Why Are Venture Capitalists Shrinking Away From Crypto?

and the startups who need them. I think for a lot of vcs, they're seeing this as an opportunity for talent to step in that's maybe more experienced. Welcome back, Hannah. How's life in San Francisco. Life in San Francisco is great. Um, yeah, October's always kind of summary here. So it's actually been

warm temperatures as of late. Well, you spoke to our colleague vill Donna about the fact that October has also been historically speaking like a pretty decent one for crypto markets, and that's I mean mixed results given the extent of the crypto winter. But you've also been reporting on an area where October has been a little bit more challenging than maybe folks were expecting, and that is in the venture capital market for crypto starts up fundraising. What's going

on over there. Yeah, So I got some data from Pitchbook looking at venture capital funding in the third quarter compare to the same period in one and it's a steep drop. It's a thirty seven percent declined to four point four billion dollars uh and venture funding four crypto startups, and that's roughly half of the record amount of funding that vcs poured into crypto and blockchain startups in the

first quarter of two. So it's it's really a bit unsettling, you know, seeing this big drop, but it makes sense considering market conditions. We are in the depths of crypto winter. Uh. There there are still a lot of issues within the industry. Uh. And that podcast with bel Donna referred to October as potentially October in terms of market performance, but it's actually been Hackedober with a lot of security incidents. As a la,

protocols have become an easy target for attackers. That's according to blockchain analysis firm Chain Analysis, which estimates around one point nine billion dollars worth of digital tokens have been stolen and hacks this year of the we're talking about declines from a record and kind of if we you know, vcs will love to say, well, we have a long term view, and so if we take the long term view for a second, we're still talking about money being

deployed at levels unthinkable three four, five years ago because this industry barely existed then, both on the startup side, but also some of the investors who are pouring money into these startups. Talk a little bit about who those venture capitalists are. We've seen big names back the crypto industry. I'm talking about Andres and Horowitz here, which has massive, massive crypto funds and has a big crypto team dedicated to examining and investing in this industry. UM. We also

have other big names. Electric Capital is one, UH, they're more crypto focus UM and how also raised a massive fund UH. Paradigm another big crypto name, UM founded by um co founded by Fred Orsu from coin base. And it's just really interesting to see kind of this growing divide now between generalist specs which look at many different industries, back many different areas of tech versus crypto native vcs.

These are firms that specialize in crypto investments. They might have a dedicated research team, dedicated coding team, and these crypto native vcs are very much committed still to the space. This is everything that they have hinged their entire investment philosophy on blockchain going big. Who are some of those startups?

So you've mentioned the venture capitalists, like the big traditional names, the newer but big crypto names, who are they still invest sting in even if they're investing maybe at lower levels than they were this time left you. Yeah, it's been really interesting to see a trend where n FT gaming startups are actually scoring a big round still um. In September we saw Lute Mogul and improbable Um raise

over a hundred million dollars. And what's interesting about these startups is that yes, they use blockchain technology, but it's more to sort of sort of more in the background. They're not like explicitly crypto startups. They just kind of take advantage of blockchain technology and they're more focused on gaming and the metaverse. So I think a lot of crypto vcs still see gaming as an opportunity to broaden blockchain and cryptos appeal to the main to mainstream consumers.

You know, people love games, they love playing them. There it's a lot more accessible than something like a complicated defy platform that might be prone to hacks and bankruptcies. I mean, it's so interesting that what we're essentially talking about is people doubling down on one of our go to phrases here on this podcast, the underlying technology as opposed to some of like the buzzier applications built on top of that technology. Yeah, it's all about infrastructure and

picks and shovels. So we have seen investments raised for companies that are still building on l one blockchains, or even companies that kind of help bridge the gap between Web two players and Web three. So I recently wrote about a company called Stardusts that does that for gaming. Now, when you talk about l one blockchains, we're talking like, as you say, the picks and shovels, like the bitcoins,

the ethereums, right, like those sort of fundamental things. But we've also seen folks like um Anamocha raise money blockchain dot com. How are they still fundraising in this environment? I mean, is it because Anamoca is partly a gaming play, is it something else? Yeah, Animoca is you know, it does fall into that gaming space. The last round they had was flat. Um, so it wasn't necessarily a down round. I spoke with Yatsu who founded Animoca, and he really

gave a very rosy picture of what's happening with his company. Uh. He is still very much interested in eventually going public. He is very excited about what lies ahead for blockchain gaming, and he really thinks that Crypto Winter hasn't actually come for gaming right now. And then you mentioned blockchain dot Com. So they were looking to raise a down round uh recently and we've seen, you know, some shifts there. Um.

They just recently did a strategic financing round. Um. So it's kind of been interesting to see what's going to happen with that company. They did have a layoff um recently. There are two sort of concepts which seemed to be really important in the context of Crypto Winter especially. The first is a down round. When folks talk about a down round, it's often like, oh my god, he raised a down round, but like, what is it exactly? Yeah,

So that's referring to the valuation of a company. Uh. So you know, companies were raising at these these massive valuations. Uh last year really that were you know, saying that these were unicorn and some of them many times over, meaning that they were worth more than a billion dollars. So it's been a real calmdown this year. We've seen more companies like watching dot Com looking to raise at

lower valuations UM than they were at previously. So the reason people get sort of weird about it is because there's this implied suggestion that you're definitely not worth as much as the last time we had a conversation about fround raising, but maybe you were like never worth that much. We'll be right back with more from Bloomberg Report, Hannah Mila. We've talked about gaming and the fact that it's sort of an outlier in terms of its ability to continue

to be attractive. Do you have a sense of what's going on with like VC overall? Right? Is it that, like, is crypto a sector that's being hit harder by the decline than other places or are we looking at a general pullback in liquidity. Yeah, there's definitely a general pullback across tech um. The crypto is not the only area being affected. The thing is, though crypto has an extremely high profile as being risky. UM. We see that because

of the volatility of tokens. We see that in the hacks that affect the industry, and we just see this also, you know, there are shady characters and you know there have been very spectacular fails um UM different players, major players within the industry. I'm thinking three rows capital here,

I'm thinking Celsius, I'm thinking Voyage or Digital. So it's very I think in some ways the stakes are a bit higher for the crypto industry UM with this you know slow down, and even with this more broad slowdown, it'll be interesting to see how things shape up. I will say that a lot of the vcs I talked to are still very hopeful about the space. Even though they're telling their portfolio companies to buckle down for the next eighteen twenty four months, make sure they have enough

cash on hand to last crypto winter. They still believe we will come out of this. And one thing that's also interesting about this current bear market and how it's different from previous crypto winters, is that we do see more institutional money coming in UM, more big players from

traditional finance entering crypto. So I think this has given a lot of people hope UM, and they're saying, you know, hey, the industry is more mature than it was in previous bear markets, and you know, it's we're gonna overcome this. So I still I will say, I still see a lot of optimism within crypto because you mentioned October. You know, you've previously reported that security startups have been an area of growth. Are they raising enough money to keep up

with the outbreak of hacks right now? I'm like, what's going on over there? I would say so with the most recent hack UM for Mango, UH, I spoke to one of a startup that had just uh done a recent raise and it's called Hawborn, and you know, they seem to be doing really well, UM, very very busy.

So again, and I think that's sort of that security piece falls into the infrastructure category where you're you're you're looking for flaws and either UM platforms, code or even its economic models and testing them to see whether they can, you know, or whether they have any vulnerabilities and whether they can withstand extremes this extreme market conditions that we see in crypto at times, extreme market conditions is a very diplomatic way of putting it. As a sort of

a closing thought. You know, we've talked on previous episodes about one of the propositions that the crypto native vcs like to make is that like we we are the experts, like we really know this area inside out. We can provide expert council expert guidance. Are you hearing it all that in this wave of C suite departures, when you know companies like actually really need that expert guidance. Are you hearing from either founders or vcs that folks are

stepping up in that area. Yeah, I know. It's I think for a lot of vcs, they're seeing this as an opportunity for talent to step in that's maybe more sperienced in dealing with growing regulatory scrutiny or you know, handling a larger company. Um. So, I think for some of the founders it's nice for them to you know, maybe pull back focus on something else, whether it's policy

or just their own you know, sanity. Um And it's it's interesting to see whether we're going to have more talent pulled in from traditional finance, whether we're gonna see familiar names from big institutional players common too crypto and sort of fill these leadership gaps that have been left. You know, you're making an interesting point about folks coming in to be you know, we've called them in the

past like the adults in the room. That may play to the strength of the more traditional, noncrypto native vcs because they have you know, much bigger benches of experience in those types of policy areas and that regulatory area in the how to testify but before the Senate Banking Committee area. So it's certainly going to be an interesting

time for all involved. Yeah. I mean, you see, with a lot of the larger, more established VC firms, they have legal experts, legal teams who can help growing startups navigate this changing landscape for crypto regulation. So I do think that there are things that traditional vcs can offer these companies, and it'll be interesting to see how crypto

native vcs evolved to offer similar benefits their portfolio companies. Terrific. Well, Hannah, I'm sure we'll have you back on the show soon and have a great rest of your San Francisco summer. Thank you have a good one. You can find more of Hanna Miller is reposing on the Bloomberg terminal on Bloomberg dot Com. I'll follow her on Twitter. She's at h G. Miller nine. That's h G m I L L e Er two nine. On the next episode of Bloomberg Crypto, crypto traders are still hoping that October will

turn into October. But are their hopes misplaced? And what's the effect of all this looming regulation on sentiments? Oh, and have you heard about some guy named Matt Levine? All this and more on the next episode. 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 or find us on Twitter. We're at Crypto. The supervising producer of Bloomberg Crypto is Vicky very Galina. Our senior producer is Janet Babin. Our producers are Mohammed Faruk and Sharon Barriro. Our associate producers are Ty Butler and Moses on Them. Desta wonder At is our engineer original music by Leo Sidrin. I'm Stacy Maria Shmael. We'll be back tomorrow.