Andreessen Horowitz this week launched a $300 million specialist crypto fund, five years after first investing in the space through Coinbase. The venture capital firms’ long interest in crypto and sizeable new fund make it a trailblazer — most VCs have largely ignored cryptocurrencies and are now struggling to play catch-up.
“If you look back a year ago at where we were, it really wasn’t on many [venture capitalists’] radars,” Michael Jackson, a partner at venture capital firm Mangrove, told Business Insider.
“Ethereum hadn’t come up, ICOs hadn’t started, bitcoin had been Mt Gox’d. There wasn’t any mainstream interest aside from bitcoin and I think most of the venture world was agreed that investing in a currency wasn’t for venture capital companies.”
Now the industry is reconsidering its position after an explosion of activity towards the end of 2017. Bitcoin rose over 1,000% against the dollar in 2017, with other cryptocurrencies recording similarly eye-catching returns. The entire market has more than halved since the start of 2018 but there is a sense that the technology is not going away.
“[VCs] certainly want to talk more and more to us, in fact ever since 2017 they’re much more interested in talking to us to invest in us,” Jon, the COO of digital cryptocurrency exchange Shapeshift, told Business Insider. (Shapeshift doesn’t give out the second names of its employees for fear of phishing attacks.)
Unfortunately for VCs, the particular nature of cryptocurrency presents plenty of potential hurdles.
‘They’re a little late to the boat’
2017 saw the emergence of ICOs — initial coin offerings — as a new fundraising method unique to the cryptocurrency space. ICOs allow startups to mint their own digital currencies or tokens and sell them in exchange for ether or bitcoin that can be sold for fiat as and when they need working capital.
Billions have been raised through this method, most coming from individual investors. It allows startups in the space to effectively circumvent the VC world if they want.
Even for crypto companies that don’t do an ICO, the rising tide of cash in the industry means that many are bringing in huge revenues and profiting from money flowing into the sector.
The CEO of crypto derivatives platform BitMEX told Business Insider in January: “The mining firms, the trading platforms — they don’t need VC money. They’re perfectly capable of funding capex and opex from retained earnings.”
Jon at Shapeshift said his business turned into an accidental hedge fund in 2017 due to the inventory of cryptocurrencies it holds.
“Of course, now we don’t need their money anymore,” Shapeshift’s Jon said. “They’re a little late to the boat.”
Venture funds could theoretically buy crypto tokens offered in ICO raises but that presents problems too. Laws in some jurisdictions prevent venture funds from straying beyond equity and convertible debt investments, and most funds are bound by the terms of sales documents produced when raising money for their funds.
“We’ve historically written pretty boilerplate stuff in that, which is equity, convertible debt, and some amount of cash into companies and that’s it,” Mangrove’s Jackson said. “We have never included the term token, or cryptocurrencies or anything like that because they didn’t exist when the PPMs [private placement memorandum] were written.”
‘What the hell do you do with them?’
Even if funds find ways around these problems and buy tokens, there still the problem of how to handle these investments.
“If you get a load of crypto tokens, what the hell do you do with them?” Jackson said. “You get a USB key. Well, to be honest, we’re not really geared up around USB keys and certainly having a USB key or a ledger in the office — it just goes against all the sort of governance and things that you’ve got used to.
“Everybody’s struggling. When I talk to [other investors] they’re looking at the token side of things and struggling with some of the practicalities and things around that.”
Jackson, who authored a report last year on crypto’s impact on venture capital, said he expects the problem to be a temporary one. Companies such as Bitcoin Suisse, Coinbase, and Ledger are all developing custodial solutions for crypto.
‘Some of the biggest and best VCs saw ahead’
Still, given all these hurdles, why are VCs bothering with crypto at all? The answer is because the people who have invested in venture funds are asking for it.
“VCs wanted to invest in all those companies and were told by their LPs involved in their VC funds, ‘oh no we’re not interested in that,'” Shapeshift’s Jon said.
“Now those same people who couldn’t get those deals done are now the ones having people come to them and say: ‘What’s our crypto strategy?’ Our crypto strategy was investing in all those companies a year and a half ago that I told you about and you all said no to — that was our strategy and now we’ve missed it.”
Ari Paul, the CIO of Blocktower Capital, told a recent conference in London that traditional investors are increasingly moving from a fear of crypto towards “FOMO” — fear of missing out.
One Silicon Valley VC told BI recently that they had begun investing in ICO tokens after consulting with their limited partners (LPs), who are the institutions that back the VC funds. The LPs told the fund to go for it because “everyone else is doing it.”
Cryptocurrency hedge fund Polychain Capital was founded in late 2016 and this week it became the first crypto specific fund to hit $1 billion in assets under management, demonstrating rising investor interest.
Thomas Bertani, the director of cryptocurrency app Eidoo, which raised $27 million through an ICO last year, expects to see a “huge wave of capital hit the market” by the end of the year as VCs wrap their heads around investing in the space.
Shapeshift’s Jon said: “VCs tend to like a herd. When the herd move in, then everybody wants to move in. There are a few that saw ahead of that.”
Jon praised the early adopters like Andreessen Horowitz, who took a chance on the space when it was still largely associated with the dark web and cyberpunk anarchists.
“Some of the biggest and best VCs I think saw ahead of those,” he said. “Some of the VCs like Sequoia and Union Square and Andreessen Horowitz. They took the chance that no one was willing to take and now everyone else is jumping on board because it’s much clearer now. It’s kind of the way things go.”
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