For fear of being left in the digital dust, private equity investors are flocking to crypto projects—blockchain-based applications and platforms powered by cryptocurrencies inherent in virtual worlds and Web3’s virtual economy.
Global venture capital investment in such projects totaled $10 billion in the first quarter of this year, the largest quarterly investment on record and more than double the level a year earlier, according to Pitchbook.
The trickle turned into a torrent: the full-year totals for 2019, 2020, and 2021 were $3.7 billion, $5.5 billion, and $28 billion, respectively.
Steve Ehrlich, CEO of crypto brokerage Voyager Digital, said: “You’re going to see a lot of VC investing in a lot of protocols because they all believe, like us, that some of these protocols are the future infrastructure.”
Such projects range from cryptocurrencies and NFT exchanges to decentralized finance applications and token issuers, often referred to as protocols, referring to rules embedded in their computer code.
According to Alex Thorn, head of firm-wide research at New York-focused blockchain-focused bank Galaxy Digital, the latest action is different from the past, when venture capital levels tended to track bitcoin’s price despite delays Time is short.
Thorn noted that the level of investment in the cryptocurrency continued to grow during this year’s rout in bitcoin’s price — down about 16 percent — and another drop last summer.
“This decoupling shows investors’ disbelief that a long-term bear market for digital assets is imminent, and that funds looking to allocate to the sector are holding a lot of dry powder,” he wrote last week.
The 2022 VC crypto boom also coincided with a 21% drop in the tech-heavy Nasdaq benchmark.
Average crypto fund size (2016-present) https://graphics.reuters.com/CRYPTO-INVESTMENTS/byprjnezxpe/chart.png
VC meets WEB3
The number of M&A deals involving crypto-targeted companies has also exploded globally, with the buzz surrounding the metaverse of virtual worlds and the Web3 decentralized online utopia.
So far in 2022, 73 deals have been completed with a total value of $8.8 billion, compared with 51 deals worth $6.8 billion for all of last year, according to Dealogic.
Mildred Idada, founding partner of blockchain venture fund and accelerator Open Web Collective, said the funding boom means crypto companies can be picky.
“The founders said, ‘There are five funds out there that want to invest in us, which one will bring the most value?'” she said.
Idada added that, in many cases, blockchain technology companies are interested in the brand value backed by established players and their increasing integration with the financial system.
Some companies have been creative in how they raise money. For example, Polygon, a platform for developing and scaling applications on the ethereum blockchain, raised $450 million in February by selling its cryptocurrency privately to investors including SoftBank Vision Fund 2.
Co-founder Sandeep Nailwal said: “The bigger reason for this raise is to put institutions on our side and increase Polygon’s profile.”
However, the entry of traditional VCs accustomed to red-carpet treatment into the online developer community that pushes for decentralization is not without culture clashes.
According to Alexandra Bertomeu-Gilles, venture manager at decentralized finance (DeFi) firm Aave, many deep-pocketed venture capitalists find themselves forced to appeal to the developer community behind potential targets.
“Now some founders…when they take money from investors, they are making protocols so investors don’t have too much say in corporate governance or they can’t overrule most of the others People’s opinions. The community wants it,” she said.