CoinMarketCap Academy takes a look at the role of venture capitalists and venture funds in crypto, and some of the top VCs in the game.
Investment bankers and venture capitalists see crypto as the next gold rush.
While not everyone agrees that VCs are a force for good, they are here to stay. This article will break down the role that venture capitalists play in the crypto economy today and how they will play a bigger role in shaping the crypto landscape in the years to come.
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The Exponential Growth of Venture Capital Investment
With crypto’s steadily breaking into the mainstream, all kinds of auxiliary and supporting businesses are starting up, most of which need investment and guidance from people who understand both crypto and business.
This is where VCs come in.
Role of Venture Capitalists
Venture capitalists, or VCs, seek out startups with lots of growth potential and provide them with funding and guidance in exchange for an equity stake in the company. VC funds are usually created by a pool of investors searching for high-risk, high-reward investment opportunities.
VCs tend to invest in industries they’re familiar with, as their knowledge, experience and professional network enables them to guide and support the teams they work with. They typically target firms with an experienced management team, a big target market and ideally a unique and never-before-seen product.
Once a team of venture capitalists invest in a company, they work with the in-house team in areas like business management, marketing and public relations to ensure the company grows. They also provide access to their professional network, which in turn helps the company to grow their team, expand into new markets and establish themselves within their industry.
In the traditional business sector, VCs don’t usually fund startups from the ideas stage. Instead, they typically finance firms who have a finished product and want to expand their enterprise. However, crypto startups don’t raise funds in the way other businesses do, so VCs have had to adjust their investing strategy.
Let’s dive into how crypto venture capitalists work.
Venture Capital in Crypto
Besides Money, What Do Startups Get From VCs?
In addition to the funding that gets their project off the ground, startup founders also benefit from access to the VCs’ extensive network of companies and founders, as well as advice on navigating regulation, marketing, public relations and more.
On top of that, obtaining funding from a notable VC is a form of branding — it gives startups an air of legitimacy, which typically guarantees more interest and investment from retail investors further down the road. It’s no wonder that a startup’s list of investors is displayed prominently on its landing page.
In exchange for their funding and guidance, VCs are usually given either an equity stake in the company, or a percentage of the tokens before they go on sale publicly. If the startup succeeds, the VCs then cash out their tokens or sell their equity stake for a profit.
Top VC Firms
The following is a list of seven of the most well-known venture capital firms in the crypto sphere.
DCG – Digital Currency Group
The group’s mission is to accelerate the development of Bitcoin and blockchain companies by investing in and guiding young fintech firms, particularly those building new digital assets.
To date, the group has invested in more than two hundred crypto and blockchain companies, including BitPay, Chainalysis, Circle, Coinbase, the Lightning Network, Ripple and ZCash.
But DCG is perhaps best known for its subsidiaries: Grayscale Investments, which manages the Bitcoin Investment Trust and is the world’s biggest digital asset manager, and CoinDesk, one of the top crypto news media sites.
3AC – Three Arrows Capital
Three Arrows Capital is a crypto-focused investment fund. It was founded in 2012 by Su Zhu (pictured above) and Kyle Davies, and was previously based in Singapore but now moving to Dubai.
The firm aims to provide investors with “superior risk-adjusted returns,” and has accumulated an enormous portfolio of mixed crypto investments over the past ten years.
The fund’s portfolio includes several DeFi projects, including AAVE, Trader Joe and KeeperDAO, as well as blockchain gaming and NFT platforms, such as Axie Infinity and Crypto Raiders.
A16z – Andreessen Horowitz
Andreessen Horowitz, better known as a16z, is probably the best-known VC fund in crypto today. The firm was founded in 2012 by Marc Andreessen and Ben Horowitz, and is today based in Silicon Valley, California.
A16z offers financing to “bold entrepreneurs building the future through technology” at every stage of the funding cycle; from seed rounds all the way through to Series C.
The firm has nearly $30 billion in assets under management, which is split across numerous funds including a dedicated crypto fund called a16z crypto.
a16z crypto has more than $3 billion under management today, and its team includes crypto-native advisors, marketers, computer scientists, operations managers and investors, all of whom guide the crypto firms that a16z invests in.
To date, a16z has financed hundreds of well-known and successful crypto platforms, including OpenSea, the NFT marketplace, Dapper Labs, maker of CryptoKitties, and Axie Infinity, the insanely popular blockchain-based game.
The fund’s crypto portfolio also contains stakes in Compound, Near Protocol, Uniswap, Maker and Celo, among others.
In an interview with Forbes, Choi explained that rather than dedicating funds for investment ahead of time, Coinbase uses money from its balance sheet to buy equity stakes in startups, and that they prefer to join funding rounds that are led by other VC firms.
The fund’s current investment portfolio includes stakes in BlockFi, the crypto lending and wallet service, Audius, the decentralized music platform, and Dapper Labs, the company behind CryptoKitties and NBA Top Shot NFTs.
Alameda Research is a Hong-Kong based private equity fund that was founded in late 2017 by Sam Bankman-Fried, also known as SBF. You might have heard of SBF already — he’s the founder and CEO of FTX, one of the top crypto derivatives exchanges.
Its most recent investments include funding for ConsenSys, which developed the MetaMask wallet, and Near Protocol, a DApp development platform.
Binance’s incubation team specifically focuses on exciting early-stage projects that haven’t issued a token or coin yet, and that support the growing development of the decentralized web. Over the course of the ten-week program, incubated projects gain access to mentorship from business leaders in the Binance ecosystem, as well as regulatory, legal and networking support.
Although the Binance Labs team primarily incubates up-and-coming projects, they also invest in established projects as well. The fund recently took part in Figment’s $110 million Series C funding round, and actually led a $60 million raise for a blockchain building platform called Multichain.
Binance Labs' most recent investment was in a platform called Stepn, which is a Web3 lifestyle app that pays you crypto for keeping healthy.
Paradigm is a crypto venture firm aiming to “be the earliest and most helpful partner to crypto entrepreneurs and communities.”
Coinbase co-founder Fred Ehrsam founded Paradigm in 2018, alongside former Sequoia Capital partner Matt Huang.
The duo launched the fund because of their shared belief that crypto will fundamentally change the global financial system, and by investing in crypto entrepreneurs, they could capitalise on the sector’s unprecedented growth.
So far, they have mostly partnered with early-stage crypto platforms who need both guidance and funding to get their ideas off the ground. But they’ve also invested in some larger crypto concepts as well, like BlockFi, FTX and Coinbase.