Who Are the Dominant Venture Capitalists in Crypto?

Investment bankers and venture capitalists see crypto as the next gold rush.

Last year, venture capitalists, or VCs, poured more money into crypto and blockchain ventures than in all previous years combined. A total of $33 billion dollars were invested in crypto and blockchain startups, according to a report by Galaxy Digital. $9 billion, the amount invested in the last quarter of 2021, exceeded the whole year of VC investments in 2020.

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

In 2021, we saw the mainstreaming of venture capital investment in crypto. Data from Galaxy Digital shows that VCs invested $33 billion in crypto and blockchain firms in 2021, which accounts for about five percent of all the money they invested last year.

That’s nearly a thousand percent increase on the money they invested in 2020.

Despite a bearish trend enveloping the crypto market in early 2022, VCs investment hasn’t slowed down. According to Galaxy Digital, venture investment topped $10 billion in Q1 2022, the highest quarter. This differed greatly from the previous bear market in 2018, where many crypto startups struggled to raise funds and stay above water.

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.

However, some larger companies have specific venture arms that are managed by in-house specialists, which is called corporate venture finance. In the corporate world, examples would be Intel’s venture arm Intel Capital, Facebook’s venture capital unit, Alphabet’s Google Ventures and Salesforce Ventures. For the most part, corporate venture finance teams operate in much the same way as VCs, except the profits are absorbed by the corporation and not individual investors.

In the crypto equivalent, examples would be the likes of Binance Labs, Coinbase Ventures and FTX Ventures.

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

Since 2013, crypto startups mostly raised their initial funds through token sales in a process called initial coin offerings, or ICOs. Many of the most popular coins and platforms today raised their initial funds using ICOs, including Ethereum.

ICOs are ideal for gaining funding from retail investors, as there’s no regulation and no barriers to entry. They also allow startups to raise funds without taking on any debt, and without giving away any equity in the company.

As you can imagine, VCs are taking advantage of ICOs as well, as they can buy into new crypto startups early but without providing any marketing or networking assistance. Also, VCs can easily cash out tokens much faster than they could sell an equity stake, although a vesting period is usually enforced in initial token sales.

However, over the past year or so, VCs have invested more of their money before tokens are made available to the public through ICOs, allowing them to buy tokens cheaper than retail traders can. One could argue that this allows VCs to “dump” tokens on retail investors, sometimes known as “plebs”. Keep in mind that not everyone agrees that the recent surge in venture capital is good for 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 Digital Currency Group, or DCG, was founded in 2015 by billionaire Barry Silbert, who was one of the earliest Bitcoin investors.

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

Source: cryptotimes.io

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.

Unlike most other investment firms, Three Arrows buys and holds cryptocurrencies and tokens as well, including Bitcoin, Kusama and Solana. And in December last year, the firm reportedly bought $400 million worth of ETH.

Three Arrows recently took part in a ninety-two million dollar funding round for the Mina protocol, which currently holds the record for being the world’s lightest blockchain at just 22KB.

A16z – Andreessen Horowitz

Source: a16zcrypto.com

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.

Coinbase Ventures

Source: blog.coinbase.com

Coinbase, the popular and publicly listed crypto exchange, has its own venture capital wing, called Coinbase Ventures. According to research from CB Insights, Coinbase Ventures was the top blockchain investor in 2021.

The fund started in March 2018 and provides financing to promising, early-stage companies that could move the industry forward in a positive way. Unlike the other funds we’ve talked about so far, Coinbase Ventures has no fixed fund size and zero full-time employees, according to Coinbase COO Emilie Choi.

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.

According to Crunchbase, Coinbase Ventures has so far made 240 investments, and recently took part in a Series A funding round for an NFT minting platform called Mintbase.

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

Source: www.alameda-research.com

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.

Today, Alameda manages over a billion dollars in digital assets today, including Bitcoin, Ethereum, BNB, Solana, Uniswap and more than thirty other coins and tokens.

Its most recent investments include funding for ConsenSys, which developed the MetaMask wallet, and Near Protocol, a DApp development platform.

But perhaps Alameda’s most successful venture to date might have been its huge bet on Solana in June 2021, before its token surged from under thirty dollars to more than two hundred and fifty dollars.

Binance Labs

Source: labs.binance.com

In 2018, Binance launched a combined investment and incubation wing, called Binance Labs. Incubators find and help brand new companies through the critical stages of their early development.

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.

Projects incubated by Binance receive an initial $500,000 in exchange for a 10 percent stake in the business, and are also eligible to receive up to ten million additional dollars in funding as well.

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

Source: www.paradigm.xyz

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.

Paradigm’s current investment portfolio includes a selection of cryptocurrencies and tokens as well, including Bitcoin, Compound, and COSMOS. In November last year, Paradigm announced a new $2.5 billion venture fund just for crypto, which at the time made it the largest crypto fund in existence.

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