Speaker 1: This is Bloomberg Crypto, a daily Bloomberg Ihad podcast, and
Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News.
Speaker 1: It's Tuesday, February seventh. Like many buzzy, fast growth, high
Speaker 1: risk industries, companies operating in and around crypto on the
Speaker 1: blockchain have relied heavily on venture capital to fund their activities.
Speaker 1: Venture capitalists, or vcs as they're more commonly known, manage
Speaker 1: pools of private money. What sets them apart from many
Speaker 1: other kinds of investors is that they tend to focus
Speaker 1: on the riskiest possible bets. For every ten or so investments,
Speaker 1: they expect that some eight or nine of them might fail.
Speaker 1: But what keeps them in business year after year is
Speaker 1: that every now and then one of those high risk
Speaker 1: bets pays off spectacularly, covering the losses in the rest
Speaker 1: of the portfolio. Given their appetite for risk and reward,
Speaker 1: it's no surprised that, for a while VC is big
Speaker 1: and small, we're flocking to crypto. But what does the
Speaker 1: relatively depressed environment mean for VC investments and digital assets
Speaker 1: these days? Bloomberg reports Hanna Miller joins me now to
Speaker 1: discuss Hannah. Always a pleasure to have you on the show.
Speaker 1: Thank you for having me. Let's talk about one of
Speaker 1: our favorite topics. I mean, I don't know if it's
Speaker 1: one of your favorite topics, but we do talk a
Speaker 1: lot about venture capitalists or vcs, and the reason we
Speaker 1: talk a lot about them is because they provide the
Speaker 1: you know, to use the buzzy word, the liquidity to use,
Speaker 1: the reality, the cash that crypto startups, especially right now,
Speaker 1: really desperately need to fund their ongoing activities. Now, one
Speaker 1: of the things I've appreciated about your reporting over time
Speaker 1: is you know, if you go back and you read
Speaker 1: the various things that you've written, it starts from this
Speaker 1: place of here are signs that vcs are positive on crypto,
Speaker 1: but not like a hundred percents invested too q one
Speaker 1: all time record high investments made into crypto to four
Speaker 1: quarto and they're like, oh, we're just gonna pull it
Speaker 1: back a little bit, not a huge amount, but some
Speaker 1: what's the investor sentiment in venture capital right now? Like
Speaker 1: when you're talking to these folks and you're asking them,
Speaker 1: so all that money you put into f t X
Speaker 1: regrets question Mark, how how does that go. Yeah. So
Speaker 1: I've always referred to venture capitalists as some of the
Speaker 1: crypto industry's biggest cheerleaders, so you know, they're definitely an
Speaker 1: important barometer for how things are going within the industry.
Speaker 1: And with this fourth quarter, you know, venture capitalists are
Speaker 1: still investing in crypto startups, that's clear. There's just been
Speaker 1: a pretty sharp decline. So it was a seventy five
Speaker 1: percent drop in the fourth quarter of two compared to
Speaker 1: the same period a year prior. And you know that
Speaker 1: that that's just like, that is a big plunge. It
Speaker 1: shows a pretty dramatic shift, and I think it's also
Speaker 1: showing a divide. You know, we had a lot of
Speaker 1: big name venture capitalists who are very established. They're known
Speaker 1: for investing in a broad array of tech companies, and
Speaker 1: they kind of came into crypto, you know, started back
Speaker 1: in companies like FTX, and now I think those generalist
Speaker 1: FECs are starting to pull back. You know, they're like,
Speaker 1: all right, maybe this crypto thing isn't all it's cracked
Speaker 1: up to be. And this is a point that you've
Speaker 1: made a few times, which is that there's this real
Speaker 1: divide between the phrase that you use like the neuralist vcs,
Speaker 1: right who might have been investing in tech or in
Speaker 1: finance and who kind of came into crypto and the
Speaker 1: kind of crypto native or crypto specialist vcs. Yeah, you know,
Speaker 1: these these crypto native vcs are still sticking with the
Speaker 1: industry because that's their entire investment thesis. That's what they're
Speaker 1: staking on here. And you know, you're still seeing investments
Speaker 1: from those vcs. And so I think that you know,
Speaker 1: while we saw this you know, dramatic plunge, uh, it
Speaker 1: doesn't mean that crypto is going away. There's still a
Speaker 1: lot of money, billions of dollars being poured into this industry.
Speaker 1: How come. So I think people still see use cases
Speaker 1: for blockchain, you know that they think the full potential
Speaker 1: of this technology hasn't been realized. And we've seen a
Speaker 1: lot of interest, you know in different types of startups
Speaker 1: that have cropped up in the crypto space. So maybe
Speaker 1: you know, it's a cybersecurity for that audits your code
Speaker 1: and make sure that it's not susceptible to hacks, or
Speaker 1: maybe it's a gaming startup that uses n f t
Speaker 1: s in some way. So there are still people who
Speaker 1: see promise in this and they think that, yeah, f
Speaker 1: t X was a setback, but that doesn't define the industry.
Speaker 1: There's also a lot of vcs who differentiate between centralized
Speaker 1: exchanges and decentralized entities and are really betting on DeFi
Speaker 1: you know, they're looking at these centralized finance startups. They're
Speaker 1: they're backing those versus centralized exchanges like f t X.
Speaker 1: And for the vcs who are sort of staying in it,
Speaker 1: even if, as you note, not necessarily at the level
Speaker 1: that they were last year, how has their approach changed?
Speaker 1: I mean, as an as an industry, as a set
Speaker 1: of investors, they're supposed to be relatively sophisticated. This is
Speaker 1: definitely the story that they tell about themselves to the market,
Speaker 1: which is like you want us in your you know,
Speaker 1: in your realm as it were, because we we can
Speaker 1: help were smart as we give me connections. But some
Speaker 1: of that vaunted expertise seems to have gone right out
Speaker 1: the window when it came to asking founders tough questions
Speaker 1: about if they had any of the crypto that they
Speaker 1: said they had. Yeah, so I think in the past,
Speaker 1: you know, two years or so, vcs came into this
Speaker 1: that you know, they had to play a bit fast
Speaker 1: and loose in order to become a part of deals
Speaker 1: because things were moving really quickly. Evaluations were white hot.
Speaker 1: You know, they were huge and venture capitalists I think
Speaker 1: we're suffering from fear of missing out Felmo. And you know,
Speaker 1: they were maybe willing to set aside some of their
Speaker 1: typical due diligence practices, some of the more intense questions
Speaker 1: that they would be willing to ask in order to
Speaker 1: move forward with a deal. And I think now we
Speaker 1: we've seen a reset. You know, I talked to a
Speaker 1: venture capitalist named David Pacman. He's a managing partner at
Speaker 1: coin Fund, which is a crypto native venture fund held
Speaker 1: by the name Yes, and you know we talked about,
Speaker 1: you know, the pace of deals selling down. I think
Speaker 1: we went through obviously a major correction market correction last year,
Speaker 1: exacerbated by a bunch of fat acting, you know, self
Speaker 1: harm in crypto that led to a lot of money
Speaker 1: leaving the space. I would classify some of that money
Speaker 1: a sort of tourist money that's chasing just momentum anywhere.
Speaker 1: But also we saw some of the traditional vcs who
Speaker 1: had been there are more traditional expectations now that maybe
Speaker 1: got thrown out the window previously. You know that there
Speaker 1: needs to be a board, There needs to be a
Speaker 1: board seat. You know. It's definitely a sort of resetting
Speaker 1: of expectations from from before. Now when we talk about
Speaker 1: things like vcs want to be on the board, what
Speaker 1: does that mean in practice? Yeah, I mean, I think
Speaker 1: the fact that more vcs are demanding board seats again,
Speaker 1: you know post FTX, like that that makes sense because
Speaker 1: FTX did not have a formal board, and that board
Speaker 1: would have been a safeguard you know, in theory that
Speaker 1: maybe they would have helped keep things in check. Um.
Speaker 1: We also know that a lot of the founders in
Speaker 1: the crypto space, including Sam Bankman Freed, are extremely young.
Speaker 1: Maybe this is their their first you know, big business experience.
Speaker 1: They haven't led a company before. So having a board
Speaker 1: in place can help, you know, provide guidance to young founders.
Speaker 1: It can also you know, make sure that they're not
Speaker 1: engaging in unsavory or just ridiculous business practices like keeping
Speaker 1: all of your accounting on QuickBooks. Um. But yeah, I
Speaker 1: think you know, moving ahead this kind of like you know,
Speaker 1: seeing which companies have boards, which don't you know, that's
Speaker 1: going to be a very interesting thing that actually we're
Speaker 1: looking into as a team. And one of the things,
Speaker 1: one of the points that David Pacman made in your
Speaker 1: interview with him, is this idea that some of these
Speaker 1: crypto companies, especially in the FTX, be and we're like
Speaker 1: doing too much. Now, obviously he's a Poston running a
Speaker 1: specialist crypto fund, so he's going to be a fan
Speaker 1: of like narrow portfolios. But is there anything to the
Speaker 1: idea that you know, you have these entities that are
Speaker 1: run by relatively inexperienced folks that maybe their second or
Speaker 1: third real job quote unquote out of college. They're raising
Speaker 1: billions of dollars and suddenly they're like in gaming, in
Speaker 1: centralized exchanges, in defy, doing token offerings over here and
Speaker 1: their own investments over there. Like, is there suddenly kind
Speaker 1: of a in praise of simplification vibe going around the valley? Yeah,
Speaker 1: I think it's been interesting to see, you know that
Speaker 1: there are some areas within crypto that have a lot
Speaker 1: of resilience. So even just going back to basics like
Speaker 1: developing you know, block chain infrastructure, you know, things that
Speaker 1: can help with trading. You know, stuff like that that's
Speaker 1: a little maybe maybe it's maybe it's less sexy than
Speaker 1: creating some massive centralized exchange, but still a vital building
Speaker 1: block within the world of crypto. So yeah, you know, David,
Speaker 1: David mentioned that, you know that that infrastructure is a
Speaker 1: pretty key area right now, and you're asking, like, what
Speaker 1: are we focused on? Those people tend to be deep
Speaker 1: in the infrastructure build out right now. We have base
Speaker 1: layers Layer ones, which is a layer for decentralized compute
Speaker 1: and really record keeping. But we don't fully have decentralized storage,
Speaker 1: we don't have fully decentralized databases, we don't have decentralized personalization,
Speaker 1: we don't have decentralized AI. These are pieces of the
Speaker 1: tech stack that are readily available in Web two that
Speaker 1: need to be built out. I think it's been interesting
Speaker 1: to see that, you know, startups that might not necessarily
Speaker 1: identify as crypto startups, that they're gaming startups and maybe
Speaker 1: use some element of blockchain, you know, like they non
Speaker 1: fungible tokens in the game, you know, something along those lines.
Speaker 1: Those have seen some resilience over the past few months.
Speaker 1: So I think, yeah, you know, thinking more specialized, thinking smaller.
Speaker 1: You know, those are things that are helping founders, you know,
Speaker 1: as they scrounge up funds during this difficult time. Up next,
Speaker 1: more from Bloomberg Report to Hanna Milla on what this
Speaker 1: ongoing crypto winter means for crypto vcs. We'll be right back.
Speaker 1: We did ask for folks to tell us if they
Speaker 1: had any blockchain games that you like. The people did emails.
Speaker 1: I'm gonna um, I'm gonna mention a couple of them, so,
Speaker 1: you know, one person talked about metal Core, another person
Speaker 1: talked about Hunters on Chain, which does have an n
Speaker 1: f T element. There are other folks who kind of
Speaker 1: made the point that you did, which is instead of
Speaker 1: folks being like, this is a blockchain based game, it's like,
Speaker 1: this is a game that has some crypto elements. It
Speaker 1: might be n f T s, it might be crypto.
Speaker 1: And I was talking to the developers of a game
Speaker 1: that's still very much in kind of like alpha early beta,
Speaker 1: where you know, they were like, the n f T
Speaker 1: elements of this game are not the point, right, Like
Speaker 1: there to be an interesting at or an interesting incentive,
Speaker 1: but they're not the point. And so perhaps one thing
Speaker 1: that we'll see is more pure play gaming start ups
Speaker 1: that you know, dabble in blockchain rather than the other
Speaker 1: way around. Yeah, I think when I've talked to a
Speaker 1: lot of gaming developers who are experimenting with blockchain, you know,
Speaker 1: they want blockchain to be in the background. They don't
Speaker 1: want to be so in your face that this is
Speaker 1: a crypto game, this is, you know, an n f
Speaker 1: T game. They wanted to just be an element and
Speaker 1: that the gameplay overall is smooth. It feels like a
Speaker 1: normal game. You know, it's not clunky in any way.
Speaker 1: So I think, you know, and talking to people who
Speaker 1: are maybe switching over from traditional gaming into blockchain gaming,
Speaker 1: you know, they want to take a traditional gaming feel
Speaker 1: and you know, improve that with blockchain, but have it
Speaker 1: sort of beyond the downlow, if that makes sense. Absolutely,
Speaker 1: And kind of as a kind of a closing thought,
Speaker 1: Ventra capitals are relatively small industry. There's hundreds of billions
Speaker 1: of dollars in capital here, but it's you know, it's
Speaker 1: roughly the same I don't know, hundred or a hundred
Speaker 1: and fifty so people around the world, many of whom
Speaker 1: have been personally as well as professionally burned by the
Speaker 1: results of the last several months. And this conversation is
Speaker 1: happening around the same time when many of the vaunted
Speaker 1: tech companies that were also fueled by venture capital are
Speaker 1: having their own reckoning is too strong a word, but
Speaker 1: at least questions are being raised about the sustainability of
Speaker 1: their various business models. Is VC sort of doing its
Speaker 1: own kind of like internal interrogation and asking like, are
Speaker 1: there things that the industry three needs to change, whether
Speaker 1: it relates to crypto, whether it leads to tech, but
Speaker 1: just overall to you know, continue to be sustainable and
Speaker 1: successful in the future. I think vcs are evaluating their practices,
Speaker 1: They're looking at what went wrong here. We know there's
Speaker 1: also outside pressure that regulators are looking into the role
Speaker 1: of vcs and the collapse of FTX, that they're you know,
Speaker 1: talking with them, questioning them, so that I think is
Speaker 1: just an added pressure on all of this. But yeah,
Speaker 1: I mean this is a reckoning. You know, this is
Speaker 1: something that you know, isn't unique to crypto, that venture
Speaker 1: capitalists are are looking at the role that they played
Speaker 1: in pushing these companies to a very high point, you know,
Speaker 1: maybe too high a point, maybe past realistic expectations and
Speaker 1: they're now, you know, reckoning with the consequences of that,
Speaker 1: and I'm sure you'll continue reporting on those consequences. Thank
Speaker 1: you as always for being on the show. Thank you.
Speaker 1: That was Bloomberg reporter Hannah Miller. You can find more
Speaker 1: of her reporting in the Bloomberg Terminal and on Bloomberg
Speaker 1: dot com, and she also pops up in our twice
Speaker 1: weekly crypto newsletter called Bloomberg Crypto, so make sure to subscribe.
Speaker 1: This is Bloomberg Crypto, a daily podcast from Bloomberg and
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Speaker 1: suggestions for the show to Crypto at Bloomberg dot net.
Speaker 1: The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our
Speaker 1: senior producer is Janet Babin. Our producers are Mohammed Faruke
Speaker 1: and Sharon Barrero. Our associate producers are Ty Butler and
Speaker 1: Moses on Them. Desta wonder At is our engineer. Original
Speaker 1: music by Leo Sidron. I'm Stacy Marie Schmal We'll be
Speaker 1: back tomorrow. The fat At a s