Venture Capital plants crypto seeds

Some venture capitalists are nurturing small upstarts amid the ongoing crypto winter.

Zoom in: Rarely of late has the venture capitalist made it rain on the crypto sector. Rather, the investments are small and go to smaller operations whose missions are aimed at strengthening the crypto ecosystem, VCs tell Axios.

• Crypto investments in dollars have fallen significantly since peaks reached just last year, but it is not zero.

What they say: “There has definitely been a shift to the past [investment] stages, and it appears that most activity has been at the seed stage, Spencer Bogart, general partner at Blockchain Capital, told Axios.

• “This is a notable departure from 18 months ago when we saw a lot of high-profile activity in the mid to late end of the market,” says Bogart.
• “Later-stage growth capital is much harder to come by these days, as companies have to meet a higher bar in terms of real traction and growth,” Shan Aggarwal, head of corporate development and Coinbase Ventures, tells Axios.

Of note: Andreessen Horowitz, who led most crypto fundraising rounds in 2022, revived his “startup school,” an accelerator program amid a slowdown in deal activity.

However, the strategy is not new for Coinbase Ventures.

• “We have been dedicated to early-stage investing since 2018 and our strategy remains largely unchanged,” Aggarwal said.

Between the lines: Regulatory risk shines in other categories and other jurisdictions.

• There is less activity in historically heavily funded categories such as DeFi and Layer-1 blockchains, in part because they pose a regulatory risk, according to Bogart.
• “From a geographic standpoint, we’re seeing more and more interesting opportunities outside of the U.S. because of the lack of regulatory clarity domestically,” Aggarwal said. “[We] are happy to invest in emerging crypto markets, [with] our portfolio companies span[ning] over 40 countries.”

What we’re looking at: Certain categories are capturing interest, including decentralized infrastructure, wallets and games, according to Bogart.

• Others include infrastructure that addresses scalability or privacy; developer tools that make it easier to build crypto-based apps, and decentralized finance, Aggarwal said.

Details: Among Blockchain Capital’s biggest investments in the last quarter is EigenLayer, which effectively wants to become a platform for launching networks via what they call restaking.

• Coinbase Ventures also participated. Additionally, they funded former FTX CEO Brett Harrison’s crypto trading infrastructure startup Architect as well as decentralized protocol Affine last quarter.
• Azra Games, which develops an NFT game called Legions & Legends, raised more money led by a16z in the last quarter; other investors included NFX, Coinbase Ventures, Play Ventures and Franklin Templeton.

Bottom line: The seedlings that make it past the countless dead ends this crypto winter will produce a healthy crop for the next bull market.

• Synthetix founder Kain Warwick recently said that the key metric in the next cycle is going to be actual income.