With FinTech Funding Tanking, Crypto Remains VC Firms’ Darling

In late May, venture capital (VC) giant Andresseen Horowitz raised $4.5 billion for a new fund to invest in crypto startups, almost a third more than in all of its three previous rounds. Binance Labs, the investment arm of the top global cryptocurrency exchange Binance, raised $500 million in June.

And if you glance at crypto industry news outlets, some version of the verb “raise,” followed by a dollar sign and lots of zeros, pops up over and over. This observation raises the question: Why isn’t it following the rest of FinTech into the basement?

On the face of it, there are plenty of reasons for crypto to be down more than it is. Aside from the crypto winter that has seen the price of bitcoin and many other digital assets drop 50% or more since November, isn’t there a global recession coming?

With interest rates spiraling and the Russian-Ukrainian war frightening markets, the European Central Bank sure seems to think so, announcing its first rate-hike in a decade on Friday (June 10), following in the footsteps of the Federal Reserve.

Certainly, the broader FinTech market also seems to think so, with valuations having crashed from 25 times revenue in October to 4 times in May, according to a report from Protocol, which noted that Andresseen Horowitz warned startup founders to “reevaluate your valuation, understand your burn multiples and build scenario plans.”

It’s not just FinTech. Global VC investments were $39 billion in May, according to CrunchBase, down 45% from its $70 billion high in November. The last time it was below $40 billion was in November 2020.

One factor, CrunchBase said, is that seed stage funding is proving “more resilient,” down only 22% in May, compared to the 2021 monthly average. Late-stage funds were down 38%.

Is Crypto Immune?

All this isn’t to say crypto is immune. But its illness is a lot milder.

While overall investment in crypto does appear to be declining, it is only “slowing slightly,” Bloomberg reported on June 1, saying that “VCs are still rushing to back crypto startups.” Two-thirds of the way through the second quarter, crypto startups have raised $5.3 billion, leaving it on track for an $8 billion quarter — well below its $9.7 billion Q1.

But again, Bloomberg found that chatter among crypto venture capitalists shows they see the crypto winter as just another sign of the industry’s volatility rather than a real problem — “speedbumps, rather than roadblocks.”

Fidelity CEO Abby Johnson reaffirmed the company’s commitment to the crypto industry at a conference this week, saying: “I figure this is my third crypto winter. There’s been plenty of ups and downs, but I see that as an opportunity. If you believe that the fundamentals of a long-term case are really strong, when everybody else is dipping [out], that’s the time to double down.”

Arianna Simpson, a crypto-focused general partner at Andreessen Horowitz, told CNBC much the same thing, saying that bear markets help put focus on building out viable technologies rather than “getting distracted by short-term price activity.”

That’s more or less what Nasdaq-listed crypto exchange Coinbase — something of a Wall Street bellwether for the sector — said in its first-quarter earnings call, right before its stock tanked. Aggressive cost cutting followed.

And indeed, late-stage companies are being hit harder than seed and Series A funding rounds. The most notable firm to take a hit is BlockFi, which is raising $100 million at terms that dropped its valuation from more than $3 billion to $1 billion this week, according to crypto-industry news outlet The Block. It’s still a unicorn, but one with a much shorter horn.

Follow the Hype?

With cryptocurrency prices having collapsed, one possibility is the VCs are not, generally, investing directly in cryptocurrencies, but get them in exchange for their investment in companies providing services like crypto infrastructure, as well as in three of the buzziest, most hyped sectors right now: Web3, the metaverse and NFT projects.

In a May 31 Crunchbase article looking at five areas where U.S. seed funding was strong, the metaverse and NFTs came in at No. 1 and No. 2, beating out NeuroTech, alternative proteins and fitness.

How much success they achieve remains to be seen, as all three sectors — especially the metaverse and Web3 — are somewhere between fledgling and theoretical at this point.

Besides, a lot of the investment isn’t in those categories, TechCrunch countered on June 1. The report said that while many crypto investors “remain bullish,” the biggest VC investment category is blockchain infrastructure, at 21%, followed by decentralized finance and centralized finance — and only then NFTs and other Web3 categories like the metaverse.

“Generally, there is a big difference between people who are at the surface of understanding this space — those funds might take a backseat — but true crypto-native funds with conviction will continue to invest heavily,” Saurabh Sharma, head of investments at Jump Crypto, told TechCrunch. “This time is where we find the best long-term-thinking entrepreneurs.”