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Weekend Analysis

Crypto startups rewrite the rules of corporate venture capital

Crypto tends to distort and intensify everything it touches. So it should come as no surprise that crypto corporate venture capital arms are upending norms.

Crypto tends to distort and intensify everything it touches.

The value of art is subjective. The value of an NFT defies explanation. Gaming companies make money off of users. Blockchain gamers make money off of each other. Day trading stocks is risky. Day trading cryptocurrencies is like base jumping in one of those flying squirrel suits.

So it should come as no surprise that crypto corporate venture capital arms are upending norms.

CVCs typically try to make money in a way that benefits the parent company’s strategy. In that respect, crypto CVCs aren’t all that special: They’ve made money and grown the ecosystem, to the benefit of all involved.

These startups-turned-investors are remarkably active. They back rivals and underwrite bailouts—and some are making a fortune along the way. Which makes them inescapably odd.

Crypto startups may simply be borrowing from the “coopetition” approach that gave the garage entrepreneurs of early Silicon Valley an advantage over tech conglomerates. They’re just taking it up a notch, playing the role of both founder and funder.

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The ride together, die together approach of crypto CVCs fits the sector’s collectivist culture. The blockchain experiment is still proving that it is not merely a solution in search of a problem, that decentralized tech will fulfill needs in ways that powerful platforms have failed. Coopetition may be the way to meet that challenge.

In a world where digital assets are meant to move around a network, it follows that the larger the network, the greater the potential value of that asset. A Porsche in a garage may look lovely, but you don’t know its true value until you take it on the Autobahn.

“Web3 is all about the shared network effect,” said Yat Siu, co-founder and chairman of Animoca Brands, a blockchain game company that frequently invests in other startups. “It makes sense for us to invest in all the businesses that can build value on top of each other.”

A similar argument underpins platform tech company VC arms like Salesforce Ventures, Amazon‘s Alexa Fund and Microsoft‘s M12. Invest in companies building on the platform, and the value of the platform increases.

But nobody owns the blockchain, so the amount of strategic value captured by a crypto CVC investment is rarely straightforward.

Paying it forward

Startups that invest in other startups are typically the exception, but in crypto, they seem to be the rule.

Since the beginning of 2021, about half of all crypto VC deals included participation by a fellow crypto company, amounting to more than 1,300 deals, according to PitchBook data.

Animoca Brands has made more than 150 investments and backed many of crypto’s biggest names, including OpenSea, Dapper Labs and Sky Mavis. It has done so with a distributed approach to dealmaking. The company has an investment team, but checks can also be written by members of the product team, Siu said.

Here’s another way blockchain startups are upsetting CVC norms: They unabashedly invest in rivals.

This isn’t totally without precedent. Ford backed EV truck maker Rivian, and Tyson Foods invested in Beyond Meat, for example. But Tyson sold its stake before launching its own plant-based burger. And Ford relinquished its board seat and ended a collaboration with Rivian prior to launching the electric F-150, which Ford reportedly argues isn’t a true competitor to Rivian’s luxury truck.

Crypto startups, by contrast, show little sensitivity to apparent conflicts.

Coinbase, arguably the godfather of crypto CVC, has made investments in competitors BlockFi and FTX. Even more norm-altering was Coinbase’s decision to launch an NFT marketplace after it had invested in OpenSea, the leading NFT marketplace. (Andreessen Horowitz has led rounds for both companies, a possible sign that crypto weirdness is contagious.)

Meanwhile, Animoca Brands has invested in dozens of blockchain gaming companies. And OpenSea has paid Coinbase’s favor forward by investing in Formfunction, yet another NFT marketplace.

Two theories of crypto coopetition

The simplest explanation for why crypto startups are enthusiastically investing in each other is that they’re getting rich.

Coinbase’s venture portfolio, which cost $352 million, could be worth about $6.6 billion, according to Oppenheimer analyst Owen Lau. About 20% of Coinbase’s capital is reserved for strategic investment, and it primarily invests in seed- and early-stage rounds.

For some, the spoils of investing can be personal: FTX Ventures’ $2 billion fund is financed in part by CEO Sam Bankman-Fried.

And even in a period of flat or declining VC valuations, those of blockchain startups can’t stop climbing.

Another explanation is that the crypto community, and especially trading platforms like Coinbase, need to diversify away from bitcoin and the boom-bust cycles of cryptocurrency trading. The proliferation of venture funds at blockchain startups is one way to ensure that no good idea goes unfunded.

This need might explain one of the weirdest crypto CVC deals of all. Earlier this month, crypto exchange Binance decided to bail out Sky Mavis, whose leading game “Axie Infinity” was robbed of cryptocurrency worth more than $600 million in a hack.

Justifying the decision, Binance CEO Changpeng Zhao said it was “necessary” to help Sky Mavis, given the gaming company’s prominent position in the crypto industry.

The actions and message suggest that Sky Mavis is too important to fail. Blockchain needs killer apps, and the far-from-perfect “Axie Infinity” game—whose business model is frequently compared to a pyramid scheme because of its reliance on money from new users—is among the best it’s got.

In his recent book “The Power Law,” Sebastian Mallaby argues that Silicon Valley’s success in the early days of personal computing is owed to a large number of small companies engaging in “coopetition” with each other.

At the time, nobody really knew what a personal computer was or why people might want one. The collaborative approach gave Silicon Valley an edge over more established electronics corporations because, as a collective, startups were able to run more frequent experiments than any one company could internally.

Venture capitalists facilitated the network effect both directly, through their networks, and indirectly, through the shared language of money.

A similar argument could be made within blockchain tech today. Nobody really knows what the final objective of the crypto experiment is, and the industry needs to try as many things as quickly as possible to find out.

The only way to do that is by working together and throwing money around, norms be damned.


Featured image by Boris Zhitkov/Getty Images

  • james-thorne.jpg
    About James Thorne
    James Thorne is a Seattle-based managing editor overseeing PitchBook’s venture capital coverage and data journalism initiatives. He previously reported for GeekWire, Reuters, CNBC and Source Media. A native of Colorado, James graduated from Boston College and received his master’s degree in business journalism from New York University.
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