Afraid of being left in the digital dust, private equity investors are rushing to crypto projects – blockchain-based applications and platforms powered by native cryptocurrencies from virtual metaverse and web3 economies. .
Venture capital investments in such projects totaled $10 billion globally in the first quarter of this year, the highest quarterly sum on record and more than double the level seen in the same period a year ago. , according to data from Pitchbook.
A trickle became a torrent: the annual totals for 2019, 2020 and 2021 were $3.7 billion, $5.5 billion and $28 billion.
“You see a lot of VC investment in many protocols because they all believe, like us, that some of these protocols are the infrastructure of the future,” said Steve Ehrlich, CEO of crypto brokerage Voyager. Digital.
Such projects, which can range from crypto exchanges and NFTs to decentralized financial applications and token issuers, are often referred to as protocols in reference to the rules embedded in their computer code.
The recent action is different from the past when venture capital investment levels tended to follow the price of bitcoin, albeit with a short lag, according to Alex Thorn, head of research at the IAEA. company at blockchain-focused bank Galaxy Digital in New York.
Crypto investment levels have continued to rise during a bitcoin price crash this year — it’s down about 16% — as well as during another drop last summer, Thorn notes.
“This decoupling demonstrates investors’ disbelief that a prolonged digital asset bear market is coming, as well as the significant amount of dry powder held by funds looking to allocate to the sector,” he wrote. last week.
The 2022 VC crypto craze also coincided with a crash in the tech-heavy Nasdaq benchmark, which is down 21%.
Average Crypto Fund Size (2016-YTD) https://graphics.reuters.com/CRYPTO-INVESTMENTS/byprjnezxpe/chart.png
VC DATING WEB3
The number of M&A deals involving crypto target companies is also exploding globally as buzz builds around the metaverse of virtual worlds and the Web3 decentralized online utopia.
According to Dealogic, 73 deals have been closed so far in 2022 with a combined value of $8.8 billion, compared to 51 deals worth $6.8 billion for all of last year.
The rush for funding means crypto firms can afford to be picky, said Mildred Idada, founding partner of blockchain venture fund and accelerator Open Web Collective.
“The founders say, ‘There are five funds that want to invest in us, which one is going to bring the most value? ‘” she said.
In many cases, blockchain tech companies are interested in the brand value of backing established players and growing integration with the financial system, Idada added.
Some companies have gotten creative with how they raise funds. For example, Polygon, a platform for developing and scaling applications on the Ethereum blockchain, raised $450 million in February through a private sale of its cryptocurrency to investors, including the SoftBank’s Vision Fund 2.
“The main reason for this increase was to get institutions on our side and to increase Polygon’s visibility,” said co-founder Sandeep Nailwal.
Yet the entry of traditional venture capitalists accustomed to dealing with the red carpet into online developer communities pushing for decentralization is not without cultural clashes.
Many deep-pocketed venture capitalists find themselves forced to woo these developer communities behind potential targets, according to Alexandra Bertomeu-Gilles, risk manager at decentralized finance (DeFi) firm Aave.
“Some founders now… when they get money from investors, create agreements so that the investors don’t have a say in the governance of the company, or they can’t undo something that the majority of the rest of the community wants,” she said.