempt from registering as investment advisers, but only 20% of their holdings can be in “non-qualifying investments” like digital tokens*. 

A new way of investing in companies is emerging; today it is very common for “crypto native” investors to have a dual strategy of investment a) equity and b) tokens. 

More funds will over time need to complain with SEC regulation in order to keep investing in tokens. 

According to some data learnt over conversations with industry leaders, institutional investors like Andreessen Horowitz’s invest around 75% in tokens, similar investment strategy seems to be used by others like CoinFund, Coinbase Ventures, Pantera and many others. 

Fund managers will also need to balance long term token holding vs short term liquidity funds; holding vs liquidating will ultimately also impact the reputation of the firm, and in same cases their governance power, since many tokens come with governance/voting powers attached. 

Last, one of the core differentiators between the traditional VC funds and the Crypto funds, is that many Crypto Native funds have dedicated  tech researcher teams. A reminder of how early this space is, but also how complex the vetting process of crypto companies could be.


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