What do Venture Capitalists Think About the Crypto Market?

pools of private money. What sets them apart from many other kinds of investors is that they tend to focus on the riskiest possible bets. For every ten or so investments, they expect that some eight or nine of them might fail. But what keeps them in business year after year is that every now and then one of those high risk bets pays off spectacularly, covering the losses in the rest of the portfolio. Given their appetite for risk and reward, it's no surprised that, for a while VC is big

and small, we're flocking to crypto. But what does the relatively depressed environment mean for VC investments and digital assets these days? Bloomberg reports Hanna Miller joins me now to discuss Hannah. Always a pleasure to have you on the show. Thank you for having me. Let's talk about one of

our favorite topics. I mean, I don't know if it's one of your favorite topics, but we do talk a lot about venture capitalists or vcs, and the reason we talk a lot about them is because they provide the you know, to use the buzzy word, the liquidity to use, the reality, the cash that crypto startups, especially right now,

really desperately need to fund their ongoing activities. Now, one of the things I've appreciated about your reporting over time is you know, if you go back and you read the various things that you've written, it starts from this place of here are signs that vcs are positive on crypto, but not like a hundred percents invested too q one all time record high investments made into crypto to four quarto and they're like, oh, we're just gonna pull it back a little bit, not a huge amount, but some

what's the investor sentiment in venture capital right now? Like when you're talking to these folks and you're asking them, so all that money you put into f t X regrets question Mark, how how does that go. Yeah. So I've always referred to venture capitalists as some of the crypto industry's biggest cheerleaders, so you know, they're definitely an important barometer for how things are going within the industry. And with this fourth quarter, you know, venture capitalists are

still investing in crypto startups, that's clear. There's just been a pretty sharp decline. So it was a seventy five percent drop in the fourth quarter of two compared to the same period a year prior. And you know that that that's just like, that is a big plunge. It shows a pretty dramatic shift, and I think it's also showing a divide. You know, we had a lot of

big name venture capitalists who are very established. They're known for investing in a broad array of tech companies, and they kind of came into crypto, you know, started back in companies like FTX, and now I think those generalist FECs are starting to pull back. You know, they're like, all right, maybe this crypto thing isn't all it's cracked

up to be. And this is a point that you've made a few times, which is that there's this real divide between the phrase that you use like the neuralist vcs, right who might have been investing in tech or in finance and who kind of came into crypto and the kind of crypto native or crypto specialist vcs. Yeah, you know, these these crypto native vcs are still sticking with the industry because that's their entire investment thesis. That's what they're

staking on here. And you know, you're still seeing investments from those vcs. And so I think that you know, while we saw this you know, dramatic plunge, uh, it doesn't mean that crypto is going away. There's still a lot of money, billions of dollars being poured into this industry. How come. So I think people still see use cases for blockchain, you know that they think the full potential

of this technology hasn't been realized. And we've seen a lot of interest, you know in different types of startups that have cropped up in the crypto space. So maybe you know, it's a cybersecurity for that audits your code and make sure that it's not susceptible to hacks, or maybe it's a gaming startup that uses n f t s in some way. So there are still people who see promise in this and they think that, yeah, f t X was a setback, but that doesn't define the industry.

There's also a lot of vcs who differentiate between centralized exchanges and decentralized entities and are really betting on DeFi you know, they're looking at these centralized finance startups. They're they're backing those versus centralized exchanges like f t X. And for the vcs who are sort of staying in it, even if, as you note, not necessarily at the level that they were last year, how has their approach changed? I mean, as an as an industry, as a set

of investors, they're supposed to be relatively sophisticated. This is definitely the story that they tell about themselves to the market, which is like you want us in your you know, in your realm as it were, because we we can help were smart as we give me connections. But some of that vaunted expertise seems to have gone right out the window when it came to asking founders tough questions about if they had any of the crypto that they

said they had. Yeah, so I think in the past, you know, two years or so, vcs came into this that you know, they had to play a bit fast and loose in order to become a part of deals because things were moving really quickly. Evaluations were white hot. You know, they were huge and venture capitalists I think

we're suffering from fear of missing out Felmo. And you know, they were maybe willing to set aside some of their typical due diligence practices, some of the more intense questions that they would be willing to ask in order to move forward with a deal. And I think now we we've seen a reset. You know, I talked to a venture capitalist named David Pacman. He's a managing partner at coin Fund, which is a crypto native venture fund held by the name Yes, and you know we talked about,

you know, the pace of deals selling down. I think we went through obviously a major correction market correction last year, exacerbated by a bunch of fat acting, you know, self harm in crypto that led to a lot of money leaving the space. I would classify some of that money a sort of tourist money that's chasing just momentum anywhere. But also we saw some of the traditional vcs who had been there are more traditional expectations now that maybe

got thrown out the window previously. You know that there needs to be a board, There needs to be a board seat. You know. It's definitely a sort of resetting of expectations from from before. Now when we talk about things like vcs want to be on the board, what

does that mean in practice? Yeah, I mean, I think the fact that more vcs are demanding board seats again, you know post FTX, like that that makes sense because FTX did not have a formal board, and that board would have been a safeguard you know, in theory that maybe they would have helped keep things in check. Um. We also know that a lot of the founders in the crypto space, including Sam Bankman Freed, are extremely young. Maybe this is their their first you know, big business experience.

They haven't led a company before. So having a board in place can help, you know, provide guidance to young founders. It can also you know, make sure that they're not engaging in unsavory or just ridiculous business practices like keeping all of your accounting on QuickBooks. Um. But yeah, I think you know, moving ahead this kind of like you know, seeing which companies have boards, which don't you know, that's going to be a very interesting thing that actually we're

looking into as a team. And one of the things, one of the points that David Pacman made in your interview with him, is this idea that some of these crypto companies, especially in the FTX, be and we're like doing too much. Now, obviously he's a Poston running a specialist crypto fund, so he's going to be a fan of like narrow portfolios. But is there anything to the idea that you know, you have these entities that are run by relatively inexperienced folks that maybe their second or

third real job quote unquote out of college. They're raising billions of dollars and suddenly they're like in gaming, in centralized exchanges, in defy, doing token offerings over here and their own investments over there. Like, is there suddenly kind of a in praise of simplification vibe going around the valley? Yeah, I think it's been interesting to see, you know that there are some areas within crypto that have a lot

of resilience. So even just going back to basics like developing you know, block chain infrastructure, you know, things that can help with trading. You know, stuff like that that's a little maybe maybe it's maybe it's less sexy than creating some massive centralized exchange, but still a vital building block within the world of crypto. So yeah, you know, David, David mentioned that, you know that that infrastructure is a pretty key area right now, and you're asking, like, what

are we focused on? Those people tend to be deep in the infrastructure build out right now. We have base layers Layer ones, which is a layer for decentralized compute and really record keeping. But we don't fully have decentralized storage, we don't have fully decentralized databases, we don't have decentralized personalization, we don't have decentralized AI. These are pieces of the tech stack that are readily available in Web two that

need to be built out. I think it's been interesting to see that, you know, startups that might not necessarily identify as crypto startups, that they're gaming startups and maybe use some element of blockchain, you know, like they non fungible tokens in the game, you know, something along those lines. Those have seen some resilience over the past few months. So I think, yeah, you know, thinking more specialized, thinking smaller. You know, those are things that are helping founders, you know,

as they scrounge up funds during this difficult time. Up next, more from Bloomberg Report to Hanna Milla on what this ongoing crypto winter means for crypto vcs. We'll be right back. We did ask for folks to tell us if they had any blockchain games that you like. The people did emails. I'm gonna um, I'm gonna mention a couple of them, so, you know, one person talked about metal Core, another person talked about Hunters on Chain, which does have an n

f T element. There are other folks who kind of made the point that you did, which is instead of folks being like, this is a blockchain based game, it's like, this is a game that has some crypto elements. It might be n f T s, it might be crypto.

And I was talking to the developers of a game that's still very much in kind of like alpha early beta, where you know, they were like, the n f T elements of this game are not the point, right, Like there to be an interesting at or an interesting incentive, but they're not the point. And so perhaps one thing that we'll see is more pure play gaming start ups that you know, dabble in blockchain rather than the other

way around. Yeah, I think when I've talked to a lot of gaming developers who are experimenting with blockchain, you know, they want blockchain to be in the background. They don't want to be so in your face that this is a crypto game, this is, you know, an n f T game. They wanted to just be an element and that the gameplay overall is smooth. It feels like a normal game. You know, it's not clunky in any way.

So I think, you know, and talking to people who are maybe switching over from traditional gaming into blockchain gaming, you know, they want to take a traditional gaming feel and you know, improve that with blockchain, but have it sort of beyond the downlow, if that makes sense. Absolutely, And kind of as a kind of a closing thought,

Ventra capitals are relatively small industry. There's hundreds of billions of dollars in capital here, but it's you know, it's roughly the same I don't know, hundred or a hundred and fifty so people around the world, many of whom have been personally as well as professionally burned by the

results of the last several months. And this conversation is happening around the same time when many of the vaunted tech companies that were also fueled by venture capital are having their own reckoning is too strong a word, but at least questions are being raised about the sustainability of

their various business models. Is VC sort of doing its own kind of like internal interrogation and asking like, are there things that the industry three needs to change, whether it relates to crypto, whether it leads to tech, but just overall to you know, continue to be sustainable and successful in the future. I think vcs are evaluating their practices,

They're looking at what went wrong here. We know there's also outside pressure that regulators are looking into the role of vcs and the collapse of FTX, that they're you know, talking with them, questioning them, so that I think is just an added pressure on all of this. But yeah,

I mean this is a reckoning. You know, this is something that you know, isn't unique to crypto, that venture capitalists are are looking at the role that they played in pushing these companies to a very high point, you know, maybe too high a point, maybe past realistic expectations and they're now, you know, reckoning with the consequences of that, and I'm sure you'll continue reporting on those consequences. Thank you as always for being on the show. Thank you.

That was Bloomberg reporter Hannah Miller. You can find more of her reporting in the Bloomberg Terminal and on Bloomberg dot com, and she also pops up in our twice weekly crypto newsletter called Bloomberg Crypto, so make sure to subscribe. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever

you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net. The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our senior producer is Janet Babin. Our producers are Mohammed Faruke and Sharon Barrero. Our associate producers are Ty Butler and Moses on Them. Desta wonder At is our engineer. Original music by Leo Sidron. I'm Stacy Marie Schmal We'll be back tomorrow. The fat At a s