Home » Andreessen Horowitz bet on crypto at the worst time — here’s why

Andreessen Horowitz bet on crypto at the worst time — here’s why

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When cryptocurrency prices soared last year, no other investor bet more on the field than Andreessen Horowitz.

The renowned venture capital firm has built a reputation as Silicon Valley’s largest cryptocurrency bull. This is largely thanks to his 50-year-old partner named Chris Dixon, who was one of the earliest evangelists of how the blockchain technology that powers cryptocurrencies will transform businesses. His unit was one of his most active crypto investors last year, and in May announced his $4.5 billion crypto fund, the largest such investment ever.

The timing wasn’t right.

The price of Bitcoin and other cryptocurrencies plunged this year in the midst of a broader market downturn, wiping out billions of dollars in profits from Andreessen’s funds. Some of the company’s most acclaimed cryptocurrency startups have lost consumer demand, while others are facing heavy scrutiny from regulators.

Andreessen’s flagship crypto fund lost about 40% of its value in the first half of this year, according to people familiar with the matter. The fund’s investors say the drop is much bigger than the 10% to 20% declines recorded by other venture funds.

Despite record cash piles, Andreessen has dramatically slowed the pace of his crypto investments this year.

Now Dixon must convince nervous investors that Andreessen hasn’t overdid the May fund. Other crypto venture capitalists say it’s too big for the so-called crypto wintering sector.

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“They’ve pushed so far with cryptocurrencies, and I’m not sure they’ll ever be able to restore the balance,” said Ben Narassin, general partner at venture capital firm Tenacity Venture Capital.

In an interview, Dixon said he remains true to the crypto-centric vision of an internet called Web3 that underpins Andreessen’s foray into the sector.The cryptocurrency they can earn and trade.

Dixon said the sector is still in the early stages of user acquisition and it is unclear when blockchain services will see mass adoption. Cryptography is “about the political and governance structure of the internet,” he said. “We have a very long-term view.”

Dixon’s move from Andreessen’s fringes reflects the company’s transformation into a cryptocurrency powerhouse.

A coder with master’s degrees in both philosophy and business since childhood, he has helped found and sell two startups (one in cybersecurity, the other in e-commerce) and founded the VC firm Founder Collective. co-founded. He also developed an interest in new technologies such as virtual reality and his 3D printing.

He joined Andreessen in 2012. The company, founded three years ago by Marc Andreessen and Ben Horowitz, has quickly become one of the largest and most influential technology investments, driven by Andreessen’s famous slogan, “Software is eating the world.” Became his one in the house.

At a time when many major investors still dismissed Bitcoin as little more than a haven for money launderers and speculators, Dixon defended its potential, explaining how Bitcoin could power a new decentralized financial system. I wrote a blog post (something of gospel among young crypto entrepreneurs) explaining how to create one. Andreessen said he invested around $50 million in Bitcoin-related projects, including cryptocurrency exchange Coinbase, within two years.

Dixon’s enthusiasm for the space grew with the launch of Ethereum in 2015. Ethereum has allowed developers to build non-payment applications using the same type of blockchain-based decentralized recordkeeping. Dixon said he likened the rise of Ethereum to the birth of the iPhone App Store, showing that the world of cryptocurrency investing is bigger than one might imagine. He told Andreessen and Horowitz that he wanted to move away from traditional investments and launch a dedicated cryptocurrency fund, according to people familiar with the matter.

The $350 million cryptocurrency fund launched in 2018 was the first of its kind created by a traditional venture. Andreessen remained bullish that year as bitcoin and other cryptocurrencies lost most of their value, raising a second crypto fund totaling $515 million in 2020.

Dixon and his team have increasingly touted their vision for Web3. They believe blockchain will create currency-like tokens for users, giving them more control over blockchain-based services such as ride-sharing and social media, which will give them more economic benefits, making them more dominant. argued that it could undermine the power of technological monopolies.

In addition to investing in cryptocurrency companies, Andreessen also bought the tokens they created, effectively betting separately on the company and its products. The unconventional strategy brought a windfall in the cryptocurrency bull market, but it also made trading riskier.

As of the end of last year, the first cryptocurrency fund had multiplied its initial investment amount net of fees by 10.6x, making it the best performing fund on paper in Andreessen’s history. Wall Street Journal.

Andreessen says Coinbase has returned more than $4 billion in equity to investors in the two months since it went public in April 2021 through a direct listing, making it the first in venture capital history. It remains one of the most profitable bets ever made. Andreessen’s third venture fund that backed Coinbase in 2013 had a 9.7x post-fees paper gain as of Dec. 31, trailing the first crypto fund in terms of performance at the time. It is documented that there is

Fueled by the proceeds, Andreessen embarked on a fundraiser. As his third crypto fund he raised $1 billion and finally in June 2021 he raised $2.2 billion.

According to Dixon, the crypto team’s strategy is to use that pile of cash to write hefty checks to startups that promise to use blockchain to reinvent everything from digital art to online games. An aggressive approach prevented the company from advancing the round jointly with other investors, making the company a significant shareholder.

Andreessen backed 56 U.S.-based cryptocurrency transactions last year, making it the second-largest crypto funder after Coinbase Ventures, according to PitchBook Data. Some of the early investments seemed successful. An irreplaceable token market, his OpenSea valuation has soared more than 100-fold in January 2022, ten months after Andreessen led an early funding round. So he made $13 billion.

Andreessen has abandoned established investment norms in his attempt to dominate the sector. According to people familiar with the matter, investors in the company said he tried to invest in Magic Eden, an NFT market, in November, but failed. Venture capitalists have long avoided backing potential rivals. Dixon said the fund does not back companies that compete directly with its existing portfolio.

Within months, the market changed.

Demand for many Andreessen-backed companies evaporated as users parted with their cryptocurrencies. OpenSea’s monthly trading volume plummeted after its December funding round amid a broader collapse in the NFT market, while Coinbase’s monthly active users fell from a peak of 11.2 million in the fourth quarter of last year. It was down 20% in two quarters. Both companies have cut about a fifth of their workforce this year.

Andreessen is also grappling with greater regulatory scrutiny of crypto startups and the funds that back them, threatening to end an era of lax oversight that has enabled the creation of thousands of cryptocurrencies.

The company is making adjustments. According to PitchBook, he announced nine crypto startup deals in the third quarter, up from his 26 crypto deals in the fourth quarter of last year. The firm also devalued its second and third crypto funds this year, but the declines were not as severe as the first crypto fund endured, said a person familiar with the matter.

Meanwhile, the company’s cryptocurrency investments have plummeted. Solana, the startup cryptocurrency the company acquired in June 2021, has lost more than 80% of its value since the beginning of the year. In the first six months of the year, Andreessen lost $2.9 billion of his remaining shares in Coinbase as the crypto exchange’s share price fell more than 80%.

Dixon said the market downturn is an opportunity for the fund to continue supporting crypto entrepreneurs in the same way it has done in previous downmarkets.

“It’s not the price that I’m looking at. I’m looking at entrepreneurial and developer activity,” Dixon said. “That’s the key indicator.”

Email to Berber Jin berber.jin@wsj.com

This article was published by The Wall Street Journal, a Dow Jones company.

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