What are Crypto Venture Capital Funds and How Do They Work?
Cryptocurrency (or blockchain) venture capital funds and investment organizations are approaching digital currency as the gold rush of our time today. Last year, crypto venture capital funds poured more money into crypto and blockchain ventures than in all previous years combined. According to a Galaxy Digital report, a total of $33 billion was invested in projects associated with the creation of applications and systems based on blockchain technologies. The $9 billion amount invested in the last quarter of 2021 exceeded the amount invested for all of 2020. This suggests that while not everyone agrees that venture capital funds are a positive force, they plan to play the long game.
In this article, we’ll break down what crypto VC funds are and how they work. We will also look at what role venture capital plays within the crypto economy and find out which crypto venture capital funds are the market leaders today.
What are Crypto Venture Capital Funds?
More and more traditional financial instruments are becoming closely tied to blockchain technology. What we used to consider exclusively in terms of fiat currency is now being successfully tested in blockchain networks. This also applies to cryptocurrency VC funds, one of the main ways to get startup funding. To understand what role venture capital plays in the crypto world, let’s first understand what crypto venture capital funds are and how they work.
Cryptocurrency VC funds are investment funds that either invest entirely in digital currencies or combine them with investments in other assets. Their goal is to maximize returns by managing their investors’ coins or investing their money in crypto projects and initial coin offerings (ICOs).
Funds investing venture capital in blockchain are relatively new to the field. For the past three decades, they have actively invested in information technology projects, but due to the high volatility of cryptocurrency and the early steps of decentralized financial market development, investors refrained from actively investing in virtual money. However, the situation is changing. Those who took the risk have made huge profits, and the growing number of crypto-asset users confirms that this is not a bubble: blockchain is the future technology.
Digital asset owners have access to powerful tools to trade and generate passive income. Blockchain business is growing at a tremendous pace, and more and more entrepreneurs are choosing this market to create companies. The crypto world has reached such proportions that it is no longer possible to ignore it.
There is still risk in early-stage financing, but it is not as high as it was three to five years ago. Crypto projects related to blockchain are entering the public domain because storing data in a distributed database is safer. Blockchain infrastructure automatically protects data, and smart contracts are objective and cheap. Decentralized finance is taking over not just commerce but other entrepreneurial activities, and crypto-space financing can generate huge profits.
Crypto VC funds are also changing, adapting to the new environment. For example, a newly created community-oriented venture capital fund backed by Electric Capital will employ blockchain technology and operate on a fair token distribution basis.
How Do Crypto Venture Capital Funds Work?
Blockchain venture capital funds investing in digital assets look for startups and projects with high growth potential and provide them with funding and guidance in exchange for an equity stake in the company. Organizations providing venture money for blockchain projects are usually created by investors looking for high-risk, high-return investment opportunities.
Such funds tend to invest in crypto projects or developments they are familiar with because their knowledge, experience, and professional network allow them to guide and support the teams with which they work. They typically target firms with an experienced management team, a large target market, and, ideally, a unique and never-before-seen product.
Once blockchain venture capital funds invest in a company, they partner with internal employees in business management, marketing, and public relations to ensure the company’s growth. They also provide access to their professional network, which helps the company develop its team, expand into new markets and establish itself in its crypto direction, whether cryptocurrency payment solutions (gateways), DeFi, Metaverse or Web 3.0, etc.
In traditional business sectors, venture capital funds typically do not fund startups from the idea stage. Instead, they fund firms with a finished product and want to expand their enterprise. However, crypto startups do not raise funds like other businesses, so blockchain venture capital funds have had to adjust their investment strategy.
Role of Venture Capital in Cryptocurrency
Since 2013, crypto startups have raised their seed money mainly by selling tokens in an initial coin offering, or ICO. Today’s most popular coins and platforms, even Ethereum, have raised their seed money through ICOs.
ICOs are an ideal tool for getting funding from retail investors because there are no government regulations or significant barriers to entry. They also allow startups to raise funds without debt or sacrificing company equity.
It should be emphasized that crypto venture funds also benefit from ICOs because they can invest in new crypto startups early but without providing marketing or professional help. In addition, crypto venture capital funds can easily cash in tokens much faster than they could sell an equity stake in the firm, even though initial sales of tokens usually introduce a vesting period.
On the other hand, it should be kept in mind that not everyone agrees that the recent boom in investments with the attraction of venture money is good for digital assets. A little over a year ago, however, there was a trend that crypto venture capital funds were putting more of their money in before tokens became publicly available through an ICO, allowing them to buy tokens cheaper than retail traders could. That said, it can be affirmed that this allows such funds to “dump” tokens on retail investors with little or no knowledge of cryptocurrencies.
Top 5 Crypto Venture Capital Funds
Now that we’ve figured out what crypto venture capital funds are and how they work, let’s take a look at the biggest ones. Below is a list of the five most recognized venture capital funds in the crypto sphere.
- DCG – Digital Currency Group
The Digital Currency Group, or DCG, was founded in 2015, and its mission is to accelerate the development of Bitcoin and blockchain corporations by investing in and curating young fintech firms, especially those creating new digital assets.
DCG is perhaps best known for its subsidiaries: Grayscale Investments, which manages the Bitcoin Investment Trust and is the world’s largest digital asset manager, and CoinDesk, one of the leading news media outlets about cryptocurrencies.
- A16z – Andreessen Horowitz
Andreessen Horowitz, better known as a16z, is arguably the most well-known venture capital fund in cryptocurrencies today. The firm was founded in 2012 and is currently based in Silicon Valley.
To date, a16z has funded hundreds of well-known and successful crypto platforms, including NFT marketplace OpenSea, creator of CryptoKitties Dapper Labs, and Axie Infinity, an insanely popular blockchain-based game. The fund’s crypto portfolio also contains stakes in Compound, Near Protocol, Uniswap, Maker, Celo, and many other projects.
- Coinbase Ventures
Coinbase, a popular and publicly listed cryptocurrency exchange, has its own venture capital wing called Coinbase Ventures. According to CB Insights research, Coinbase Ventures was the top blockchain investor in 2021.
The fund launched in March 2018 and provides funding to promising early-stage companies that can positively move the industry forward.
- Binance Labs
In 2018, Binance launched a pooled investment wing called Binance Labs. The specialists find and help newly created companies through the critical stages of their early development.
The Binance team specifically focuses on exciting early-stage projects that have yet to release a token or coin and that support the growing decentralized web development. During the ten-week program, investee projects get access to mentorship from business leaders in the Binance ecosystem and regulatory, legal, and networking support.
- Alameda Research
Alameda Research is a Hong Kong-based private equity fund established in late 2017 by Sam Bankman-Fried, the founder and CEO of FTX, one of the leading crypto exchanges.
Today Alameda has over a billion dollars in digital assets under management, including Bitcoin, Ethereum, BNB, Solana, Uniswap, and over thirty other coins and tokens.
Its most recent investments include funding ConsenSys, the developer of the MetaMask wallet, and Near Protocol, a DApp development platform. However, perhaps Alameda’s most successful investment to date was its huge bet on Solana in June 2021 before its token soared from less than thirty dollars to more than two hundred and fifty dollars.
Looking back at our last 10 years of investing and our current state of the red-hot cryptocurrency VC market, we can extrapolate a quite interesting result for the future of blockchain venture capital funding. In today’s world of crypto investing with venture money, we can continue to analyze the funds raised through venture capital and continually assess their projected expectations for crypto-asset prices. It is safe to say that in the future, cryptocurrency VC funds will be even more popular in equal proportion to the growing popularity of blockchain and the resulting development of new projects and technologies.