As crypto startup valuations come back to Earth, big investors are bargain hunting

Crypto funding might have declined last quarter, but investors behind the largest funds in the space are sticking to their guns.

“There’s always going to be a need for big funds and investors to help the startups get the funding they need,” Lydia Chiu, vice president of Business Development at Ava Labs, told TechCrunch+. With the current regulatory scrutiny on the space alongside the bearish market sentiment, venture capital funds are needed more than ever, she said.

Ava Labs, the company that deployed the layer-1 blockchain Avalanche, launched a $200 million “Blizzard” investment fund in 2021 dedicated to growing its chain’s ecosystem. Since then, it has been a “very busy time,” Chiu said.

In the past year and a half, the Blizzard fund has invested in about 400 deals across 125 portfolio companies, deploying just over three-quarters of its capital, Chiu said. “We’re still seeing really strong deal flow, and we’re actively investing.”

It’s not the only one: There are still “quite a bit of crypto venture funds left to be deployed” that were raised a couple of years ago, said Tushar Jain, managing partner at Multicoin Capital. Multicoin launched a $430 million fund in 2022, which has since deployed “under half of the fund” with a “majority” left to invest, he said.

The remainders of just those two funds are worth nine figures. Given that Q1 2023 crypto fundraising was in the billions, the figure may seem modest, but from just two funds it’s meaningful.

Some newer funds are even bigger.

In January, Venom Foundation launched a $1 billion venture fund with Iceberg Capital to invest in web3 rounds ranging from pre-seed to later stages. The foundation’s chairman, Peter Knez, shared that it has deployed “some capital” in the past few months and has plans to fully deploy its fund over the next 24 to 36 months.

“Our strategy has not changed, but I am more excited to be investing now than I was a year ago.” Tushar Jain, managing partner, Multicoin Capital

Big funds, whether it’s Andreessen Horowitz or someone like Venom Foundation, provide “critical” capital, Knez said. “At the end of the day, no transformation happens without talent or capital … if talent doesn’t get capital, it’s going to delay [the] transformation” of the crypto industry from where it is today to where it can be in the future, he said.

Andreessen Horowitz has dug deep into the crypto space after launching four funds dedicated to the sector. Its most recent fund launched at $4.5 billion in May 2022. Arianna Simpson, general partner at the firm, thinks it’s appropriate, given the size of the opportunity.

“I certainly think the ecosystem has grown to a size where it absolutely supports a fund of this size, and that’s why we raised a fund of this size,” Simpson said. “We didn’t have to raise any number; we chose a number that we thought spoke to the size of the opportunity. The ecosystem has obviously grown tremendously and is continuing to attract tons of early-stage entrepreneurs who are building across the board.”

In the current market environment, a lot of startup teams are still fundraising, Chiu said. Given that Avalanche is relatively young — the blockchain launched in 2020 — a lot of the rounds it invested in were pre-seed, seed and Series A, with checks averaging around $1 million, she said.

In Q1, $2.53 billion in capital was raised across 347 crypto and blockchain companies, down 79% from $12.27 billion in the year-ago quarter and a decrease of about 18% from $3.08 billion raised by the same corporate cohort in the previous quarter, according to PitchBook data.

Even amid market changes, crypto native funds are steady in their investment thesis.

“Our strategy has not changed,” Jain said. “Though, I am more excited to be investing now than I was a year ago.”

That might be because the entry valuation prices that drive venture returns have changed. There’s a big difference between a $20 million entry price and an $80 million entry price, Jain said. “If you hit the same exit your returns are 4x [higher], that’s the difference between a 10x return and 40x return. So it’s massive, massive differences. And that’s the kind of valuation reset we’ve seen, so yeah, I’m more excited now than I was before.”

As venture norms change, the crypto market is not immune

In the past decade or two, venture capitalists have been “effectively funding user acquisition and user growth,” Chiu said. “We saw this with Uber and Lyft launching: They were super cheap and using venture funding to subsidize users there. Then delivery, which had high operating expenses as well.”

While VCs provided capital to help businesses (both in and out of the crypto world) “grow at all costs,” that narrative has “dissipated over the last few years,” Chiu noted. “There was an expectation that venture would follow on … but we’re getting to a point where those days aren’t going to last much longer.” This means a number of traditional funds are “still in the space,” but are deploying at a slower rate and are being more picky, Chiu said.

For example, a company like Coinbase, which has been around for over a decade, has done a “phenomenal job of staying focused and staying true to their mission and what they believe in,” Simpson said. “Obviously they’re one of the biggest and most successful examples of that but there are dozens and dozens and dozens more.”

“What we’ve seen is that time and time again the companies that do the best over a long period of time are those that are able to focus on building throughout whatever period of the market cycle we’re in,” a16z’s Simpson said, adding that she’d encourage founders to not be distracted by market volatility, “which at the end of the day is a very much temporary thing.”

External capital, internal capital

Apart from funds raised to specifically target web3, Knez anticipates noncrypto capital to reaccelerate its investment in the market.

“We’re about to enter an institutional regime, and we’re in the early innings of it,” Knez said. “We’re starting to see early signs of that, for example with my conversations with institutions, even conservative Japanese institutions: They have $3 billion to $5 billion over the next three to five years just for web3.”

“You’re going to see an increase in participation by institutions. I have no doubt about that,” Knez added. “I think we’re at an inflection point.”

As for future funds? No investor was willing to definitely disclose what’s next but all seemed hopeful for another fund. “Anything is possible,” Chiu said. “That was always something on the roadmap. I think it would need to be bigger because now the teams are getting more mature, so it needs to be [more capital.]”

When asked if there would be a fifth crypto fund from a16z, Simpson said, “I certainly hope so.”

Knez also anticipates that the web3 ecosystem will see “increasingly bigger institutions launching funds and the funds sizes will continue to increase and the global footprint of those funds will increase as well.” As the regulatory framework continues to be defined (or refined) globally, increasing amounts of institutions will come in, he said.

The framework and expansion from noncrypto institutions into the space is going to happen quickly, too, he said. “I’ve lived long enough that people have said to me, ‘Why would anybody use email? You gotta be kidding me,’” Knez joked. “That’s where it was, but we’re in this, kind of going from there to there situation.”