WEBVTT - What do Venture Capitalists Think About the Crypto Market?

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<v Speaker 1>This is Bloomberg Crypto, a daily Bloomberg Ihad podcast, and

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<v Speaker 1>I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News.

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<v Speaker 1>It's Tuesday, February seventh. Like many buzzy, fast growth, high

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<v Speaker 1>risk industries, companies operating in and around crypto on the

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<v Speaker 1>blockchain have relied heavily on venture capital to fund their activities.

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<v Speaker 1>Venture capitalists, or vcs as they're more commonly known, manage

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<v Speaker 1>pools of private money. What sets them apart from many

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<v Speaker 1>other kinds of investors is that they tend to focus

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<v Speaker 1>on the riskiest possible bets. For every ten or so investments,

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<v Speaker 1>they expect that some eight or nine of them might fail.

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<v Speaker 1>But what keeps them in business year after year is

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<v Speaker 1>that every now and then one of those high risk

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<v Speaker 1>bets pays off spectacularly, covering the losses in the rest

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<v Speaker 1>of the portfolio. Given their appetite for risk and reward,

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<v Speaker 1>it's no surprised that, for a while VC is big

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<v Speaker 1>and small, we're flocking to crypto. But what does the

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<v Speaker 1>relatively depressed environment mean for VC investments and digital assets

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<v Speaker 1>these days? Bloomberg reports Hanna Miller joins me now to

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<v Speaker 1>discuss Hannah. Always a pleasure to have you on the show.

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<v Speaker 1>Thank you for having me. Let's talk about one of

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<v Speaker 1>our favorite topics. I mean, I don't know if it's

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<v Speaker 1>one of your favorite topics, but we do talk a

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<v Speaker 1>lot about venture capitalists or vcs, and the reason we

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<v Speaker 1>talk a lot about them is because they provide the

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<v Speaker 1>you know, to use the buzzy word, the liquidity to use,

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<v Speaker 1>the reality, the cash that crypto startups, especially right now,

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<v Speaker 1>really desperately need to fund their ongoing activities. Now, one

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<v Speaker 1>of the things I've appreciated about your reporting over time

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<v Speaker 1>is you know, if you go back and you read

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<v Speaker 1>the various things that you've written, it starts from this

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<v Speaker 1>place of here are signs that vcs are positive on crypto,

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<v Speaker 1>but not like a hundred percents invested too q one

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<v Speaker 1>all time record high investments made into crypto to four

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<v Speaker 1>quarto and they're like, oh, we're just gonna pull it

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<v Speaker 1>back a little bit, not a huge amount, but some

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<v Speaker 1>what's the investor sentiment in venture capital right now? Like

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<v Speaker 1>when you're talking to these folks and you're asking them,

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<v Speaker 1>so all that money you put into f t X

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<v Speaker 1>regrets question Mark, how how does that go. Yeah. So

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<v Speaker 1>I've always referred to venture capitalists as some of the

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<v Speaker 1>crypto industry's biggest cheerleaders, so you know, they're definitely an

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<v Speaker 1>important barometer for how things are going within the industry.

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<v Speaker 1>And with this fourth quarter, you know, venture capitalists are

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<v Speaker 1>still investing in crypto startups, that's clear. There's just been

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<v Speaker 1>a pretty sharp decline. So it was a seventy five

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<v Speaker 1>percent drop in the fourth quarter of two compared to

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<v Speaker 1>the same period a year prior. And you know that

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<v Speaker 1>that that's just like, that is a big plunge. It

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<v Speaker 1>shows a pretty dramatic shift, and I think it's also

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<v Speaker 1>showing a divide. You know, we had a lot of

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<v Speaker 1>big name venture capitalists who are very established. They're known

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<v Speaker 1>for investing in a broad array of tech companies, and

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<v Speaker 1>they kind of came into crypto, you know, started back

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<v Speaker 1>in companies like FTX, and now I think those generalist

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<v Speaker 1>FECs are starting to pull back. You know, they're like,

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<v Speaker 1>all right, maybe this crypto thing isn't all it's cracked

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<v Speaker 1>up to be. And this is a point that you've

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<v Speaker 1>made a few times, which is that there's this real

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<v Speaker 1>divide between the phrase that you use like the neuralist vcs,

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<v Speaker 1>right who might have been investing in tech or in

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<v Speaker 1>finance and who kind of came into crypto and the

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<v Speaker 1>kind of crypto native or crypto specialist vcs. Yeah, you know,

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<v Speaker 1>these these crypto native vcs are still sticking with the

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<v Speaker 1>industry because that's their entire investment thesis. That's what they're

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<v Speaker 1>staking on here. And you know, you're still seeing investments

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<v Speaker 1>from those vcs. And so I think that you know,

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<v Speaker 1>while we saw this you know, dramatic plunge, uh, it

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<v Speaker 1>doesn't mean that crypto is going away. There's still a

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<v Speaker 1>lot of money, billions of dollars being poured into this industry.

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<v Speaker 1>How come. So I think people still see use cases

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<v Speaker 1>for blockchain, you know that they think the full potential

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<v Speaker 1>of this technology hasn't been realized. And we've seen a

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<v Speaker 1>lot of interest, you know in different types of startups

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<v Speaker 1>that have cropped up in the crypto space. So maybe

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<v Speaker 1>you know, it's a cybersecurity for that audits your code

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<v Speaker 1>and make sure that it's not susceptible to hacks, or

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<v Speaker 1>maybe it's a gaming startup that uses n f t

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<v Speaker 1>s in some way. So there are still people who

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<v Speaker 1>see promise in this and they think that, yeah, f

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<v Speaker 1>t X was a setback, but that doesn't define the industry.

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<v Speaker 1>There's also a lot of vcs who differentiate between centralized

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<v Speaker 1>exchanges and decentralized entities and are really betting on DeFi

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<v Speaker 1>you know, they're looking at these centralized finance startups. They're

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<v Speaker 1>they're backing those versus centralized exchanges like f t X.

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<v Speaker 1>And for the vcs who are sort of staying in it,

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<v Speaker 1>even if, as you note, not necessarily at the level

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<v Speaker 1>that they were last year, how has their approach changed?

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<v Speaker 1>I mean, as an as an industry, as a set

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<v Speaker 1>of investors, they're supposed to be relatively sophisticated. This is

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<v Speaker 1>definitely the story that they tell about themselves to the market,

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<v Speaker 1>which is like you want us in your you know,

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<v Speaker 1>in your realm as it were, because we we can

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<v Speaker 1>help were smart as we give me connections. But some

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<v Speaker 1>of that vaunted expertise seems to have gone right out

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<v Speaker 1>the window when it came to asking founders tough questions

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<v Speaker 1>about if they had any of the crypto that they

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<v Speaker 1>said they had. Yeah, so I think in the past,

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<v Speaker 1>you know, two years or so, vcs came into this

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<v Speaker 1>that you know, they had to play a bit fast

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<v Speaker 1>and loose in order to become a part of deals

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<v Speaker 1>because things were moving really quickly. Evaluations were white hot.

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<v Speaker 1>You know, they were huge and venture capitalists I think

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<v Speaker 1>we're suffering from fear of missing out Felmo. And you know,

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<v Speaker 1>they were maybe willing to set aside some of their

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<v Speaker 1>typical due diligence practices, some of the more intense questions

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<v Speaker 1>that they would be willing to ask in order to

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<v Speaker 1>move forward with a deal. And I think now we

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<v Speaker 1>we've seen a reset. You know, I talked to a

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<v Speaker 1>venture capitalist named David Pacman. He's a managing partner at

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<v Speaker 1>coin Fund, which is a crypto native venture fund held

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<v Speaker 1>by the name Yes, and you know we talked about,

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<v Speaker 1>you know, the pace of deals selling down. I think

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<v Speaker 1>we went through obviously a major correction market correction last year,

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<v Speaker 1>exacerbated by a bunch of fat acting, you know, self

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<v Speaker 1>harm in crypto that led to a lot of money

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<v Speaker 1>leaving the space. I would classify some of that money

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<v Speaker 1>a sort of tourist money that's chasing just momentum anywhere.

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<v Speaker 1>But also we saw some of the traditional vcs who

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<v Speaker 1>had been there are more traditional expectations now that maybe

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<v Speaker 1>got thrown out the window previously. You know that there

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<v Speaker 1>needs to be a board, There needs to be a

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<v Speaker 1>board seat. You know. It's definitely a sort of resetting

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<v Speaker 1>of expectations from from before. Now when we talk about

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<v Speaker 1>things like vcs want to be on the board, what

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<v Speaker 1>does that mean in practice? Yeah, I mean, I think

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<v Speaker 1>the fact that more vcs are demanding board seats again,

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<v Speaker 1>you know post FTX, like that that makes sense because

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<v Speaker 1>FTX did not have a formal board, and that board

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<v Speaker 1>would have been a safeguard you know, in theory that

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<v Speaker 1>maybe they would have helped keep things in check. Um.

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<v Speaker 1>We also know that a lot of the founders in

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<v Speaker 1>the crypto space, including Sam Bankman Freed, are extremely young.

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<v Speaker 1>Maybe this is their their first you know, big business experience.

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<v Speaker 1>They haven't led a company before. So having a board

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<v Speaker 1>in place can help, you know, provide guidance to young founders.

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<v Speaker 1>It can also you know, make sure that they're not

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<v Speaker 1>engaging in unsavory or just ridiculous business practices like keeping

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<v Speaker 1>all of your accounting on QuickBooks. Um. But yeah, I

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<v Speaker 1>think you know, moving ahead this kind of like you know,

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<v Speaker 1>seeing which companies have boards, which don't you know, that's

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<v Speaker 1>going to be a very interesting thing that actually we're

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<v Speaker 1>looking into as a team. And one of the things,

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<v Speaker 1>one of the points that David Pacman made in your

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<v Speaker 1>interview with him, is this idea that some of these

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<v Speaker 1>crypto companies, especially in the FTX, be and we're like

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<v Speaker 1>doing too much. Now, obviously he's a Poston running a

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<v Speaker 1>specialist crypto fund, so he's going to be a fan

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<v Speaker 1>of like narrow portfolios. But is there anything to the

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<v Speaker 1>idea that you know, you have these entities that are

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<v Speaker 1>run by relatively inexperienced folks that maybe their second or

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<v Speaker 1>third real job quote unquote out of college. They're raising

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<v Speaker 1>billions of dollars and suddenly they're like in gaming, in

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<v Speaker 1>centralized exchanges, in defy, doing token offerings over here and

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<v Speaker 1>their own investments over there. Like, is there suddenly kind

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<v Speaker 1>of a in praise of simplification vibe going around the valley? Yeah,

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<v Speaker 1>I think it's been interesting to see, you know that

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<v Speaker 1>there are some areas within crypto that have a lot

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<v Speaker 1>of resilience. So even just going back to basics like

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<v Speaker 1>developing you know, block chain infrastructure, you know, things that

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<v Speaker 1>can help with trading. You know, stuff like that that's

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<v Speaker 1>a little maybe maybe it's maybe it's less sexy than

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<v Speaker 1>creating some massive centralized exchange, but still a vital building

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<v Speaker 1>block within the world of crypto. So yeah, you know, David,

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<v Speaker 1>David mentioned that, you know that that infrastructure is a

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<v Speaker 1>pretty key area right now, and you're asking, like, what

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<v Speaker 1>are we focused on? Those people tend to be deep

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<v Speaker 1>in the infrastructure build out right now. We have base

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<v Speaker 1>layers Layer ones, which is a layer for decentralized compute

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<v Speaker 1>and really record keeping. But we don't fully have decentralized storage,

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<v Speaker 1>we don't have fully decentralized databases, we don't have decentralized personalization,

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<v Speaker 1>we don't have decentralized AI. These are pieces of the

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<v Speaker 1>tech stack that are readily available in Web two that

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<v Speaker 1>need to be built out. I think it's been interesting

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<v Speaker 1>to see that, you know, startups that might not necessarily

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<v Speaker 1>identify as crypto startups, that they're gaming startups and maybe

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<v Speaker 1>use some element of blockchain, you know, like they non

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<v Speaker 1>fungible tokens in the game, you know, something along those lines.

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<v Speaker 1>Those have seen some resilience over the past few months.

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<v Speaker 1>So I think, yeah, you know, thinking more specialized, thinking smaller.

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<v Speaker 1>You know, those are things that are helping founders, you know,

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<v Speaker 1>as they scrounge up funds during this difficult time. Up next,

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<v Speaker 1>more from Bloomberg Report to Hanna Milla on what this

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<v Speaker 1>ongoing crypto winter means for crypto vcs. We'll be right back.

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<v Speaker 1>We did ask for folks to tell us if they

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<v Speaker 1>had any blockchain games that you like. The people did emails.

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<v Speaker 1>I'm gonna um, I'm gonna mention a couple of them, so,

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<v Speaker 1>you know, one person talked about metal Core, another person

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<v Speaker 1>talked about Hunters on Chain, which does have an n

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<v Speaker 1>f T element. There are other folks who kind of

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<v Speaker 1>made the point that you did, which is instead of

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<v Speaker 1>folks being like, this is a blockchain based game, it's like,

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<v Speaker 1>this is a game that has some crypto elements. It

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<v Speaker 1>might be n f T s, it might be crypto.

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<v Speaker 1>And I was talking to the developers of a game

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<v Speaker 1>that's still very much in kind of like alpha early beta,

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<v Speaker 1>where you know, they were like, the n f T

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<v Speaker 1>elements of this game are not the point, right, Like

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<v Speaker 1>there to be an interesting at or an interesting incentive,

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<v Speaker 1>but they're not the point. And so perhaps one thing

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<v Speaker 1>that we'll see is more pure play gaming start ups

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<v Speaker 1>that you know, dabble in blockchain rather than the other

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<v Speaker 1>way around. Yeah, I think when I've talked to a

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<v Speaker 1>lot of gaming developers who are experimenting with blockchain, you know,

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<v Speaker 1>they want blockchain to be in the background. They don't

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<v Speaker 1>want to be so in your face that this is

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<v Speaker 1>a crypto game, this is, you know, an n f

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<v Speaker 1>T game. They wanted to just be an element and

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<v Speaker 1>that the gameplay overall is smooth. It feels like a

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<v Speaker 1>normal game. You know, it's not clunky in any way.

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<v Speaker 1>So I think, you know, and talking to people who

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<v Speaker 1>are maybe switching over from traditional gaming into blockchain gaming,

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<v Speaker 1>you know, they want to take a traditional gaming feel

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<v Speaker 1>and you know, improve that with blockchain, but have it

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<v Speaker 1>sort of beyond the downlow, if that makes sense. Absolutely,

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<v Speaker 1>And kind of as a kind of a closing thought,

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<v Speaker 1>Ventra capitals are relatively small industry. There's hundreds of billions

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<v Speaker 1>of dollars in capital here, but it's you know, it's

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<v Speaker 1>roughly the same I don't know, hundred or a hundred

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<v Speaker 1>and fifty so people around the world, many of whom

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<v Speaker 1>have been personally as well as professionally burned by the

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<v Speaker 1>results of the last several months. And this conversation is

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<v Speaker 1>happening around the same time when many of the vaunted

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<v Speaker 1>tech companies that were also fueled by venture capital are

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<v Speaker 1>having their own reckoning is too strong a word, but

0:13:47.440 --> 0:13:51.400
<v Speaker 1>at least questions are being raised about the sustainability of

0:13:51.440 --> 0:13:55.400
<v Speaker 1>their various business models. Is VC sort of doing its

0:13:55.400 --> 0:13:58.800
<v Speaker 1>own kind of like internal interrogation and asking like, are

0:13:58.840 --> 0:14:01.240
<v Speaker 1>there things that the industry three needs to change, whether

0:14:01.280 --> 0:14:03.319
<v Speaker 1>it relates to crypto, whether it leads to tech, but

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<v Speaker 1>just overall to you know, continue to be sustainable and

0:14:06.679 --> 0:14:13.400
<v Speaker 1>successful in the future. I think vcs are evaluating their practices,

0:14:13.760 --> 0:14:16.240
<v Speaker 1>They're looking at what went wrong here. We know there's

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<v Speaker 1>also outside pressure that regulators are looking into the role

0:14:21.400 --> 0:14:24.440
<v Speaker 1>of vcs and the collapse of FTX, that they're you know,

0:14:24.960 --> 0:14:29.040
<v Speaker 1>talking with them, questioning them, so that I think is

0:14:29.400 --> 0:14:33.840
<v Speaker 1>just an added pressure on all of this. But yeah,

0:14:33.920 --> 0:14:36.200
<v Speaker 1>I mean this is a reckoning. You know, this is

0:14:37.400 --> 0:14:40.600
<v Speaker 1>something that you know, isn't unique to crypto, that venture

0:14:40.680 --> 0:14:44.480
<v Speaker 1>capitalists are are looking at the role that they played

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<v Speaker 1>in pushing these companies to a very high point, you know,

0:14:47.960 --> 0:14:53.000
<v Speaker 1>maybe too high a point, maybe past realistic expectations and

0:14:53.040 --> 0:14:56.080
<v Speaker 1>they're now, you know, reckoning with the consequences of that,

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<v Speaker 1>and I'm sure you'll continue reporting on those consequences. Thank

0:14:58.840 --> 0:15:00.560
<v Speaker 1>you as always for being on the show. Thank you.

0:15:01.720 --> 0:15:04.440
<v Speaker 1>That was Bloomberg reporter Hannah Miller. You can find more

0:15:04.440 --> 0:15:06.680
<v Speaker 1>of her reporting in the Bloomberg Terminal and on Bloomberg

0:15:06.720 --> 0:15:09.400
<v Speaker 1>dot com, and she also pops up in our twice

0:15:09.400 --> 0:15:12.760
<v Speaker 1>weekly crypto newsletter called Bloomberg Crypto, so make sure to subscribe.

0:15:17.560 --> 0:15:20.720
<v Speaker 1>This is Bloomberg Crypto, a daily podcast from Bloomberg and

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<v Speaker 1>The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our

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<v Speaker 1>music by Leo Sidron. I'm Stacy Marie Schmal We'll be

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