Venture capitalists have bet big on crypto start-ups in 2021, investing more than $27 billion globally as of late November, more than the previous 10 years combined, according to PitchBook.
Many of the investments were made by the venture capital arms of crypto companies, businesses whose continued growth will depend on the ecosystem expanding.
Coinbase Ventures, the investment arm of the Coinbase cryptocurrency exchange, is backing companies building infrastructure such as Solana, a blockchain network; businesses offering crypto financial services, like BlockFi, and decentralized finance projects, known as DeFi projects, in which automated transactions are handled by code; and entities working on the digital economy of the metaverse, where users buy and sell digital goods for their virtual lives, like nonfungible tokens, or NFTs.
In the third quarter of 2021, Coinbase Ventures made more deals than any venture capital firm, according to CB Insights, which tracks venture capital and start-ups.
Supporting the crypto ecosystem is the investment arm’s main focus, Shan Aggarwal, the head of Coinbase Ventures, told DealBook. “Return isn’t the primary metric by which we measure the success of Coinbase Ventures,” he said.
Coinbase and other crypto companies envision that blockchain technology, the open-source database system underlying cryptocurrencies, will lead to the evolution of the internet and eventually help displace the tech giants and gatekeepers of today.
“We see a world where the best start-ups of tomorrow are all built on web3 blockchain infrastructure,” Mr. Aggarwal said, using the industry term for a decentralized internet. “That’s the future we’re building.”
Investor interest in crypto at the institutional and retail levels has also benefited from Coinbase’s successful public debut in April, which valued the company at more than 10 times its last private valuation, and the creation of large funds dedicated to the space. The Silicon Valley venture capital firm Andreessen Horowitz, whose $20 million investment in Coinbase in 2013 has been valued at about $11 billion, announced a $2.2 billion crypto fund in June. It was the largest in the world until last month, when the venture capital firm Paradigm, which is run by a Coinbase co-founder, announced a $2.5 billion crypto fund.
Crypto venture funds and companies are interconnected and tend to place bets across multiple categories, which makes them invested in one another’s success.
For example, the biggest early-stage crypto deal this year was a $1 billion funding round raised by FTX, a crypto exchange. Paradigm, which is run by Fred Ehrsam, the Coinbase co-founder, was one of the investors. FTX’s founder, Sam Bankman-Fried, is also the founder of Alameda Research Ventures, which in August led a funding round for the stablecoin company Trust Token with Block Tower Capital and Andreessen Horowitz, an early Coinbase investor.
“It’s a mixed bag,” said Charles Hoskinson, founder of the Cardano blockchain network, which has not raised venture capital funding. Venture capital firms offer start-ups many crucial services, but some question whether their heavy involvement in crypto undermines the language of democratization so central to the industry’s ethos. “They’re always going to get their pound of flesh before everybody else,” Hoskinson said.
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