Worried about being left behind in the crypto rush, private venture capital investors are making a beeline for crypto projects. These largely consist of blockchain-based applications and platforms that utilize cryptocurrency native to the virtual economy of Web3 and the Metaverse.
Data from Pitchbook showed that the total venture capital investment for the first quarter of 2022 touched USD10 billion, which was the highest quarterly sum ever and more than double compared to the corresponding period last year.
What started as a trickle of funds in 2019, has become a flood in 2022. The respective totals of VC investment in crypto projects for 2019, 2020 and 2021 were USD3.7 billion, USD5.5 billion and USD28 billion.
VC’s have expressed an intense interest in investing in these protocols since many of them believe that these are the infrastructure of the future, according to Steve Ehrlich, the CEO of crypto brokerage concern, Voyager Digital.
Such projects, which range from crypto and NFT exchanges to decentralised finance applications and token issuers, are often known as protocols in reference to the rules embedded in their computer code.
The recent frenzy of venture capital activity differs from the past when investment levels were tied to the price of Bitcoin, said Alex Thorn, Head of Research at Galaxy Digital – a blockchain focused bank based in New York.
Thorn added that investment levels in the crypto sector have continued to grow despite a 16 percent slump in bitcoin prices, as was the case during a previous decline last year.
Venture Capital Meets Web3 and crypto
In addition to investor interest in the sector, a large number of mergers and acquisitions have been witnessed globally, as the hype surrounding Web3 and the Metaverse grew in leaps and bounds.
From the start of this year until now, 73 M&A deals with a combined value of USD8.8 billion were sealed, as compared to 51 deals worth USD6.8 billion for the whole of 2021.
The flipside to the rush of investors means that firms in the cryptocurrency sector can afford to be choosy, stated Mildred Idada, a founding partner of blockchain venture fund and accelerator, Open Web Collective.
She added that founders are now questioning which of the interested funding entities could provide brand value in addition to funds.
Several firms have sought alternate, creative methods to raise funding.
Polygon, a platform for developing and scaling applications on the Ethereum blockchain, raised USD450 million in February through a private sale of its cryptocurrency to investors which included SoftBank’s Vision Fund 2.
A co-founder of Polygon, Sandeep Nailwal, stated that the bigger reason for raising the funds was to get the institutions on their side and improve brand visibility.
The convergence of traditional Venture investors and developer communities pushing for decentralization comes with its own set of challenges. Traditional venture capitalists with deep pockets find themselves increasingly forced to woo the developer communities while reaching out to potential clients.
According to Alexandra Bertomeu-Gilles, a risk manager at DeFi firm Aave, some founders of companies who receive investments are creating agreements that prevent the investor from having a say in the governance of their company’s, or allow them to have an over-ruling majority vote against what majority of the developer community would want.