The dramatic fall of FTX is taking with it more than just the paper wealth of one of crypto’s most colorful players. Given the amount of invested capital that may be incinerated in the crypto exchange’s anticipated sale to rival Binance, it’s hard not to wonder where venture goes next in web3.
FTX is no longer set to generate massive investor return when it goes public; instead, backers of the exchange are concerned that their investment could go to zero in the Binance transaction. The potential sale of FTX to the larger exchange may save the brand — there’s a lot we still don’t know about its health sans rescue — but it is not clear if any of the capital pools that helped power its rise will get their money back.
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The scale of the potential losses is staggering. FTX’s mid-2021 funding round was something that it described at the time as the “largest raise in crypto exchange history,” for example. The $900 million round valued the company at around $18 billion. The boast about the round now sounds more like a threat, at least from a venture returns perspective.
“Over 60 investors participated in the $900M Series B,” FTX wrote at the time, noting that “Paradigm, Sequoia Capital, Thoma Bravo, SoftBank, Ribbit Capital, Insight Partners, Third Point, Lightspeed Venture Partners, Altimeter, BOND, NEA, Coinbase Ventures, Willoughby Capital, 40North, Senator Investment Group, Sino Global Capital, Multicoin, the Paul Tudor Jones family, Izzy Englander, Alan Howard, VanEck, Hudson River Trading, and Circle” put capital into the round.
Later in 2021, FTX raised $420 million at a $25 billion valuation that included 69 investors. Recall that last year it was perfectly acceptable for startups to use cannabis- and sex-related jokes in nine-figure venture rounds at 11-figure valuations. (Not that we’re opposed to either drugs or recreation, mind, just that in retrospect you pine for a bit more seriousness.)
FTX wasn’t done yet. A $400 million Series C announced in January of this year valued it at $32 billion — Crunchbase counts 12 investors in that particular transaction — bringing in even more capital to its coffers. Money that could now all go to zero.
Given the booms and busts we have seen in the crypto sphere, you might think that investors will once again be willing to shrug off losses in web3 and keep writing checks. Sure, we may still be early. But at some point, the low light we see around us is more dusk than dawn.
We shouldn’t be too grim. Sure, Coinbase Ventures’ investing pace has been in decline for quarters now, and the fate of the FTX venture fund is in question. But things will be all right? Right?
Yes, but also no?
Maybe, but we’re now once again forced to confront a key tension in how blockchains and blockchain culture operate contrasted with venture economics. The dissonance between a decentralized business ethos and a financing vehicle powered by large stakes in outsized winners — centralized returns predicated on market-central companies — has always been in place. It’s just that now it’s harder to see where the capital might find its next comfortable home.
Now hearing this from additional VC sources.
Total cluster. This really could be a death knell for crypto VC. Not exaggerating.
— Dan Primack (@danprimack) November 8, 2022
Let me explain. Blockchains, the stuff that powers Bitcoin and Ethereum and Solana and similar efforts, are built to be distributed. The idea is that no single entity is in charge. Consensus for any particular blockchain can be found in a number of ways — proof-of-work, proof-of-stake, proofs more exotic — but the idea is that there isn’t a single person pulling the levers and making the calls.
Contrast that ethos to traditional startups and traditional startup investing. What has been the theme in recent years? Eternal founder control and venture results concentrated in outsized winners. Both founders and venture capitalists decided in the wake of some founder-led successes that not merely centralized control, but nigh-monarchic leadership, was the way forward.
That simply does not mesh well with what web3 is supposed to be about, yeah? Well, venture found ways around the issue, backing the most centralized players in the space. Coinbase, for example, is a central hub for U.S. crypto activity. And when that activity was hot, it shit money like a golden goose with both anxiety and the tummy troubles. FTX was supposed to be a similar play — buy a cut of the middleman in the larger crypto world, and all the decentralized activity can accrue to the venture-backed player.
Lately, however, Coinbase has lost most of its value and posted massive losses. And FTX has somehow managed to topple in the space of a few days. A lot of the implied return generated by the companies is gone.
I'm pretty jaded about most VCs who invest in crypto but in this case, it's pretty disappointing to see a $32B valuation company with a very clear business model, PMF, and unit economics go to $0 overnight.
Feel terrible for everyone about to get wiped out.
— Michael Dempsey (@mhdempsey) November 9, 2022
So where else can venture players go in crypto? There are options. Crypto gaming has had some success, as well as some high-profile falls from grace. There may be some more juice there, but gaming has historically been a poor area for venture returns given its boom-and-bust release-revenue cycle — why would it be better with web3?
What about new tokens? Probably not? There’s a lot of regulatory concern there, and the implosion of FTT, FTX’s token, is not likely to create a lot of faith in new projects. (Not to mention that the Solana token’s valuation has fallen sharply in recent months, erasing some venture gains along with its own worth.)
The NFT boom has also slowed to a crawl. OpenSea, once seemingly on a one-way trip to the public markets, is now seeing its revenues constrict. It has cut staff. Other NFT marketplaces are smaller, and therefore even less likely to become big winners.
Venture players will be able to invest in crypto-related companies. Startups tackling the tax-related matters that crypto engenders will continue to get built until handling that work is easy for consumers. But given the scale of money put into crypto activities in the last few years, it doesn’t appear like there are exits on the horizon that would make all the capital spent make sense.
No returns and poor market dynamics? That’s not when venture investors get the busiest. As we saw last year, venture investing is inherently momentum-based, a polite way of saying FOMO-driven. Venture investors were content to pay comical prices for startup shares last year and waive traditional diligence when everything was hot. That didn’t work out so well generally and may wind up being even more painful among blockchain bets.
There could be a host of startups in web3 that are now effectively uninvestable and therefore on death countdowns of varying lengths. How can we know that? Because FTX was a key booster of its own sector. Now, presumably, it’s not.
FTX ventures or Alameda venture deals with the ones they led highlighted pic.twitter.com/GVGXmxID1p
— Tom Dunleavy (@dunleavy89) November 9, 2022
Who is going to step into that void?
Crypto investing may be partially saved by the fact that software valuations have fallen so far that perhaps investing in SaaS also doesn’t appeal to some investors. But with FTX ripped off the table, you wonder what appetite the venture capital world will have for new, big, high-priced deals. The vibes are bad, crypto’s aggregate market cap is under the $900 billion mark, major tokens are selling off, and there doesn’t appear to be much good news coming in the near term.
It’s hard to say that crypto won’t rise again. It probably will. But if blockchain has one more boom in it, it’s tough to see precisely where another truckload of venture dollars will fit into the mix. Perhaps the next blockchain wave will be truly decentralized, and the same names that we see elsewhere won’t be the ones collecting all the putative returns. Returns that, in the last cycle, were a bit too early to last.
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