It wasn’t long ago that venture capital firms could make out like bandits by backing new crypto projects. Instead of waiting seven or more years for a payout, as typically happens with traditional VC investments, they could gobble up easy returns when those projects issued tokens a short time later. The gig was so lucrative that former Twitter CEO Jack Dorsey and others shared a meme in late 2021 depicting a VC fat cat guzzling a river of riches from blockchain offerings while retail investors pleaded for a drop.
How times change. Today, many of the venture capitalists who rushed into crypto are reeling as token offerings have dried up entirely in the wake of FTX’s collapse. Their portfolio companies are now holding back launches of any sort, according to The Block, due to fears “over price, exchange fees and increasingly aggressive regulation.”
All of this has in turn led VC funding for crypto projects last quarter to drop to its lowest level in two years, per new data from PitchBook, with analysts predicting that a number of venture capital firms will blow away entirely. Meanwhile, other firms that recently have dabbled in crypto are expected to call it quits after getting torched by FTX or the failed hedge fund Three Arrow Capitals.
The plight of crypto-wrecked venture capitalists is unlikely to evoke much sympathy from the public or even from the industry where many blockchain builders regard them as greedy, centralized interlopers. At the same time, the retreat of the venture capital industry is not necessarily a good thing since veteran VCs can provide mentorship and connections to the traditional business world that many founders typically lack.
Meanwhile, the venture capitalists are hardly going away altogether, especially since many of them still have plenty of what the VC crowd calls “dry powder” to invest in the crypto sector. If you want an optimistic take, it’s possible to envision a future where VCs remain an integral part of the industry but in a way that forces them to focus on nurturing quality projects over long time horizons. This would be a welcome change from the recent era, which saw too many startups rush to issue tokens that offered little utility other than helping insiders—including VCs—dump their bags.
And while some in the crypto sector wish the VCs would just go away altogether, that’s not going to happen. As a PitchBook analyst explained, investment is likely to begin pouring in again by summer since “crypto funds are under obligation to deploy the massive capital they raised during the digital-asset boom.”
Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts
Worries about the financial health of DCG eased as the share value of its Grayscale subsidiary rose and as the deadline for an ultimatum set by the Winklevii passed without incident. (Bloomberg)
An investigation of Binance wallets suggests that investors are leaving the platform at a significantly higher rate than other exchanges. (Forbes)
A new Shiba Inu-themed token called Bonk has been soaring in DeFi markets, boosting the struggling Solana chain on which it's hosted. (Coindesk)
Coinbase cut another 950 jobs in a second round of layoffs that amount to 25% of its workforce. (WSJ)
Mastercard announced an accelerator program to help emerging musical artists build NFT-based fan passes and other Web3 offerings to promote their work. (Fortune)
Crypto scam, A.I. edition:
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