As the crypto market continues to plummet, founders in the space are struggling to hold on to investors who are now trying to minimize their risk and backing out of funding rounds.
This week, the global crypto market capitalization fell below $1 trillion for the first time since January 2021. As many companies prepare for a potential recession, founders building crypto startups are still trying to raise money amid the market chaos.
Earlier this month, a number of investors told TechCrunch that there was a valuation reset going on, and now is “the time to buy” as the market shifts to a VC-friendly landscape. But not every founder is happy with the way they are being treated now that investors are back in the driver’s seat.
“Won’t call out names, but there are a number of VC firms playing games with founders when it comes to fundraising,” Imran Khan, a core contributor for the DAO and web3 accelerator Alliance, tweeted. “Turns out investors are ghosting and or forcing founders to give up more. When founders invite investors, it should be considered a privilege, not a sales deal.”
Two web3 startup founders who spoke to TechCrunch under the condition of anonymity said VC firms not staying true to their words has cost them time, money and more.
“We started raising about two and a half months ago, when markets were rosy and everything was going well,” the founder of an NFT-focused startup said. “We got commitments, and then the market obviously crashed hard after the [Terra/LUNA] situation.”
The founder said one traditional VC investor bought him a swanky beachfront lunch during the Bitcoin Miami conference in April to persuade him to let him into the company’s funding round. “After lunch, he committed to a $250,000 investment, and then when he found out the other investors [in the round], he upped to $500,000. He subsequently changed his mind after the UST Terra crash.”
“That’s when I started thinking, what does commitment even mean to them? If you’re committed, you understand you’re in the hard times and the good times,” the founder said.
The founder declined to disclose the name of the VC firm, but said it’s “a big VC backed by a big bank in Europe, so it’s not like they have liquidity problems; they just got scared. But startup investing is fundamentally risky, so why get in it if you’re going to back out?”
Luckily for the startup, it began fundraising ahead of the UST and LUNA meltdown in early May and ended up oversubscribed after the crash.
“If it happened today, we would be in a bad position,” the founder said. “When they backed out after the UST situation, the market kept getting worse and it became harder for people to raise.”
But not all startups had the same luck, bittersweet or otherwise.
Valuation, quartered
The founder of a web3 gaming platform told TechCrunch that until two lead investors pulled out of their round, it was looking to raise about 50% more capital at twice the price that it ultimately managed.
After the lead investors left the deal, the startup’s valuation fell to a quarter of what it would have been earlier, and it struggled to find another lead investor at the same price. This subsequently caused every following investor who would have brought capital at the prior valuation to then offer half of that. “Even though they weren’t exposed to LUNA or UST, it has some ripple effect,” the founder said.
“Unless your [crypto] project is getting good traction, no one is getting a valuation over $30 million right now,” he said.
Similar to the NFT startup, the gaming startup also saw walls crumbling in as the now-dead algorithmic stablecoin, UST, depegged from its 1:1 ratio and collapsed.
“One of the [lead] investors had exposure to UST; no one knows how much, but they lost a significant amount of money. I was told they backed out of a bunch of deals, not just mine,” the gaming startup founder said. “They committed, and it almost felt like they saw it coming; there was a lack of urgency on their part to get the deal done.”
On the other hand, the startup’s other lead investor was pushing to get the deal signed ahead of the UST collapse, the founder said. “[They] were super keen on getting the deal done, and said, ‘We need to get it done, we need to get it done,’ so I assumed they saw the UST situation coming.”
After UST and LUNA lost over 99% of their value within a few days, the founder said both of the lead investors ignored his emails for over two weeks, and then finally pulled out of the deal.
“It feels gut-wrenching; it feels terrible. I feel like I have to go to physical therapy,” the gaming founder said.
Traditional and crypto-native VCs show lack of commitment
The founder of the NFT startup said a lot of non-crypto VCs, or traditional investment firms, “were very quick to run” and he felt “they have low commitment.”
On the other hand, he felt crypto-native VC firms were “outstanding” because they had exposure to the market and better understood the cyclical nature of crypto.
“They’ve been the quickest to sign papers, bring money and follow through on what they committed, and I think it’s because they fundamentally believe in crypto,” the founder said. “A lot of Web 2.0 or traditional VCs just got into crypto because they saw rapidly growing prices.”
But the gaming founder disagreed, saying, “It’s shocking how much VCs are willing to take advantage of people in this situation.” Both of the gaming founders’ lead investors were crypto VCs.
“It’s predatory, especially because so many founders are so young, and it feels terrible. There’s a number of funds now that still have capital, but they’re not supporting any valuations,” the gaming founder said. “Yes, a lot of funds were impacted by LUNA and UST, but it’s interesting, too — there were funds completely not impacted by either, and their entire strategy has shifted.”
In general, both founders said a number of VCs are still eager to invest in web3 startups. But only with caveats: If you cut your valuation in half and have a good team and backers, they’ll be excited, according to the gaming founder.
“Getting them to [invest] is a different story,” the gaming founder said. “It feels like now everyone is trying to take advantage of me, which is shitty, but what other option do I have? It feels so dishonest.”
Alliance’s Khan feels that at times of great uncertainty, we want founders determined to go all-in on building the future of crypto. “When you have allocators acting out of their own self-interest, it dissuades founders and slows the rate of innovation. Companies like OpenSea and Uniswap were built in the last bear market, and we expect many more during this bear market.”
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