- Last year, the crypto market welcomed many venture capitalists who were new to the space.
- Now, tourist investors are pulling back in a downturn, says IVP general partner Tom Loverro.
- Their retreat creates opportunities for crypto-focused investors who want to double down.
The crypto gold rush of last year enticed many venture capitalists to write checks into blockchain companies for the first time.
Tom Loverro, a Coinbase investor and general partner at IVP, believes many of these investors — especially those “market tourists” who only recently waded into crypto investing — are starting to retreat from crypto startups, as interest and inflation rates rise and stock prices fall.
“My bet is that a lot of VCs who were interested in Web3 and crypto in January are not interested in it by January of 2023,” Loverro said.
He expects the market tourists, lured by the prospect of quick returns and colossal wealth, to disappear amid a downturn. In 2022, a broad selloff has erased hundreds of billions of dollars from the crypto market. Thousands of workers at multiple crypto exchanges have been laid off. And a crypto hedge fund has plunged into liquidation.
“Crypto winter is here,” Loverro said in a viral tweet thread late last month.
The cascade of venture capital into blockchain companies early last year created a fear of missing out, or FOMO, among many investors. That was especially true for those whose contemporaries made savvy bets on Coinbase and then watched them mint billions of dollars in returns for their firms when the company went public a year ago.
In the past few months, some firms, such as Lux Capital, have added investors to their team who are focused on the space, while others, like Bain Capital Ventures, have launched entire crypto-focused arms. Newer venture firms, including Day One Ventures, began devoting significant resources to crypto, even if it wasn’t their primary focus.
“Venture goes through these cycles of what’s hot, what’s next,” Loverro said. “I think for a lot of folks, crypto was a shiny thing. … It’s exciting while the asset prices went up. Everyone was interested in ICOs [initial coin offerings] ” “and crypto. But I don’t remember many of those people calling me to talk about investing in crypto in 2019.”
Loverro has weathered a crypto winter before. He led his firm’s investment in Coinbase in 2017 and served as a board observer at the startup until it went public in April of 2021. He was also involved in sourcing and managing IVP’s investments in FTX, a leading crypto exchange, and Sorare, a blockchain-based fantasy soccer game.
The ‘crypto natives’ will stick around
The flight of some investors will likely make it harder for executives of blockchain companies to raise money. In the first quarter of this year, investors plowed $9.8 billion into crypto startups worldwide, according to PitchBook data. The second quarter saw startups raise $6.5 billion, a 34% decline. However, funding data is a lagging indicator of market conditions; many startups announce new funds several months after they close.
IVP
For his part, Loverro said he’s still seeking later-stage crypto startups that are ripe for investment. His firm cuts only 12 to 15 checks each year, and a handful of those go to blockchain companies. He predicts that the firm might make even more investments in crypto startups this year compared to last year, as valuations decline and investors buy discounted shares in hot startups.
The “crypto natives,” as Loverro calls them, such as crypto’s kingmaker Katie Haun and Paradigm, the firm founded by Coinbase cofounder Fred Ehrsam and former Sequoia Capital partner Matt Huang, will continue to invest in the most promising blockchain companies, trusting that a crypto winter won’t last forever, he said. For example, the venture-powerhouse Andreessen Horowitz closed the industry’s biggest-ever crypto fund at $4.5 billion in May.
“The crypto native folks … they’re not going anywhere,” Loverro said. “But I’m not sure that’s as true for normal venture firms that were just getting their feet wet.”