Did you read Hank Tucker’s article in Forbes about a $16 million investment in a crypto security startup?
This is the latest in a string of crypto-related private equity deals going back to the bitcoin-mania of 2017. While bitcoin’s price fell for more than a year, venture capital investments rose at a faster pace than ever before.
In fact, VC firms dominated the cryptocurrency landscape in 2018 and 2019. They invested at least $334 million in the first quarter of 2019 on top of $2.85 billion in 2018, and closed upwards of 900 deals last year, possibly more than that already this year.
All during the so-called “crypto winter.”
Why are VCs throwing tons of cash at so-called fake internet money?
VCs throw way more money and close way more deals with traditional businesses—even businesses that have no profits, tons of debt, and little revenue.
Not just more money. A LOT more money.
It’s tough to know exactly how much because VCs don’t have to disclose the size or value of their investments in a single report, but Crunchbase estimates as much as $350 billion in private deals last year alone.
$350 Billion. In one year.
Compare that to $3 billion in crypto deals.
Do you know what that means?
It means more than 99% of VC investments are not related to cryptocurrency or blockchain at all.
Cryptocurrency is not a big deal for VCs
While $3 billion may seem like a lot of money, it’s chump change for the private equity industry. It’s possible a big chunk of that investment comes from a few firms with non-VC partners, not some widespread VC entry into crypto.
Also, if your mind leaps to images of big money buying up your favorite alt-coin, keep in mind VCs are not always interested in the cryptocurrency tokens.
Sometimes they invest directly in the businesses behind the blockchains. Other times they invest in businesses that support the cryptocurrency industry more generally, like exchanges and crypto-focused fintech companies. Some deals come with tokens, some don’t. I’m sure each deal has its own terms, but I’ve personally been approached only twice (not a good sample size to make a judgment on).
If you’re in the VC world, I’d love to hear your experience and perspective. Leave a response below or email me (email@example.com).
Venture capital seeks windfalls not compound interest
Whether the crypto market is in an upturn or downturn, VCs use their money to buy stakes in financial opportunities that they expect will pay off big over time.
Cryptocurrency is interesting for VCs because it’s still a niche product and blockchain is still a niche market. As a result, they have a chance to get in before 95% of the public does.
This does not mean they’re piling in.
For you, cryptocurrency might be the greatest speculative investment of our generation, the ultimate boom-or-bust investment opportunity.
For VCs, all their investments stand a high chance of failure. They manage their risks to reduce losses when an investment fails and increase gains when an investment succeeds. They don’t play for 7% annualized returns, they play for 1,000% windfalls.
Cryptocurrency is simply one way for VCs to grab those windfalls.
So no, there’s no mad rush of VCs into crypto right now. A few have gone head-long into the markets, most haven’t touched it, and the rest are dabbling in the space.
When will VCs pour money into crypto?
I don’t know, but if they’re investing a little now, when the market’s recovering and most projects are still in development, do you think they’ll sit on their hands when the price of bitcoin goes back to all-time-highs?
Mark Helfman is a cryptocurrency commentator and author of Consensusland, a Readers’ Favorite 5-star book about a country that runs on cryptocurrency.