How the crypto boom changed the mindset of professional investors


As we all recall, 2017 was the peak of cryptocurrency investing. After a surge of investor interest in cryptocurrencies in 2017 led to a big crop of startups at robust valuations, the sector cooled dramatically last year.

Funding for crypto startups fell 75%—from $3.2 billion in January to $800 million in December, according to Autonomous NEXT—as cryptocurrency prices plunged more than 80% from record highs. Stumbles by high-profile startups including Bitmain and ConsenSys, which laid off hundreds late last year, as well as high-profile cryptocurrency hacks, further undermined investor confidence.

Now, more than a year after the crash began, the tougher investment environment is raising the possibility of acquisitions and forcing crypto startups to lay off workers and take other steps to show skeptical investors they can adapt to a more sober landscape for the technology.

Cryptocurrency companies that rely on trading fees for revenue, like Blockchain, have been hit especially hard during the rout due to low trading volumes. But the slump hasn’t meant trouble for all cryptocurrency startups. Many have already raised hundreds of millions of dollars, which allows them to keep building their business as they await a recovery.

The cryptocurrency exchange Coinbase, for instance, raised an additional $300 million in October from Tiger Global Management, allowing it to grow even as trading volume has fallen. Some investors say they’re taking advantage of the slowdown to target later-stage startups that have done more to prove themselves.

This shows that investors aren’t fully backing away from the idea of putting more of their money into crypto, but signs show that it’s more of a “risky investment” for them.

Lower company valuation

Meanwhile, the drop in valuations has made some cashed-up companies think more about acquisitions, according to Ben Boissevain, an investment banker at Ascento Capital. Kraken, one of the more successful U.S.-based exchanges, said this week it was on the cusp of raising a $100 million “war chest” that it will put largely toward M&A. Other established players such as Coinbase have continued to acquire companies even as the slump persists.

Adam Goldberg, a partner at Lightspeed Venture Partners who oversees the firm’s crypto investments, said he is more inclined to make investments now than at the market’s peak, and he is focusing most of his attention on later-stage startups with some degree of user traction. Another group of investors late last year launched Yeoman’s Growth Capital, a fund that will specifically target later-stage projects looking for funding amid the market downturn.

“Valuations are lower and investors are more excited to come in,” said Henry Liu, the firm’s managing partner, who is in the process of raising money for the fund. “Smart investors never touched [the valuations] at the all-time high. Now they are all planning for how to enter.”

A founder’s willingness to raise money with crypto prices near yearly lows might be a signal that he or she is especially committed to the company, making it a good investment, Ms. Xie added. “This person, raising during a bear market—they must care,” she said.

Budget problems with crypto companies

Some startups are continuing to try to raise money, despite the tougher market. One Silicon Valley crypto startup founder said he needs more money to fund his company’s operations, but isn’t sure he can raise the full amount he’s targeting. “I think the right move if you can raise some more right now is to do so, in case we have several more years of worse markets,” said the founder, who asked not to be identified in order to speak candidly about his company’s finances.

Others don’t want to settle for lower valuations, said Tushar Jain, a partner at the crypto-focused investment firm Multicoin Capital. “People remember what it used to be like,” he said.

Instead, some have opted to cut costs through layoffs, particularly companies that held a significant portion of their funds in cryptocurrency and saw the value of their holdings plummet last year. The mining hardware maker Bitmain and the Ethereum startup incubator ConsenSys, both of which employ hundreds of people, are among those that have cut staff in recent months. Exchanges have also laid off employees: In January, ShapeShift laid off 37 people, citing the harsh market in 2018.

ShapeShift CEO Erik Voorhees told The Information in an email, however, that the company didn’t need to raise more capital. “We are sufficiently capitalized and haven’t been looking for investment,” Mr. Voorhees said.

Given the bear market, the pressure is on crypto startups to prove that the companies and products they’re building can live up to expectations, investors say. Many high-profile startups are planning to roll out products this year, although several have missed their deadlines.

Bakkt, a cryptocurrency venture by Intercontinental Exchange, the parent of the New York Stock Exchange, intended to launch its bitcoin futures trading platform in mid-December, but missed that target and then was further delayed by the partial government shutdown. Filecoin and Dfinity, two companies that each raised more than $100 million, also have pushed back by months their timelines for launching tokens. Those startups sold tokens to fund the development of their own cryptocurrency networks, but the tokens can’t be traded until the networks are live.

The future is still looking strong for cryptocurrency and blockchain, but it might take a few years before we’re able to achieve the end goal.

 


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Samuel Tan

Samuel Wan has been an analyst and cryptocurrency evangelist for the last few years. Previously he worked as a consultant for a Big 4 consulting firm and is passionate about how blockchain will make an impact in the world. You can contact Sam at s@cryptomenow.com

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