The 2020 Crypto Investor Landscape
Navigating the maze of funds and recent fundraising trends
In September 2018, I published an overview of the crypto investor landscape and a live database of all funds actively investing in the space. I started digging into the topic because I consistently heard from entrepreneurs how challenging it was to navigate fundraising. Crypto investing was a rapidly changing world of SAFT’s, side pockets, and SPV’s into mining operations and it was far from clear which investors were reputable or what terms were reasonable.
The fundraising landscape has evolved but remains opaque. Many funds (often those raised off of 2017 ICO gains) have quietly closed shop, while new funds have entered. Some VC funds have launched dedicated crypto funds, while many have slowed or stopped investing in the space. And almost every single crypto fund still insists on publishing zero useful information on their website 🤦.
In this post I introduce Dove Mountain Data, a comprehensive live database of all funds deploying capital into crypto. I then cover a number of investment trends that I’ve noticed while updating the original 2018 data set. I conclude by sharing the views of a number of notable investors on these fundraising trends.
Introducing Dove Mountain Data
At an Allen & Company conference at Dove Mountain in March 2013, Wences Casares introduced a number of influential technology executives to Bitcoin¹. This was a seminal moment in Bitcoin’s acceptance amongst Silicon Valley’s elite and it’s not a coincidence that important milestones in venture funding of crypto companies followed.
Dove Mountain Data is a live database of investors actively investing in cryptocurrency companies and projects. The site is designed to help entrepreneurs navigate a fundraising process.
I’ve updated the original dataset that I published in 2018 and made some additions based on feedback:
- Funds actively investing — I’ve added a tag to all funds to flag whether they’re actively investing (roughly defined as a publicly announced crypto investment over the past year). This data is imperfect and in many cases, I’ve simply marked ‘unconfirmed.’ For example, Greylock is actively deploying capital but its last announced crypto investment was Coinbase’s Series D in 2017. In my definition they’re not “actively” investing in crypto but certainly could in the future.
- Full fund portfolios — I’ve added portfolio data for a number of the most prolific funds in the space (and will add more over time). Additionally, I’ve built a separate table of companies in the space so that you can click into each company and see a list of all of its investors.
I intend to add another table for angel investors deploying capital in the space. If you’re interested in being included, please reach out.
Fundraising trends
Some players have left the game
The crypto bear market of 2018-2019 quietly claimed a number of victims, generally upstart funds raised on 2017 ICO gains that simply couldn’t deliver returns over time. More recently, the market bloodshed of mid-March 2020 brought down a number of funds more publicly including Adaptive Capital and Cambrial Capital.
Some funding sources have seen internal controversies cause them to focus inward. In early 2018, Bitmain was riding high and had become a major funding source of venture funding. It had booked a reported $4B in profits the prior year and that May led a $110 million funding round in Circle, valuing the company at $3B. However, a disastrous bet on Bitcoin Cash, a failed IPO process, and internal power struggles have hampered the mining giant and reduced its importance as a source of capital in the ecosystem.
Other funds have been brought down by sheer incompetence. RChain raised millions of dollars in September 2017 and subsequently decided to launch an ecosystem fund. In April 2018, Reflective Ventures proudly announced that it had invested over $6M into four blockchain companies. Within a year of launch, it had come to light that RChain had managed its treasury like a drunken sailor — spending more than half its cash on hand on an audio codec — and that one of the founding partners of Reflective Ventures had previously been charged by the SEC for financial crimes.
Other players have formed a league of their own
The bull market of 2017–2018 saw a large number of fund managers announcing major hauls. This crowded market included established players like a16z (June ‘18 — $300M crypto fund) as well as upstarts like BlockTower Capital (Jan ’18 — $140M), Dragonfly Capital Partners (October ‘18 — $100M), Multicoin Capital (June ’18 — $75M), Pantera Capital (August ‘18 — $100M), Paradigm (Oct ‘18–$400M), Placeholder Capital (July ‘17 — $100M), and Polychain Capital (June ’18 — $1B).
While all of these funds are still investing today, three of them have broken out from the pack and formed an upper tier— a16z Crypto ($825M AUM), Paradigm ($400M AUM), and Polychain Capital (est. $600M AUM). These are the only US-based crypto-focused investors with flagship funds larger than $250M and these funds have led many of the largest Series A and B rounds over the past two years including Argent (March ‘20–$12M), Amber (February ’20 — $28M), Celo (April ’19 — $25M), Compound (November ‘19 — $25M), Dfinity (August ‘18 — $102M), Oasis Labs (July ’18 — $45M), and StarkWare (October ‘18 — $30M). As the industry evolves and more companies look to raise later stage rounds, I expect these funds to become even more important.
Funds focus on new assets
The latest wave of crypto funds —those that have publicly launched in 2019 or later —look very different than their predecessors that came out of the 2017-2018 bull market. The major 2017 vintage funds have generally been $100M+ and invested heavily in smart-contract platforms. The 2019 vintage funds are generally smaller (almost all <$50M) and more interested in investing in blockchain-based financial applications (popularly referred to as DeFi) than in Ethereum killers.
This shift in investment focus is certainly at least partially market driven. Many of the most prominent smart contract platforms from this ‘era’ are nearing launch and so done with private fundraising. Meanwhile, DeFi is exploding as an investable asset class. The float of Ethereum-based stablecoins is $10B+ (800%+ past 12 months) and May 2020 saw $700M+ traded on decentralized exchanges (325%+ growth past 12 months).
Regardless of its causes, this change in investment focus is a major departure from where the largest funds have historically deployed capital. For example, nearly half of a16z’s announced investments in crypto have been in layer-one blockchains (Arweave, Celo, Chia, Dapper Labs, DFINITY, and Oasis). I should note that some of these (e.g. Arweave, Chia) are application-specific blockchains that are not smart-contract platforms, and a16z has invested in a number of DeFi companies including Compound, dYdX, and MakerDAO. Nonetheless, it’s directionally clear that a large portion of a16z’s portfolio is in layer-one blockchains.
Meanwhile, round sizes are getting smaller and projects tend to be raising less pre-launch. Deal sizes shrank in 2019, as total completed crypto deals was only down 2% YoY but funding dollars fell 30%². A number of the top DeFi projects today have achieved significant traction while raising less than $5M in venture funding including InstaDApp ($40M+ AUM), Set ($12M+ AUM), and Uniswap ($35M+ AUM). More recently, Balancer and Futureswap have successfully launched with relatively small amounts of funding.
VC’s look elsewhere
VC interest in crypto has generally waned and 2020 feels lightyears away from the 2018 craze that saw every venture capitalist in the valley investing in a $133M round for a year-old company. There are certainly still funds that are actively investing in crypto —the past few months have seen a number of companies raise from top generalist VC’s including Argent ($12M w/ Index), Arweave ($8.3M w/ USV), Atomic Loans ($2.4M w/ Initialized), and Bison Trails ($25M w/ Kleiner Perkins). However, many generalist funds have clearly slowed or stopped investing in the space.
One contributor to this slowdown is that the asset class remains fairly nascent and has perhaps evolved slower than investors hoped. For generalist VC’s that frequently see fast-growing SaaS companies with high margins, crypto seems incredibly risky — there is still a huge amount of market, legal, and technical risk. One principal at a top tier Series A fund remarked to me that it would be incredibly rare for them to invest in a company without an obvious path to profitability, and so they’ve found evaluating most crypto companies at that stage challenging.
Investor Views
A few investors were kind enough to share their thoughts on fundraising trends in the space. Responses are included in full below:
Alex Pack (Dragonfly):
The most interesting change in the crypto fundraising landscape is how crypto funds are evolving. Crypto is a new asset class and it calls for a new breed of investment firm to succeed. Venture-style crypto firms are more popular than ever, with almost all of the top funds having spun out of well-known venture firms in some way, and the trader-driven days of flipping tokens are long gone. Yet investment from traditional venture firms themselves is at a cyclical low. Crypto evolves so rapidly and is so diverse that it’s hard for outsiders and generalists investors to keep up.
Devin Walsh (Coinfund):
In 2019 the crypto space saw a number of middleware protocols including The Graph and 3Box facilitate a more enjoyable experience for web3 developers and network participants alike. And over the past 6 months we have seen an explosion of protocols hitting mainnet or deploying significant upgrades and, perhaps most importantly, a number of new teams building new products or raising rounds to fund their next phases of growth. Big trends that excite me about the rest of 2020 and 2021 are the continued evolution of decentralized network governance, innovative methods by which to onboard new users to crypto, and the ongoing buildout of that core set of dev tooling and middleware.
Jason Choi (Spartan Group):
After 2017’s ICO excess, crypto is waking from its hangover to find that it is in a different world — one where money is illusory, governments mistrusted, and tech companies more invasive than ever.
It is against this backdrop that macro investors like Paul Tudor Jones have begun to invest in Bitcoin, and VC funds such as a16z continue to commit fresh capital to accelerate the coming of trustless economies.
Maturation leads to consolidation. I suspect we will see a number of high profile acquisitions, particularly from cash rich exchanges that are trying to institutionalize, or evolving into digital neo-banks. Increasingly thoughtful token models that accrue value based on usage, not just speculation, will also open the doors for more fundamentals-driven, long-term capital.
Santiago Roel Santos (ParaFi Capital)
Much of the investing style in crypto to date has been like a long-dated call option centered on a narrative (e.g., Bitcoin will become digital gold). Investing in Layer 1s is predicated on this style and has received disproportionate attention and funding.
However, a new class of crypto-assets is emerging — particularly in DeFi — which can be valued using traditional valuation techniques like a discounted cash flow. Certain tokens can be valued based on predefined token economics and on-chain activity. Many have potential for high growth and profitability. If I told you, [protocol A] is growing +100% YoY, has 80% EBITDA/Free Cash Flow margins, has a healthy dividend, and is trading at ~40x fwd P/E, you’d probably think it is undervalued relative to public or private market valuations. Firms like ParaFi are taking a fundamental approach to value crypto-assets, and betting on this disconnect between fundamentals and valuation. Not all crypto-assets are created equal but, historically, have been highly correlated. This will change as crypto-markets mature, and investors focus on fundamentals.
Spencer Noon (DTC Capital):
The funding landscape for crypto startups has arguably never been healthier, and one of the most promising developments recently has been the emergence of mega funds like a16z Crypto, Paradigm, and Polychain. Each have seasoned investment teams and hundreds of millions of dollars under management, which means they are able to fund large rounds handily by themselves. This has had a material impact on the funding environment because we now have a healthy marketplace for Series A and beyond-rounds. But there are also diseconomies of scale: as mega funds grow in size, it becomes increasingly harder for them to justify spending their time on early-stage investments. For that reason we are starting to see more specialized funds emerge, such as dedicated seed-stage crypto funds.
Vance Spencer (Framework Ventures):
We’re the archetype for a new type of DeFi fund that takes creative risk as active participants in networks. We pride ourselves on the agility of our team, and our deep expertise on tokenomics, governance, capital allocation, and operating in decentralized financial markets. This means we can help craft DeFi networks from the earliest stages as they turn an idea into a protocol, and support founders along the way with the full backing of Framework. The late stage ecosystem has started to take shape alongside the rise of megafunds like Paradigm and A16z, but smaller, more recent vintage funds like ours have been primarily responsible for re-energizing the early stage crypto venture scene. Over time, as projects gain traction and the space matures generally, we expect the fundraising landscape to continue to bifurcate between seed stage and later stage firms.
2020 Onward
The fundraising landscape has evolved significantly over the past eighteen months. Some fundraising dynamics, including smaller pre-launch rounds and the emergence of more focused investment strategies, are signs of a healthier environment. On the other hand, there is a real risk of a late-stage capital crunch if venture capitalists continue to shy away from the space and only a small number of crypto funds can lead large late-stage rounds. The next eighteen months will be hugely consequential for the industry and whether its fundraising market continues to evolve.
This is not legal or financial advice. These are my personal views. Some funds mentioned are investors in my employer. I’m an investor in some companies mentioned above — specifically Atomic Loans, InstaDApp, and Set. Thanks to Wilson Withiam for helpful feedback.
Footnotes:
¹Nathaniel Popper covers the event extensively in the fantastic Digital Gold
³VC’s are generally limited to holding 80% of their assets in ‘qualifying investments’ which basically means purchasing equity from private companies. This is a good explainer.
