The crypto markets might be red all over, but that isn’t stopping many venture capitalists from investing in the space.
Valuations across the crypto industry are being pulled back and the sector has grown more investor friendly. Many VCs see this period as a great opportunity and are shifting their crypto investment strategies to maximize potential during the bear market. Powering that potential deal-making, a number of large crypto-focused funds launched this week, including Multicoin Capital’s $430 million venture fund, its third and biggest fund to date, and Protagonist’s $100 million fund, focused on early-stage crypto companies.
Like the traditional technology world, crypto works in cycles, Craig Burel, partner at crypto-focused firm Reciprocal Ventures, said to TechCrunch. “During booming times, you get wild experimental applications with new use cases that are out there or fringey, and so many of them break or fall apart and go flat.”
But in bear markets?
“Infrastructure gets built to stand those applications up again but in a successful way. That’s where we tend to focus and lean in during bear markets,” Burel added.
“In 2016, our firm was 20% in crypto and 80% in fintech, and now we’ve flipped that formula at 80% crypto and 20% fintech,” Burel said. “And even that 20% bucket looks like a fintech or traditional finance company, but it’s catering to the crypto market or bridging assets over to DeFi.”
Despite the market conditions, Reciprocal Ventures sees this period as a “ripe” time for investments after recently closing its second fund at $70 million, which was three times oversubscribed. It has deployed about 40% of the capital.
In a similar sense, a fintech-focused firm Portage Ventures sees massive opportunities in crypto right now, but it’s focused on longer-term investments.
“Over the last two years, it has become clear crypto is the risk-on asset class of choice,” Stephanie Choo, general partner at Portage Ventures, said to TechCrunch. “You can debate a lot of things, but you can’t debate that people want to own this.”
Portage, which has $3 billion in assets under management, formed in 2016 as a fintech-focused firm and began investing in the crypto and DeFi space shortly after. The firm believes the core areas it invests in have “huge potential for disruption,” mainly across the B2B and international payments sector.
“Our belief is that some of the most important use cases for crypto will replace existing financial rails,” Choo said. “The real debate amongst our team we’re trying to resolve is in what time frame?”
Some of her co-workers think it’ll take five years; others think it’ll take 20. Choo herself believes it has already started to happen, suggesting that crypto’s replacement of today’s financial frameworks will fully play out over the next decade.
But in a bear market, Portage is focusing on two areas: centralized finance (CeFi) providing access to decentralized finance (DeFi) and onboarding the next generation of crypto consumers in DeFi.
“We think it’s still really early in this space,” Choo said. Regardless, “bull or bear [market], you want to own fundamental infrastructure.”
Long term, Portage sees crypto as a fundamental paradigm shift in technology, Choo said. “I think in 10 years we won’t see this separation of people who only look at crypto and people who don’t look at crypto at all … web3 constructs are going to be embedded everywhere in tech and maybe in other industries, too.”
“During these trying times is when we make real advancements on the infrastructure side that enable new applications that we couldn’t imagine during a bull market,” Burel said. “This time around, I think the application use cases were so much more broad than the previous bull market.”
For example, NFTs were barely discussed during the last bull run, but in 2021 they were all the rage, with a number of different use cases blossoming, such as gaming play-to-earn opportunities, Burel noted.
But this shaky market could last a long time.
“It could be a couple of years that we’re in this,” Choo said. “I do think if you’re an investor in this market, there’s a huge opportunity, but the next two years you might not see measurable traction.”
Her advice? Be patient.
“As an investor, if you’re long-term bullish, it’s an amazing opportunity, but short term you won’t see that many [markups],” Choo said. “You have to be thoughtful about what metrics you’re looking for in the next two years and stick to it.”
Burel said this is Reciprocal Ventures’ favorite time to invest.
“The last year and a half has been crazy. I saw a lot of things for the first time and I’ve been doing this for 5.5 years,” Burel noted. During the most recent bull market, he said he saw some deals finalized within days and seed valuations above $100 million pre-product. “If these things happened three years ago, it would have blown people’s minds.”
Although the market favors investors right now, it’s important to recognize these are just cycles, Burel said. “It’s not the end of the world as we know it; things will get better and improve. It’s about sticking around and supporting the ecosystem when things feel like they’ve gotten really bad.”
People who entered the crypto market briefly — aka tourists — are “already going home,” Burel joked.
“Every time we go through these cycles, the space grows and is left larger than it was before. We’ve seen developers hang around the most,” Burel said. “The people who show up and leave, the tourists, were probably here for speculative or not best incentives that brought them here to the space, but the builders will still be here. They’re still around and so are we.”
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