WEBVTT - Why Are Venture Capitalists Shrinking Away From Crypto? 0:00:02.520 --> 0:00:05.640 This is Bloomberg Crypto, a daily Bloomberg I heard podcast, 0:00:06.000 --> 0:00:09.559 and I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg. 0:00:09.600 --> 0:00:28.440 Mus It's Thursday, October. Let's say you're crypto startop trying 0:00:28.480 --> 0:00:31.760 to raise money from venture capitalists. All things being equal, 0:00:31.960 --> 0:00:35.640 you'd have done decently well in twenty ridiculously well in 0:00:36.479 --> 0:00:38.920 one and not bad at all in the first half. 0:00:40.280 --> 0:00:44.920 But right now maybe not so much. Bloomberg Report. Hannah 0:00:44.960 --> 0:00:47.599 Milla joins me to discuss what's happening with crypto vcs 0:00:47.720 --> 0:00:50.159 and the startups who need them. I think for a 0:00:50.200 --> 0:00:54.840 lot of vcs, they're seeing this as an opportunity for 0:00:55.240 --> 0:01:08.679 talent to step in that's maybe more experienced. Welcome back, Hannah. 0:01:09.200 --> 0:01:14.600 How's life in San Francisco. Life in San Francisco is great. Um, yeah, 0:01:14.640 --> 0:01:18.520 October's always kind of summary here. So it's actually been 0:01:18.520 --> 0:01:22.320 warm temperatures as of late. Well, you spoke to our 0:01:22.480 --> 0:01:25.800 colleague vill Donna about the fact that October has also 0:01:25.880 --> 0:01:30.480 been historically speaking like a pretty decent one for crypto markets, 0:01:30.520 --> 0:01:33.760 and that's I mean mixed results given the extent of 0:01:33.760 --> 0:01:37.800 the crypto winter. But you've also been reporting on an 0:01:37.840 --> 0:01:40.039 area where October has been a little bit more challenging 0:01:40.040 --> 0:01:42.520 than maybe folks were expecting, and that is in the 0:01:42.640 --> 0:01:47.400 venture capital market for crypto starts up fundraising. What's going 0:01:47.400 --> 0:01:51.720 on over there. Yeah, So I got some data from 0:01:51.720 --> 0:01:55.520 Pitchbook looking at venture capital funding in the third quarter 0:01:57.440 --> 0:02:00.800 compare to the same period in one and it's a 0:02:00.840 --> 0:02:04.400 steep drop. It's a thirty seven percent declined to four 0:02:04.400 --> 0:02:09.000 point four billion dollars uh and venture funding four crypto startups, 0:02:09.080 --> 0:02:13.079 and that's roughly half of the record amount of funding 0:02:13.360 --> 0:02:17.040 that vcs poured into crypto and blockchain startups in the 0:02:17.120 --> 0:02:23.639 first quarter of two. So it's it's really a bit unsettling, 0:02:23.840 --> 0:02:26.359 you know, seeing this big drop, but it makes sense 0:02:26.480 --> 0:02:32.400 considering market conditions. We are in the depths of crypto winter. Uh. 0:02:32.440 --> 0:02:37.520 There there are still a lot of issues within the industry. Uh. 0:02:37.600 --> 0:02:40.320 And that podcast with bel Donna referred to October as 0:02:40.520 --> 0:02:44.400 potentially October in terms of market performance, but it's actually 0:02:44.440 --> 0:02:48.440 been Hackedober with a lot of security incidents. As a la, 0:02:49.040 --> 0:02:52.240 protocols have become an easy target for attackers. That's according 0:02:52.280 --> 0:02:55.760 to blockchain analysis firm Chain Analysis, which estimates around one 0:02:55.800 --> 0:02:58.360 point nine billion dollars worth of digital tokens have been 0:02:58.400 --> 0:03:01.960 stolen and hacks this year of the we're talking about 0:03:02.000 --> 0:03:06.200 declines from a record and kind of if we you know, 0:03:06.840 --> 0:03:08.640 vcs will love to say, well, we have a long 0:03:08.760 --> 0:03:12.520 term view, and so if we take the long term 0:03:12.600 --> 0:03:15.960 view for a second, we're still talking about money being 0:03:16.000 --> 0:03:22.160 deployed at levels unthinkable three four, five years ago because 0:03:22.160 --> 0:03:26.200 this industry barely existed then, both on the startup side, 0:03:26.240 --> 0:03:29.639 but also some of the investors who are pouring money 0:03:29.680 --> 0:03:32.080 into these startups. Talk a little bit about who those 0:03:32.160 --> 0:03:38.960 venture capitalists are. We've seen big names back the crypto industry. 0:03:39.120 --> 0:03:43.240 I'm talking about Andres and Horowitz here, which has massive, 0:03:43.280 --> 0:03:47.839 massive crypto funds and has a big crypto team dedicated 0:03:48.000 --> 0:03:52.360 to examining and investing in this industry. UM. We also 0:03:52.440 --> 0:03:57.400 have other big names. Electric Capital is one, UH, they're 0:03:57.440 --> 0:04:01.680 more crypto focus UM and how also raised a massive 0:04:01.720 --> 0:04:07.720 fund UH. Paradigm another big crypto name, UM founded by 0:04:08.320 --> 0:04:12.000 um co founded by Fred Orsu from coin base. And 0:04:12.360 --> 0:04:15.840 it's just really interesting to see kind of this growing 0:04:15.840 --> 0:04:21.840 divide now between generalist specs which look at many different industries, 0:04:21.920 --> 0:04:26.640 back many different areas of tech versus crypto native vcs. 0:04:26.800 --> 0:04:30.839 These are firms that specialize in crypto investments. They might 0:04:30.880 --> 0:04:35.479 have a dedicated research team, dedicated coding team, and these 0:04:35.520 --> 0:04:39.920 crypto native vcs are very much committed still to the space. 0:04:40.040 --> 0:04:45.279 This is everything that they have hinged their entire investment 0:04:45.279 --> 0:04:52.240 philosophy on blockchain going big. Who are some of those startups? 0:04:52.240 --> 0:04:55.720 So you've mentioned the venture capitalists, like the big traditional names, 0:04:55.839 --> 0:04:59.559 the newer but big crypto names, who are they still 0:04:59.600 --> 0:05:02.360 invest sting in even if they're investing maybe at lower 0:05:02.480 --> 0:05:04.960 levels than they were this time left you. Yeah, it's 0:05:04.960 --> 0:05:09.400 been really interesting to see a trend where n FT 0:05:09.640 --> 0:05:14.840 gaming startups are actually scoring a big round still um. 0:05:14.880 --> 0:05:20.279 In September we saw Lute Mogul and improbable Um raise 0:05:20.520 --> 0:05:23.840 over a hundred million dollars. And what's interesting about these 0:05:23.839 --> 0:05:27.760 startups is that yes, they use blockchain technology, but it's 0:05:27.800 --> 0:05:30.080 more to sort of sort of more in the background. 0:05:30.480 --> 0:05:33.920 They're not like explicitly crypto startups. They just kind of 0:05:34.080 --> 0:05:37.760 take advantage of blockchain technology and they're more focused on 0:05:37.839 --> 0:05:40.840 gaming and the metaverse. So I think a lot of 0:05:41.080 --> 0:05:44.880 crypto vcs still see gaming as an opportunity to broaden 0:05:45.560 --> 0:05:49.200 blockchain and cryptos appeal to the main to mainstream consumers. 0:05:49.400 --> 0:05:52.000 You know, people love games, they love playing them. There 0:05:52.000 --> 0:05:55.120 it's a lot more accessible than something like a complicated 0:05:55.200 --> 0:05:59.360 defy platform that might be prone to hacks and bankruptcies. 0:06:00.720 --> 0:06:03.039 I mean, it's so interesting that what we're essentially talking 0:06:03.040 --> 0:06:06.159 about is people doubling down on one of our go 0:06:06.279 --> 0:06:10.440 to phrases here on this podcast, the underlying technology as 0:06:10.440 --> 0:06:14.000 opposed to some of like the buzzier applications built on 0:06:14.080 --> 0:06:19.800 top of that technology. Yeah, it's all about infrastructure and 0:06:19.880 --> 0:06:23.360 picks and shovels. So we have seen investments raised for 0:06:23.520 --> 0:06:27.240 companies that are still building on l one blockchains, or 0:06:27.839 --> 0:06:31.040 even companies that kind of help bridge the gap between 0:06:31.600 --> 0:06:35.560 Web two players and Web three. So I recently wrote 0:06:35.560 --> 0:06:39.320 about a company called Stardusts that does that for gaming. Now, 0:06:39.320 --> 0:06:41.880 when you talk about l one blockchains, we're talking like, 0:06:41.960 --> 0:06:44.360 as you say, the picks and shovels, like the bitcoins, 0:06:44.680 --> 0:06:48.640 the ethereums, right, like those sort of fundamental things. But 0:06:48.680 --> 0:06:52.640 we've also seen folks like um Anamocha raise money blockchain 0:06:52.760 --> 0:06:56.840 dot com. How are they still fundraising in this environment? 0:06:57.040 --> 0:06:59.640 I mean, is it because Anamoca is partly a gaming play, 0:06:59.760 --> 0:07:04.240 is it something else? Yeah, Animoca is you know, it 0:07:04.279 --> 0:07:07.040 does fall into that gaming space. The last round they 0:07:07.040 --> 0:07:10.920 had was flat. Um, so it wasn't necessarily a down round. 0:07:11.240 --> 0:07:17.440 I spoke with Yatsu who founded Animoca, and he really 0:07:17.440 --> 0:07:21.520 gave a very rosy picture of what's happening with his company. Uh. 0:07:21.560 --> 0:07:24.560 He is still very much interested in eventually going public. 0:07:25.240 --> 0:07:29.680 He is very excited about what lies ahead for blockchain gaming, 0:07:30.240 --> 0:07:34.840 and he really thinks that Crypto Winter hasn't actually come 0:07:35.000 --> 0:07:38.880 for gaming right now. And then you mentioned blockchain dot Com. 0:07:39.400 --> 0:07:42.040 So they were looking to raise a down round uh 0:07:42.520 --> 0:07:47.320 recently and we've seen, you know, some shifts there. Um. 0:07:47.480 --> 0:07:51.480 They just recently did a strategic financing round. Um. So 0:07:51.600 --> 0:07:54.200 it's kind of been interesting to see what's going to 0:07:54.280 --> 0:07:57.640 happen with that company. They did have a layoff um recently. 0:07:58.080 --> 0:08:00.800 There are two sort of concepts which seemed to be 0:08:00.840 --> 0:08:04.120 really important in the context of Crypto Winter especially. The 0:08:04.200 --> 0:08:07.000 first is a down round. When folks talk about a 0:08:07.000 --> 0:08:08.880 down round, it's often like, oh my god, he raised 0:08:08.880 --> 0:08:12.640 a down round, but like, what is it exactly? Yeah, 0:08:12.640 --> 0:08:15.800 So that's referring to the valuation of a company. Uh. 0:08:15.840 --> 0:08:21.080 So you know, companies were raising at these these massive valuations. 0:08:21.320 --> 0:08:25.640 Uh last year really that were you know, saying that 0:08:25.680 --> 0:08:28.040 these were unicorn and some of them many times over, 0:08:28.720 --> 0:08:31.320 meaning that they were worth more than a billion dollars. 0:08:31.400 --> 0:08:34.400 So it's been a real calmdown this year. We've seen 0:08:34.520 --> 0:08:37.920 more companies like watching dot Com looking to raise at 0:08:38.000 --> 0:08:42.880 lower valuations UM than they were at previously. So the 0:08:42.880 --> 0:08:46.360 reason people get sort of weird about it is because 0:08:46.559 --> 0:08:50.679 there's this implied suggestion that you're definitely not worth as 0:08:50.760 --> 0:08:52.920 much as the last time we had a conversation about 0:08:52.960 --> 0:08:55.560 fround raising, but maybe you were like never worth that much. 0:08:57.000 --> 0:08:59.640 We'll be right back with more from Bloomberg Report, Hannah Mila. 0:09:10.720 --> 0:09:13.319 We've talked about gaming and the fact that it's sort 0:09:13.360 --> 0:09:16.199 of an outlier in terms of its ability to continue 0:09:16.200 --> 0:09:18.400 to be attractive. Do you have a sense of what's 0:09:18.400 --> 0:09:21.240 going on with like VC overall? Right? Is it that, like, 0:09:21.400 --> 0:09:24.560 is crypto a sector that's being hit harder by the 0:09:24.600 --> 0:09:26.920 decline than other places or are we looking at a 0:09:26.960 --> 0:09:32.000 general pullback in liquidity. Yeah, there's definitely a general pullback 0:09:32.120 --> 0:09:35.199 across tech um. The crypto is not the only area 0:09:35.280 --> 0:09:39.479 being affected. The thing is, though crypto has an extremely 0:09:39.559 --> 0:09:44.000 high profile as being risky. UM. We see that because 0:09:44.000 --> 0:09:47.840 of the volatility of tokens. We see that in the 0:09:47.960 --> 0:09:52.240 hacks that affect the industry, and we just see this also, 0:09:52.480 --> 0:09:56.760 you know, there are shady characters and you know there 0:09:56.760 --> 0:10:01.840 have been very spectacular fails um UM different players, major 0:10:01.880 --> 0:10:05.120 players within the industry. I'm thinking three rows capital here, 0:10:05.520 --> 0:10:09.920 I'm thinking Celsius, I'm thinking Voyage or Digital. So it's 0:10:10.440 --> 0:10:14.120 very I think in some ways the stakes are a 0:10:14.120 --> 0:10:18.480 bit higher for the crypto industry UM with this you 0:10:18.520 --> 0:10:21.560 know slow down, and even with this more broad slowdown, 0:10:22.160 --> 0:10:26.200 it'll be interesting to see how things shape up. I 0:10:26.280 --> 0:10:28.400 will say that a lot of the vcs I talked 0:10:28.400 --> 0:10:31.319 to are still very hopeful about the space. Even though 0:10:31.360 --> 0:10:34.920 they're telling their portfolio companies to buckle down for the 0:10:34.960 --> 0:10:37.600 next eighteen twenty four months, make sure they have enough 0:10:37.640 --> 0:10:41.720 cash on hand to last crypto winter. They still believe 0:10:42.000 --> 0:10:44.920 we will come out of this. And one thing that's 0:10:44.920 --> 0:10:48.280 also interesting about this current bear market and how it's 0:10:48.280 --> 0:10:51.000 different from previous crypto winters, is that we do see 0:10:51.040 --> 0:10:55.719 more institutional money coming in UM, more big players from 0:10:55.760 --> 0:10:59.160 traditional finance entering crypto. So I think this has given 0:10:59.200 --> 0:11:02.560 a lot of people hope UM, and they're saying, you know, hey, 0:11:02.600 --> 0:11:05.720 the industry is more mature than it was in previous 0:11:05.720 --> 0:11:10.080 bear markets, and you know, it's we're gonna overcome this. 0:11:10.640 --> 0:11:12.400 So I still I will say, I still see a 0:11:12.400 --> 0:11:17.400 lot of optimism within crypto because you mentioned October. You know, 0:11:17.480 --> 0:11:22.840 you've previously reported that security startups have been an area 0:11:23.040 --> 0:11:25.760 of growth. Are they raising enough money to keep up 0:11:25.760 --> 0:11:27.800 with the outbreak of hacks right now? I'm like, what's 0:11:27.800 --> 0:11:30.160 going on over there? I would say so with the 0:11:30.440 --> 0:11:35.680 most recent hack UM for Mango, UH, I spoke to 0:11:35.720 --> 0:11:38.600 one of a startup that had just uh done a 0:11:38.640 --> 0:11:42.440 recent raise and it's called Hawborn, and you know, they 0:11:42.440 --> 0:11:46.040 seem to be doing really well, UM, very very busy. 0:11:47.840 --> 0:11:50.880 So again, and I think that's sort of that security 0:11:50.920 --> 0:11:54.280 piece falls into the infrastructure category where you're you're you're 0:11:54.320 --> 0:12:00.000 looking for flaws and either UM platforms, code or even 0:12:00.160 --> 0:12:04.640 its economic models and testing them to see whether they can, 0:12:04.920 --> 0:12:08.480 you know, or whether they have any vulnerabilities and whether 0:12:08.520 --> 0:12:12.960 they can withstand extremes this extreme market conditions that we 0:12:13.000 --> 0:12:15.439 see in crypto at times, extreme market conditions is a 0:12:15.559 --> 0:12:19.160 very diplomatic way of putting it. As a sort of 0:12:19.200 --> 0:12:22.439 a closing thought. You know, we've talked on previous episodes 0:12:22.559 --> 0:12:27.000 about one of the propositions that the crypto native vcs 0:12:27.240 --> 0:12:29.760 like to make is that like we we are the experts, 0:12:29.800 --> 0:12:32.520 like we really know this area inside out. We can 0:12:32.559 --> 0:12:36.719 provide expert council expert guidance. Are you hearing it all 0:12:36.840 --> 0:12:40.880 that in this wave of C suite departures, when you 0:12:40.880 --> 0:12:44.839 know companies like actually really need that expert guidance. Are 0:12:44.840 --> 0:12:47.280 you hearing from either founders or vcs that folks are 0:12:47.280 --> 0:12:51.000 stepping up in that area. Yeah, I know. It's I 0:12:51.040 --> 0:12:54.280 think for a lot of vcs, they're seeing this as 0:12:54.600 --> 0:12:59.640 an opportunity for talent to step in that's maybe more 0:13:00.000 --> 0:13:05.280 sperienced in dealing with growing regulatory scrutiny or you know, 0:13:05.600 --> 0:13:10.840 handling a larger company. Um. So, I think for some 0:13:10.920 --> 0:13:16.680 of the founders it's nice for them to you know, 0:13:16.720 --> 0:13:19.320 maybe pull back focus on something else, whether it's policy 0:13:19.559 --> 0:13:24.640 or just their own you know, sanity. Um And it's 0:13:24.640 --> 0:13:27.000 it's interesting to see whether we're going to have more 0:13:27.080 --> 0:13:30.480 talent pulled in from traditional finance, whether we're gonna see 0:13:30.480 --> 0:13:35.280 familiar names from big institutional players common too crypto and 0:13:35.360 --> 0:13:37.760 sort of fill these leadership gaps that have been left. 0:13:39.679 --> 0:13:42.319 You know, you're making an interesting point about folks coming 0:13:42.400 --> 0:13:44.760 in to be you know, we've called them in the 0:13:44.800 --> 0:13:47.720 past like the adults in the room. That may play 0:13:47.840 --> 0:13:51.400 to the strength of the more traditional, noncrypto native vcs 0:13:51.480 --> 0:13:55.120 because they have you know, much bigger benches of experience 0:13:55.720 --> 0:13:59.040 in those types of policy areas and that regulatory area 0:13:59.120 --> 0:14:01.920 in the how to testify but before the Senate Banking 0:14:01.920 --> 0:14:05.080 Committee area. So it's certainly going to be an interesting 0:14:05.120 --> 0:14:09.160 time for all involved. Yeah. I mean, you see, with 0:14:09.240 --> 0:14:12.000 a lot of the larger, more established VC firms, they 0:14:12.080 --> 0:14:16.600 have legal experts, legal teams who can help growing startups 0:14:16.679 --> 0:14:22.000 navigate this changing landscape for crypto regulation. So I do 0:14:22.120 --> 0:14:26.440 think that there are things that traditional vcs can offer 0:14:27.000 --> 0:14:29.640 these companies, and it'll be interesting to see how crypto 0:14:29.720 --> 0:14:36.600 native vcs evolved to offer similar benefits their portfolio companies. Terrific. Well, Hannah, 0:14:36.600 --> 0:14:38.120 I'm sure we'll have you back on the show soon 0:14:38.280 --> 0:14:40.920 and have a great rest of your San Francisco summer. 0:14:41.520 --> 0:14:45.520 Thank you have a good one. You can find more 0:14:45.520 --> 0:14:47.640 of Hanna Miller is reposing on the Bloomberg terminal on 0:14:47.680 --> 0:14:50.880 Bloomberg dot Com. I'll follow her on Twitter. She's at 0:14:51.120 --> 0:14:54.280 h G. Miller nine. That's h G m I L 0:14:54.400 --> 0:15:01.600 L e Er two nine. On the next episode of 0:15:01.600 --> 0:15:05.840 Bloomberg Crypto, crypto traders are still hoping that October will 0:15:05.880 --> 0:15:09.880 turn into October. But are their hopes misplaced? And what's 0:15:09.920 --> 0:15:13.120 the effect of all this looming regulation on sentiments? Oh, 0:15:13.200 --> 0:15:15.080 and have you heard about some guy named Matt Levine? 0:15:15.600 --> 0:15:22.000 All this and more on the next episode. This is 0:15:22.000 --> 0:15:25.640 Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. 0:15:26.360 --> 0:15:28.480 For more shows from I Heart Radio, visit the I 0:15:28.560 --> 0:15:32.560 Heart Radio app, Apple Podcasts, or wherever you get your podcasts. 0:15:33.360 --> 0:15:35.920 Send us your comments, questions, or suggestions for the show 0:15:36.080 --> 0:15:39.360 to Crypto at Bloomberg dot net or find us on Twitter. 0:15:39.600 --> 0:15:44.320 We're at Crypto. The supervising producer of Bloomberg Crypto is 0:15:44.400 --> 0:15:48.280 Vicky very Galina. Our senior producer is Janet Babin. Our 0:15:48.320 --> 0:15:52.240 producers are Mohammed Faruk and Sharon Barriro. Our associate producers 0:15:52.240 --> 0:15:55.840 are Ty Butler and Moses on Them. Desta wonder At 0:15:55.960 --> 0:16:01.120 is our engineer original music by Leo Sidrin. I'm Stacy 0:16:01.200 --> 0:16:03.000 Maria Shmael. We'll be back tomorrow.