coinculture.com
The crypto market has witnessed a downward turn in December, yet venture capitalist funding of crypto companies continues to soar. Statistics of CBInsights show that blockchain-related funding raised more money in the second quarter of 2021 than in all of 2020. Despite the sluggish performance of crypto recently, venture capitalists are still flowing into crypto companies as new data shows that crypto companies received at least $6.5 billion USD ($9 billion AUD) in Q3 of 2021.
Which Kind of Crypto Companies do VCs like?
Newly rising interoperable blockchains are still popular among venture capitalists. Considering the problems of congestion and high gas fees on Ethereum, which are unlikely to be resolved before its network upgrade next year, institutional investors are betting on Ethereum competitors. On 9th Dec, crypto VC Chiron raised $50 million USD ($69.72 million AUD) to fund Terra’s ecosystem. Heating competition between different blockchains has bolstered the market potential of cross-chain products. Building partnerships with different ecosystems, cross-chain infrastructure startup Router Protocol, announced on 10th Dec that it received $4.1 million USD ($5.71 million AUD) from investors including Coinbase Ventures and Polygon.
Crypto native investing firms prefer niche markets in NFTs, GameFi or Metaverse. Paradigm, for example, invested in Royal, an NFT music platform, and ParagonsDAO, a gaming guild, in November and December respectively. Alchemy Ventures, a sub-company of Alchemy founded in early December, will work with famous crypto VCs including a16z to focus on Web3 related funding.
Features and Risks of VC Funding in Crypto
Many established brands, for example, public blockchains and centralised crypto exchanges, are setting up venture capitalist departments to raise funds and attract new investors. Comparatively, crypto-native venture capitalists will have more advantages than traditional VCs which are moving into the crypto world due to their niche in resources, experiences, and knowledge. VCs from different crypto ecosystems are now increasingly cooperating in building new applications and products to maximise their probabilities of success.
Though the above actions of venture companies show strong confidence from smart money in the global crypto market, there are risks lying ahead. Profit-centric investment strategies may not always strengthen the crypto ecosystem, but might actually harm it. Su Zhu, the CEO of a crypto investment firm called Three Arrows Capital Ltd, claimed at the end of November that he “abandoned” Ethereum as the high transaction fees on the network would only drive new users away. Critics questioned the investor’s motivation to criticise Ethereum as the company had invested in Ethereum competitors. The company also bought more ETH after the CEO made these harsh comments. The crypto community believes the venality of VCs will not help build the blockchain industry, but could actually lead to the same kind of corruption crypto was meant to combat.