Crypto venture capital’s rapid rise as big names jump onboard

Crypto start-ups enjoyed an unprecedented investment frenzy in 2021. Will the goldrush continue?

Golden cow in front of gold coins                                 
Is the great crypto VC cash cow here to stay? – Photo: Shutterstock
                                

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At the end of January 2022, London-based incubator NFT Investments announced its pending acquisition of Pluto Digital, a publicly listed crypto technology and venture company, for £96m – just one of a frenzy of venture capital transactions in the cryptocurrency and wider digital asset space, as more and more funds realise the potential of an industry with a projected compound annual growth rate (CAGR) in real-world value of 18.36% year-on-year.

The reverse merger is seen by both companies as a way to scale up into a globally competitive metaverse and play-to-earn company. According to NFT’s executive chairman, Jonathan Bixby, it is “a transformational deal that will provide [NFT Investments] with the scale to expand and diversify our investment portfolio in a rapidly growing sector.” 

Graph showing the rapid rise in venture capital investments in 2021 – Photo: The New York Times via PitchBook
Crypto investments in 2021 far outstripped any prior year – Photo: The New York Times, via PitchBook

NFT companies seem to be a major focus for venture capital funds lately, the likely spur being the fervour and hype surrounding the metaverse.

The New York Times, using data supplied by private investment data tracker PitchBook, reported that more than $3bn in private investment was injected into NFT companies in 2021, out of a total capital injection of $28bn (other market commentators offer an even higher estimate) into the crypto market as a whole.

OpenSea, the Silicon Valley-based NFT marketplace, was one major benefactor of this capital groundswell, having raised $300m in new venture capital during a January 2022 investment round led by Paradigm and Coatue Management. In the space of a year, OpenSea increased its valuation by nearly eight times, from $1.5bn to a whopping $13.3bn, with little sign of slowing down.

The bigger picture

NFT funding deals are just one piece of a larger VC pie. More venture capital money was injected into the space in 2021 than all prior years combined, according to the digital asset researcher Galaxy’s crypto VC executive summary.

“2021 was a year of extremes,” the report said. Every aspect of crypto VC grew rapidly, including a 50% increase in round sizes and a 141% increase in blockchain and cryptocurrency company valuations. 

But what is a crypto venture capital fund’s wider focus? All major sub-sectors enjoyed substantial growth in 2021, including decentralised finance (DeFi), centralised finance (CeFi), infrastructure, Web3 and NFTs. Early-stage rounds dominated the relatively nascent DeFi and Web3 spaces, while the more mature CeFi and infrastructure sectors saw an emphasis on late-stage funding rounds.

Although “sector-agnostic” VC firms account for the bulk of capital injection, we are also seeing a steep rise in crypto- and blockchain-specific VC firms. Major players include Andreessen Horowitz, a $2.2bn vehicle and major backer of the Bloktopia metaverse project, and Paradigm, which contributed $2.5bn in investments in 2021.

Major exchanges get in on the action

Led by Amy Wu, FTX Ventures is a $2bn crypto venture capital vehicle launched by the FTX cryptocurrency exchange in early 2022. FTX itself was recently valued at $25bn after a consortium of blue-chip investors including BlackRock, Sequoia and Ontario Teachers injected $421m of capital into the Bahamas-registered exchange in October 2021.

In a recent blog post, the FTX team said: “We’re excited about crypto. We believe digital assets and blockchain technology can reshape our world in the next few decades. Some sectors we’re excited about are gaming, social, software, fintech and healthcare. We will also occasionally invest outside of crypto."

Coinbase, as well as being among the world’s largest digital asset exchanges, regularly clocking over $3.5bn in daily exchange volume, is also one of the industry’s primary VC players. 2021 was by far the biggest year to date for Coinbase Ventures, which averaged one venture capital deal every 2.5 days throughout the year, with DeFi and CeFi constituting nearly half of its portfolio allocation.

Pie chart displaying allocation of Coinbase Ventures funds across company types – Photo: blog.coinbase.com
Web3 infrastructure follows CeFi and DeFi in Coinbase Ventures’ attention – Photo: blog.coinbase.com

But Coinbase and FTX are not the only exchanges getting in on the venture capital frenzy. Kraken announced $65m in fundraising for its early-stage VC investment vehicle in late 2021, while Binance’s social impact fund continues to make big strategic investments, including a recent $60m financing round into the cross-chain protocol Multichain.

Bill Chin, head of investment at Binance Labs Fund, said: “Binance Labs invests in disruptive innovations that have incredible potential to shape the crypto landscape, which is why we are fully supporting the Multichain.”

Investment DAOs: the next big thing?

Although traditional venture capital funds are still by far the primary recourse for digital asset capital raising, their institutional nature  is at odds with cryptocurrency’s original philosophy of decentralisation. This has led to the rise of investment DAOs (decentralised autonomous organisations), which Coinbase deems a “fast and simple means of capital formation.”

Galaxy’s research pointed to a steady rise in investment DAOs throughout 2021, contributing to 10% of the year’s crypto-related funding deals, particularly in the DeFi and NFT spaces.

Pie chart of investment DAO capital injection
NFTs and Defi platforms are focus areas for investment DAOs – Photo: Galaxy Digital

The advantages of investment DAOs over traditional VC funding rounds include efficiency, democratic decision making (since a DAO lacks a general partner) and a lack of regulatory red tape. But perhaps more importantly, all transactions are logged on-chain, creating transparency for all parties involved.

Kinjal Shah is a partner at the venture firm Blockchain Capital and the founder of the Komorebi Collective, an investment DAO supporting female and non-binary founders in the cryptocurrency space. The Komorebi Collective does not have a bank account, instead deploying capital through the USDC stablecoin.

Investment DAOs democratise the capital deployment process, but in a recent interview with Coinbase Ventures, Shah discussed the issues involved with scalability under such a system, even mentioning the importance of hierarchical structures to maintaining efficiency at the decision-making level.

But although hierarchies might still exist, the comparative simplicity – from a regulatory perspective – of starting a crypto venture capital fund through a DAO serves to open the space up to more diverse communities. Shah’s recommendation for investors who are hoping to move away from traditional VC structures, or who are exploring how to start a crypto venture capital firm, is to get involved with online DAO communities, learn the unwritten rules of the DAO scene, and donate time and resources at a grassroots level.

2022: another record year for crypto VC?

Most commentators expect venture capital to continue pouring into crypto and blockchain start-ups. Crunchbase, the California-based company information service,  predicts that infrastructure and analytics could be focus points for VC in crypto throughout the year.

Interest rate rises in the US might adversely affect the capital flow of crypto venture capital funds, while at the same time, we might see increasing scrutiny from regulators as the capital injections continue to flow, which could potentially drive traditional VC investors into the investment DAO space.

Lastly, 2022 could see some record-breaking crypto IPOs, given that the unprecedented groundswell of crypto venture fund investment into the industry created 43 $1bn+ unicorns, according to Galaxy’s data. Since many of these unicorns will be looking to exit, could 2022 be the year of crypto capital markets? We’ll let you know.

FAQs

According to data accrued by Galaxy Digital, more than $30bn of venture capital was injected into crypto start-ups in 2021, a figure that was higher than every prior year combined.

Major suppliers of crypto venture capital include the centralised exchanges Coinbase, FTX and Binance; crypto-focused funds including Paradigm, Andreessen Horowitz and Blockchain Capital; traditional VC funds including Sequoia and BlackRock; and a growing ecosystem of grassroots investment DAOs.

Some of the biggest recent deals in crypto venture capital included Paradigm’s and Coatue Management’s $300m injection into the NFT marketplace OpenSea, and a $421m investment in the FTX exchange by a consortium led by Sequoia, BlackRock and Ontario Teachers.

Further reading

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