Andreessen Horowitz bet on crypto at the worst time – here’s why
As cryptocurrency prices soared last year, no investor bet more on the sector than Andreessen Horowitz.
The big venture capital firm had developed a reputation as Silicon Valley’s biggest crypto bull, largely thanks to a 50-year-old partner named Chris Dixon who was one of the earliest evangelists for how the blockchain technology that powers cryptocurrencies could change business. His entity was one of the most active crypto investors last year, announcing in May a $4.5 billion crypto fund, the largest ever for such investments.
The timing was not good.
The prices of bitcoin and other cryptocurrencies have plunged this year amid a broad market decline, wiping out billions of dollars in paper gains for Andreessen’s funds. Consumer demand has faded for some of the firm’s most prized crypto startups, while others face increased scrutiny from regulators.
Andreessen’s flagship crypto fund shed about 40% of its value in the first half of this year, according to people familiar with the matter. This decline is much larger than the 10 to 20% drop recorded by other venture funds, which have largely avoided the risky practice of buying volatile cryptocurrencies, according to fund investors.
Despite the record cash pile, Andreessen has dramatically slowed the pace of his crypto investments this year.
Now Dixon must convince jittery investors that Andreessen didn’t overplay his hand for the May fund, which other crypto venture capitalists said is too big for a sector heading into a so-called crypto winter.
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“They’ve just pushed it so far with crypto that I’m not sure they can rebalance,” said Ben Narasin, a general partner at VC firm Tenacity Venture Capital.
In an interview, Dixon said he remains faithful to the cryptocentric vision of the Internet called Web3 that underpins Andreessen’s push into the sector — a view that blockchain versions of a range of services will return financial control and power to users in the form of cryptocurrencies they can earn and act.
Dixon said the sector is still in the early stages of acquiring users and he is not sure when mass adoption of blockchain services will happen. Crypto “is about the political and governing structure of the internet”, he said. – We have a very long-term horizon.
Dixon’s path from the periphery to Andreessen mirrors the firm’s transformation into a crypto powerhouse.
A childhood coder who earned master’s degrees in both philosophy and business, he helped found and sell two startups—one in cybersecurity and the other in e-commerce—and co-founded the VC firm Founder Collective. He also nurtured interests in new technologies such as virtual reality and 3D printing.
He joined Andreessen in 2012. The firm, founded three years earlier by Marc Andreessen and Ben Horowitz, quickly became one of the largest and most influential technology investors, driven by Andreessen’s famous mantra that “software is eating the world”.
When many big investors still dismissed bitcoin as little more than a haven for money launderers and speculators, Dixon championed its opportunities by writing blog posts — something of a gospel among young crypto entrepreneurs — describing how bitcoin would create a new, decentralized financial system. Within two years, Andreessen had invested nearly $50 million in bitcoin-related projects, including the cryptocurrency exchange Coinbase.
Dixon’s enthusiasm for the space grew with the launch of Ethereum in 2015, which used the same kind of blockchain-based, distributed ledger to allow developers to build applications beyond payments. Dixon compared Ethereum’s arrival to the creation of the iPhone App Store and said it showed that the crypto-investment universe was bigger than imagined. He told Messrs. Andreessen and Horowitz that he wanted to shift his focus away from traditional investing and start a dedicated crypto fund, people familiar with the matter said.
The $350 million crypto fund, launched in 2018, was the first of its kind created by a traditional venture firm. Andreessen remained a bull that year when bitcoin and other cryptocurrencies lost most of their value, raising a second crypto fund in 2020 totaling $515 million.
Dixon and his team also increasingly highlighted their vision for Web3. They argued that blockchain’s creation of currency-like tokens for users could give them more control and financial advantage over blockchain-based versions of services such as ride-sharing and social media, undermining the power of dominant technology monopolies.
In addition to investing in crypto companies, Andreessen bought the tokens they created, effectively betting separately on the company and its product. The unconventional strategy provided headwinds during the crypto bull market, but also made the deals riskier.
As of the end of last year, the first crypto fund had multiplied its initial investment by 10.6 times after fees, making it the best fund on paper in Andreessen’s history, according to documents seen by The Wall Street Journal.
Andreessen returned over $4 billion in stock to his investors in the two months after Coinbase went public in April 2021, public filings show, making it one of the most lucrative bets ever made in venture capital history. Andreessen’s third venture fund, which backed Coinbase in 2013, saw paper earnings of 9.7 times after fees as of Dec. 31, trailing only the first crypto fund in performance during that time, the filings showed.
Encouraged by the returns, Andreessen went on a fundraising blitz. It set out to raise $1 billion for its third crypto fund and raised $2.2 billion by June 2021.
Dixon said the crypto team’s strategy was to use its pile of cash to write big checks to startups that promised to reinvent everything from digital art to online gaming using the blockchain. The aggressive approach often prevented it from leading rounds with other investors and made the firm a significant shareholder.
Andreessen backed 56 US-based crypto deals last year and was the second largest crypto financier by investment volume after Coinbase Ventures, according to PitchBook Data. Some early investments appeared to be taking off. The valuation of OpenSea, a non-fungible token marketplace, rose over 100 times to $13 billion in January 2022, ten months after Andreessen led an early funding round.
In his push to dominate the sector, Andreessen rejected established investment norms. In November, the investors tried — and failed — to invest in Magic Eden, an NFT marketplace, even though the firm already backed OpenSea, people familiar with the matter said. Venture capitalists have long avoided backing potential rivals because it damages their reputation with founders who resent the practice. Dixon said the fund does not support companies that directly compete with its existing portfolio.
Within months, the market turned.
Demand for many Andreessen-backed companies disappeared as users dumped their crypto holdings. OpenSea’s monthly trading volume has fallen since its December funding round amid a broader collapse in the market for NFTs, while Coinbase’s monthly active users fell 20% in the second quarter from last year’s peak of 11.2 million in the fourth quarter. Both companies have cut around a fifth of their employees this year.
Andreessen is also grappling with tighter regulatory scrutiny of crypto startups and the funds that backed them, which threatens to end the era of loose oversight that enabled the creation of thousands of cryptocurrencies.
The company is making adjustments. It announced nine crypto startup deals in the third quarter, down from a high of 26 crypto deals in the fourth quarter last year, according to PitchBook. The firm also marked down the value of its second and third crypto funds this year, although the declines are not as severe as the first crypto fund endured, people familiar with the matter said.
Meanwhile, the firm’s crypto investments are plummeting. Solana, an upstart cryptocurrency that the firm acquired in June 2021, has lost over 80% of its value since the beginning of the year. In the first six months of this year, Andreessen lost $2.9 billion of his remaining stake in Coinbase as the crypto exchange’s share price fell by more than 80%.
Dixon said the market’s downturn is an opportunity for the fund to continue supporting crypto-entrepreneurs, as it has done in previous downturns.
“What I look at is not prices. I look at the entrepreneurial and developer activity,” Dixon said. “That’s the core value.”
Write to Berber Jin at [email protected]
This article was published by The Wall Street Journal, a division of Dow Jones
