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VCs Rethink Investments in Crypto Startups After FTX Bankruptcy

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  • VCs have poured billions into cryptocurrencies, but investors say the technology is still flawed.
  • Investors have clung to crypto startups they viewed as a “safe bet,” but FTX’s failure challenges that notion.
  • Some investors have now turned their backs on cryptocurrencies, and VC fund backers are likely to follow suit, he said.

For most of the year, enthusiastic crypto boosters continued to play games as the market collapsed.

Held crypto startup Yacht parties throughout the summer NFT.NYC and messari mainnetSome manage earn a high reputation Despite the cold of the crypto winter.Investors have declared a commitment to Funding the companies that build the backbone of Web3, even if the times get rough.Andreessen Horowitz Announcing $4.5 Billion Crypto Fund Because the token price fell.

That outward optimism overshadowed a far harsher reality. Venture capitalists have defeated a hasty exit from cryptocurrencies. Funding for his Web3 startup in the third quarter of 2022 fell nearly in half from the previous quarter, from $6 billion to his $3.3 billion. According to CrunchbaseSeveral cryptocurrency companies such as Coinbase, Gemini and OpenSea have Over 1,000 jobs lost due to layoffs.

And now, with the bankruptcy of the once-booming cryptocurrency exchange FTX, that cheery exterior has been completely shattered. Some VCs admit that cryptocurrencies and Web3 have not lived up to their potential, at least for now.

“There hasn’t been any large-scale tangible value creation yet,” said Ullas Naik, founder and general partner of venture capital firm Streamlined Ventures.

Cryptocurrencies Are Still Unproven, According To Some Investors

As crypto advocates often point out, this is not the first time the crypto market has faced turmoil. One big difference this time around, though, is the billions of dollars at stake from his venture capitalists and institutional investors.

The collapse of FTX has highlighted that fact. The virtual currency exchange has A long list of heavyweight backersIncludes top VC firms such as BlackRock, Thoma Bravo, Ontario Teachers’ Pension Plan, Sequoia, Lightspeed, IVP and Insight Partners.

Detractors of Crypto, including angel investor Liron Shapira, venture capitalist Brad Zions, and researcher Molly White, creator of the website Web3 Is Going Just Great, say the technology’s primary use is financial. It has long been claimed to be speculation and fraud.

“Further blows await,” Shapira told an insider. “The entire crypto space is a highly leveraged space, susceptible to cascading failures.”

However, in recent months, some cryptocurrency investors have already become wary of the space. For example, exchange-backed Thoma Bravo previously suggested it would. refrain from further cryptocurrency investmentsEven some investors who are bullish on the space say there are still significant gaps in technology and governance within the crypto industry.

Jonathan Golden, an NEA partner who has helped several cryptocurrency startups, including FTX, said, “To be honest, we lack a lot of infrastructure and identity tools. is confusing.” The NEA declined to comment on FTX.

Golden’s view largely points to an opportunity to focus on segments within crypto that several other investors the insider spoke to likewise see them as safe bets. includes development tools, security, customer authentication, and anti-fraud services.

Foundation Capital partner Steve Vassallo said: “What I see with cryptocurrencies is the opportunity for value creation at the protocol and application layers.”

FTX’s demise could surprise investors

Until last week, investors largely viewed exchanges as one of the surest bets among mainstream-minded cryptocurrency companies. Cryptocurrency exchange Coinbase has given the venture capital industry its biggest win in the space. It went public in 2021 and has a market capitalization of $13 billion, even though its stock has fallen more than 70% this year. His FTX value before implosion was $32 billion.

But now, as a result of the FTX demise, some investors are readjusting their approach to betting in this space.For example, Naik of Streamlined Ventures $3.4 billion crypto payment company MoonPay and the Crypto lender Voyager Digital is now bankrupt — he told an insider that he currently avoids investing in pure crypto companies.

“Web3 applications for Web3 developers probably aren’t very interesting to me,” he said. “That’s not what we’re trying to do anymore.”

The money behind venture capital is also at risk of setbacks in the wake of FTX’s demise. Some limited partners (LPs), including pensions, endowments, foundations, family offices, and wealthy individuals that fund ventures, have long been reluctant to back crypto-focused funds.

Three venture capitalists told Insider that it’s becoming an increasingly common practice for companies to block crypto investments from other positions to protect crypto-phobic LPs. Also, many crypto venture firms raise money primarily from individuals and small family offices rather than large institutional investors, said CoinFund managing partner David Pakman. I’m here.

The events of the past week are unlikely to whet the risk-averse LP’s appetite for cryptocurrencies, investors told Insider.

“For some investors, the failure of public markets like FTX will no doubt chill investment interest,” says the crypto-focused fund behind digital currency group Haun Ventures. Matthew Le Merle, Co-Founder and Managing Partner of Blockchain Coinvestors, of Funds, said: Dragonfly Capital, Pantera Capital.

The path forward for cryptocurrency investors

Investors who continue to pursue crypto investments may develop discriminating power.

For example, Le Merle said his company has avoided exposure to public crypto tokens. Some cryptocurrency startups issued tokens as a way for early investors to realize returns in as little as a year or two years after investing. However, these tokens can also be very risky. For FTX, tokens played a big role in the company’s downfall.

Still, some of the investors backing crypto startups told Insider that despite the industry’s recent woes, they continue to believe in the technology.

Crypto momentum may slow in the short term, but Ruth Fox Blader, a partner at fintech-focused venture firm Anthemis Group, told Insider in an email. attributed many of cryptocurrency’s recent problems, including the collapse of FTX, to regulatory failures rather than to cryptocurrency’s fundamental flaws.

“Investors who have shied away from cryptocurrencies are not looking to participate so far, but I don’t think cryptocurrency will retreat on the scale of Mt. Gox,” she wrote. The exchange went bankrupt in 2014.

But for the time being, until regulators address the issues that led to the failure of FTX and others, “I expect investors in this space will need maximum trading data and better audit trails.” is doing.

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