In the first half of 2021, more venture capital (VC) funding was deployed into cryptocurrency and blockchain startups than in any previous full year. At the current rate of investment, CB Insights has forecasted that the total capital deployed in 2021 will roughly triple the previous record set in 2018. There is little doubt that cryptocurrency and blockchain are both à la mode in 2021, something that is in no small part thanks to the emergence of NFTs. This article will attempt to provide context to the blazing hot VC market for all things crypto. In particular, it will cover the following topics:
1. Setting the Stage: The Cryptocurrency VC Market
2. Andreessen Horowitz
3. Coinbase Ventures
4. Pantera Capital
5. Digital Currency Group
7. The Evolution in Cryptocurrency VC Funding
Taking a macro look at the NFT and wider cryptocurrency funding markets, VC firms investing in the space can be grouped into one of two segments.
1. Traditional VCs: These include the likes of Andreessen Horowtiz and Sequoia Capital. Such firms have established their reputations by investing in Web 2.0 startups. They invest in crypto startups as a way of diversifying their portfolios and betting on the upside potential of Web 3.0. The approaches that traditional VCs take to gain exposure to the burgeoning crypto startup scene differ. For instance, some traditional VC firms invest indirectly into the crypto economy by providing liquidity to cryptocurrency hedge funds and venture firms, where others invest directly in crypto companies in the same way they have invested in Web 2.0 startups.
2. Crypto-focused VCs: These include such firms as Pantera Capital and Digital Currency Group. These firms are solely concentrated on investing in the most promising projects across different segments of the crypto market. Recent data suggest that crypto-focused VC funds have vastly outperformed their traditional counterparts; whereas traditional VC firms have tended to achieve rates of return in the low double digits, select crypto-focused VC firms including CoinFund and Blockchain Capital have realized a tenfold increase over those results. These crypto-focused VC firms are also less correlated with traditional markets than other VCs, indicating the significant diversification benefits they pose to buy side investors.
Andreessen Horowitz can best be described as VC royalty. Founded in 2009 by early internet entrepreneurs Marc Andreessen and Ben Horowitz, the firm has quickly made its mark as one of the best-recognized and most visionary VCs in Silicon Valley. The firm’s portfolio speaks for itself, with lead or participating investments in technology giants such as Airbnb, Lyft, and Robinhood.
Andreessen Horowitz’s first foray into the crypto-sphere came about in 2013, when the firm made early investments in modern-day cryptocurrency titans such as the Ripple payment network and the Coinbase exchange. The firm would then double-down on their bullish crypto thesis, raising a USD$300M fund in 2018 intended for investing in companies at the bleeding-edge of the vertical. This was followed by a USD$515M crypto fund in 2020, and a third USD$2.2B fund in 2021.
Naturally, Andreessen has diversified their investments in the crypto world rather than focusing on any one specific application or technology. With respect to their interest in companies building in the NFT ecosystem, the firm has had some recent activity:
• Andreessen led the USD$100M Series B round for NFT marketplace OpenSea on July 20, 2021, valuing the company at USD$1.5B and making it one of few crypto startups to have achieved unicorn status. OpenSea provides a platform for auctioning NFTs and minting new tokens. Andreessen previously led the $23M Series A round on March 18, 2021.
• Andreessen served as a strategic investor in the USD$305M Series C round at a USD$2.6B valuation in Dapper Labs on March 30, 2021. The NFT darling is best known for having launched some of the most notable collections in circulation today, namely CryptoKitties and NBA Top Shot. Andreessen previously co-led Dapper’s USD$12.9M Series A round.
• Andreessen co-led a financing round in Solana Labs alongside Polychain Capital in the amount of USD$314,159,265 – a subtle nod to the Greek constant Π – in the form of a private token sale on June 9, 2021. The firm’s thesis was that the next wave of crypto innovation would occur at the application layer, including NFTs, and a high-performance blockchain such as Solana would be central to driving that innovation.
For those both unfamiliar with and deeply entrenched in the crypto-economy, the Coinbase brand is one that has become instantly recognizable. In its blockbuster 2021 initial public offering, where it listed on the Nasdaq at a USD$85B+ valuation, Coinbase solidified itself as the foremost digital asset exchange and transcended the fringe world of crypto to enter mainstream consciousness.
In 2018, Coinbase’s VC arm was inaugurated with the vision of financing early-stage companies promising to advance the crypto-economy in a positive and meaningful way. The entity has invested in some of the most forward-thinking projects in crypto, including Compound and BloXroute.
Coinbase Ventures set a purposely broad crypto investment objective, being to fund the companies building the open financial system. Within this sweeping and lofty goal have come a number of investments in companies specifically dedicated to developing the NFT ecosystem. Coinbase Venture’s recent investment activity in the NFT space includes:
• Coinbase Ventures participated in the USD$2.4M seed round for ImmutableX in May of 2018. The startup is best known for its digital trading card game Gods Unchained, and is also deeply invested in providing layer 2 scaling solutions for Ethereum-based NFTs to enable inexpensive minting and trading.
• Coinbase Ventures participated in the USD$12.1M Series A round for the NEAR Protocol in July 10, 2019. This startup develops a proof-of-stake blockchain optimized for scalability, transaction throughput, and security of the assets it custodies. It is currently being leveraged by numerous NFT projects including Metamon and Crypto Corgis.
Considered to be among the blue-chip VCs in the crypto ecosystem, Pantera boasts the unique claim-to-fame of creating the first blockchain venture and hedge funds in the US with the firm’s 2013 Pantera Venture Fund I and Pantera Bitcoin Fund. The firm’s track record is difficult to match, having led 50% of 145 investments since inception and realizing USD$82M on USD$18M deployed into its portfolio companies. Pantera has launched a series of venture funds since its first in 2013, with Pantera Venture Fund II in 2014 and Pantera Venture Fund III in 2018.
Pantera’s 3 venture funds have increased in size as the firm proved its investing acumen, with the first fund amounting to USD$12M and the third amounting to USD$175M. The firm’s vision for each fund also seemed to progressively increase in scope and ambition. Where Fund I was dedicated to investing in companies enabling the trading of and speculation on bitcoin, Fund III was raised to fund companies building the scaffolding to allow institutional entry into the digital asset world. Within these investment objectives, Pantera has had some noteworthy NFT-centric activity, including:
• Pantera led a USD$5M financing round in the Codex Protocol. The startup provides a registry service for owners of unique digital collectibles to record information on the assets they own. This secures the provenance of the NFT and provides assurance to prospective buyers that the asset is authentic.
• On September 7, 2017, Pantera participated in the public token crowdsale of Maecenas, making an ether investment of roughly USD$4M. Maecenas was built to democratize access to fine art, offering a decentralized gallery through which users can purchase shares of tokenized artwork from time-honoured artists such as Monet and Warhol.
Founded in 2015, DCG has catapulted itself to the forefront of the crypto VC space through an aggressive and geographically-expansive investment approach. This strategy has ballooned DCG’s portfolio to 165 crypto startups spanning 30+ countries and 6 continents.
DCG claims to be supporting the largest portfolio of early-stage investments in the digital currency and blockchain ecosystems, and aims to support its portfolio companies on their over-arching mission to build a better financial system. Some of the NFT activity in DCG’s portfolio includes:
• DCG participated in the USD$1.4M seed round of NFTBank.ai on April 19, 2021. This startup provides a streamlined portfolio management experience for NFT investors, allowing them to track all NFTs they own across collections and the blockchains from a central location. The platform also allows users to audit their NFT transactions and view financial statements presenting gains or losses on their positions.
• DCG participated in the first leg of a USD$21M funding round for Big Time Studios on May 12, 2021. This startup is a blockchain-based game development studio building the infrastructure to help other developers integrate NFTs into their in-game economies.
One of the fastest-emerging VC firms specializing in crypto, Placeholder is highly-regarded for its thesis-driven investing and for backing some of the most notable names in crypto. The firm was founded in 2017 by alumni of Union Square Ventures and ARK Invest. Placeholder focuses their investments on startups building decentralized information networks with native crypto tokens.
Based on Managing Partner Joel Monegro’s seminal writings on the blockchain application stack, the firm segments the crypto market into 3 strata: infrastructure protocols, decentralized applications, and user interfaces. In all cases, Placeholder assesses prospective investments based on their decentralized information networks, their usage of a native token to direct activity and allocate resources, and the potential for flywheel effects in token price appreciation.
Since its founding and at the time of writing, the firm has invested in 27 different crypto startups. Some of the firm’s most prominent NFT activity includes:
• On February 18, 2021, Placeholder participated in the USD$2M seed round for Async Art, alongside other VC firms such as Galaxy Interactive. Launched only a year prior, Async Art was built as a marketplace for minting and trading programmable digital art.
• Placeholder VC has also previously participated in a 2018 financing round for OpenZeppelin. This startup is a mainstay in the worlds of NFTs and blockchain, developing Ethereum smart contract standards for the creation and issuance of tokens.
The NFT and wider crypto funding landscapes have seen marked shifts in recent years as the technologies have matured. With the number of opportunistic scams and rug-pulls in the industry slowly tapering off, what have begun to emerge are pain-soothing use cases and clear value propositions worthy of institutional VC backing. Cointelegraph’s 2020 Blockchain Venture Capital Report highlighted the stark shift in institutional perception and VC activity in the crypto space, noting that 82% of all investments in the crypto space up to 2020 were made with no VC involvement whereas that number fell to just 22% in 2020.
To examine the trend in VC funding for NFT companies, it would be reasonable to consider funding in the wider blockchain ecosystem as a close proxy; naturally, as investor interest in the protocol & infrastructure layers increases, interest in the application layer should follow suit. The 10- year trend in annual blockchain private equity funding shows an all-too familiar pattern. Funding spiked in 2018, likely off the momentum of cryptocurrency prices reaching all-time-highs and the speculative bubble that formed around initial coin offerings. In a similar manner, funding has spiked year-to-date in 2021, no doubt driven again by all-time-high prices and speculative manias forming in the NFT and decentralized finance spaces. In spite of this cycle of booms and busts, it would appear that blockchain funding has generally trended upwards over the past decade, something that is likely attributable to the emergence of practical, real-world use cases being enabled by the technology.
Sources: Cointelegraph, CB Insights
The record-setting levels of blockchain funding in 2021 are unlikely to slow down, with CB Insights forecasting the year-end funding level to climb above USD$14.6B. As alluded to at the start of the article, this nearly triples the previous record set in 2018, showing clear signs of a frothy market that is most likely poised for a correction in the near future.
The NFT companies that have received the greatest level of backing from VCs and angel investors have received as much as USD$63M in lifetime funding.
Historical precedent says that upon the next major bust in the crypto VC funding market, when liquidity dries up as it did in 2019 and 2020, there will be no shortage of anti-crypto pundits proclaiming it to be the end of the technology; perhaps they will cite the NFT craze that has fueled much of the recent interest as irrefutable evidence of crypto’s lack of practical utility. Ultimately, however, historical precedent also says that the crypto markets – with all of their underlying applications, from NFTs to DeFi – will come roaring back in response, declaring their importance as an unassailable technological and financial innovation.
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