Andreessen Horowitz Went All In on Crypto at the Worst Possible Time

The timing wasn’t right.

price Bitcoin and other cryptocurrencies It plunged this year in the midst of a broader market downturn, wiping out billions of dollars in paper profits from Andreessen funds. demand is gone, but other companies are facing Increased scrutiny from regulatory authorities.

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 dabbled too much in the May fund. Other crypto venture capitalists say it’s too big for the so-called crypto wintering sector.

“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.

Dixon said in an interview that he remains true to the vision of a crypto-centric internet called Web3 that underpins Andreessen’s foray into the space.The form of 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 be adopted on a large scale. Cryptography is “about the political and governance structure of the internet,” he said. “We have a very long-term view.”

Dixon’s path from around Andreessen reflects the company’s transformation into a crypto 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 investors, fueled by Andreessen’s famous slogan, “Software is eating the world.” became one of his

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 and explored how bitcoin could power the new decentralized finance. I wrote a blog post explaining how to create system. 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 fund of its kind founded by a traditional venture firm. 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. He 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 increased its initial investment by 10.6 times after deducting fees, making it the best-performing fund in Andreessen’s history, according to documents seen by The Wall Street Journal. rice field.

Andreessen has returned more than $4 billion in equity to investors, two months after coinbase went public via a direct listing in April 2021, according to public documents, making history in venture capital. Andreessen’s third venture fund backing Coinbase in 2013 posted a 9.7x post-fees paper gain as of Dec. 31. Yes, second only to the first crypto fund in terms of performance at the time.

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 cash on hand to write large checks to startups that promise to reinvent everything from digital art to online games using blockchain. It is said that 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 him the second-largest crypto funder after Coinbase Ventures, according to PitchBook Data. An irreplaceable token market, his OpenSea valuation jumped more than 100-fold in January 2022, ten months after Andreessen led an early funding round. $13 billion.

Andreessen has abandoned established investment norms in his attempt to dominate the sector. In November, the company’s investors tried to invest in his NFT marketplace, Magic Eden, even though the company already backed OpenSea, according to people familiar with the matter. I 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 as it has done in previous downmarkets.

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

Email to Berber Jin berber.jin@wsj.com