Venture capital makes a big step on crypto in 2022
Afraid of being left in the digital dust, private equity investors are rushing to crypto projects – blockchain-based apps and platforms fueled by cryptocurrencies native to the virtual economies of the metaverse and Web3.
Venture capital investments in such projects totaled $10 billion worldwide in the first quarter of this year, the highest quarterly amount ever and more than double the level seen in the same period a year ago, according to data from Pitchbook.
A trickle has become a torrent: The annual totals for 2019, 2020 and 2021 were $3.7 billion, $5.5 billion and $28 billion.
“You see a lot of VC investment in a lot of protocols because they all believe, just like us, that some of these protocols are the infrastructure of the future,” said Steve Ehrlich, CEO of crypto brokerage Voyager Digital.
Such projects, which can range from crypto and NFT exchanges to decentralized financial applications and token issuers, are often known as protocols in reference to the rules embedded in their computer code.
The recent move differs from the past, as venture capital investment levels tracked the price of bitcoin, albeit with a short lag, according to Alex Thorn, head of firm-wide research at blockchain-focused bank Galaxy Digital in New York.
Investment levels in crypto have continued to grow this year during a bitcoin price decline — it’s down about 16% — and also during another dip last summer, Thorn notes.
“This decoupling demonstrates investors’ disbelief that a prolonged bear market in digital assets is imminent, as well as the significant amount of dry powder held by funds trying to allocate to the sector,” he wrote last week.
The VC crypto craze in 2022 also coincided with a collapse of the tech-heavy Nasdaq benchmark, which is down 21%.
Average Crypto Fund Size (2016-YTD) https://graphics.reuters.com/CRYPTO-INVESTMENTS/byprjnezxpe/chart.png
VC MEET WEB3
The number of mergers and acquisitions involving target crypto firms is also increasing globally as buzz grows around the virtual world metaverse and Web3’s decentralized online utopia.
According to Dealogic, 73 deals worth a combined $8.8 billion have been closed so far, up from 51 deals worth $6.8 billion in the past year.
The funding rush means crypto firms can afford to be picky, said Mildred Idada, founder of the blockchain venture fund and accelerator Open Web Collective.
“The founders say, ‘There are five funds that want to invest in us, which one will deliver the most value?'” she said.
In many cases, blockchain technology companies are interested in the brand value of backing from established players and increasing integration with the financial system, Idada added.
Some companies have been creative in raising money. For example, Polygon, a platform for developing and scaling applications on the Ethereum blockchain, raised $450 million in February through a private sale of its cryptocurrency to investors, including SoftBank’s Vision Fund 2.
“The bigger reason for that raise was to get the institutions on our side and increase Polygon’s visibility,” said co-founder Sandeep Nailwal.
Still, the entry of traditional venture capitalists accustomed to red carpet treatment into online developer communities pushing for decentralization has not been without cultural clashes.
According to Alexandra Bertomeu-Gilles, risk manager at Aave, a decentralized financial (DeFi) company, many venture capitalists are forced to lure those developer communities behind potential targets.
“Some founders now…when they take money from investors, they make agreements so that the investors don’t have an undue say in the governance of the company, or they can’t ignore something that the majority of the rest of the community wants,” she said. .