Afraid of being left in the digital dustbin, private equity investors are stepping up to crypto projects – blockchain-based applications and platforms fueled by cryptocurrencies that are native to the virtual economies of the metaverse and Web3.
VC investment in such projects totaled $ 10 billion worldwide in the first quarter of this year, the largest quarterly sum ever and more than double the level seen in the same period a year ago, according to data from Pitchbook.
A drop has become an avalanche: the full annual totals for 2019, 2020 and 2021 were $ 3.7 billion, $ 5.5 billion and $ 28 billion.
“You see a lot of VC investing in a lot of protocols, because they all, like us, believe that some of these protocols are the infrastructure of the future,” said Steve Ehrlich, CEO of crypto-brokerage firm Voyager Digital.
Such projects, which can range from crypto and NFT exchanges to decentralized financing applications and token issuers, are often known as protocols with reference to the rules embedded in their computer code.
The recent action differs from the past when risky investment levels tended to follow the price of bitcoin, albeit with a short delay, according to Alex Thorn, head of firm-wide research at blockchain-focused bank Galaxy Digital in New York.
Investment levels in crypto continued to grow during a bitcoin price drop this year – which is about 16% lower – as well as during another drop last summer, Thorn notes.
“This decoupling is proof of investors’ disbelief that a long-term bear market in digital assets is emerging, as well as the significant amount of dry powder held by funds that want to allocate to the sector,” he wrote last week.
The VC crypto craze in 2022 also coincided with a slump in the technology-heavy Nasdaq benchmark, which is 21% lower.
Average cryptocurrency fund size (2016-YTD) https://graphics.reuters.com/CRYPTO-INVESTMENTS/byprjnezxpe/chart.png
VC MEETS WEB3
The number of M&A transactions involving crypto-targeting companies is also increasing worldwide as the buzz grows around the virtual worlds metaverse and the Web3 decentralized online utopia.
So far in 2022, 73 transactions have been closed with a combined transaction value of $ 8.8 billion, according to Dealogic, compared to 51 transactions worth $ 6.8 billion for the entire past year.
The financing rush means crypto firms can afford to be picky, says Mildred Idada, founding partner at blockchain enterprise fund and accelerator Open Web Collective.
“Founders say: ‘There are five funds that want to invest in us, which one is going to bring the most value?’,” She said.
In many cases, blockchain technology firms are interested in the brand value of established player support and increasing integration with the financial system, Idada added.
Some firms were creative in how they raised money. For example, Polygon, a platform for developing and scaling applications on the Ethereum blockchain, raised $ 450 million in February through a private sale of its cryptocurrency to investors, including SoftBank’s Vision Fund 2.
“The bigger reason for that increase was to get the institutions on our side and increase the visibility of Polygon,” said co-founder Sandeep Nailwal.
Yet the entry of traditional venture capitalists accustomed to red carpet treatment in online developer communities pushing for decentralization is not without cultural clashes.
According to Alexandra Bertomeu-Gilles, risk manager at the decentralized finance (DeFi) firm Aave, many venture capitalists with deep pockets are being forced to lure those developer communities behind potential targets.
“Some founders now have … when they take money from investors, create agreements so that the investors do not have a big say in the management of the company, or they can not do something that the majority of the rest of the community wants , ”She said.