Crypto Startups Rewrite the Rules of Corporate Venture Capital

Crypto tends to distort and intensify anything it touches.

The value of art is subjective. The value of an NFT defies explanation. Game companies make money from users. Blockchain players make money from each other. Day trading in stocks is risky. Cryptocurrency day trading is like base jumping in one of those flying squirrel suits.

So it should come as no surprise that crypto corporate venture capital weapons are changing the norms.

CVCs generally try to make money in a way that benefits the parent company’s strategy. In that sense, crypto CVCs are not so special: they have made money and grown the ecosystem, to the benefit of everyone involved.

These startups turned investors are remarkably active. They back their rivals and write bailouts, and some are making a fortune along the way. Which makes them inescapably weird.

Cryptocurrency startups may simply be borrowing the “coopetition” approach that gave early Silicon Valley garage entrepreneurs an advantage over tech conglomerates. They are simply taking it one step further, playing the role of founder and funder.

This article appeared as part of The Weekend Pitch newsletter. Subscribe to the newsletter here.

The ride together, die together approach of crypto CVCs fits the collectivist culture of the industry. The blockchain experiment is still proving that it is not simply a solution in search of a problem, that decentralized technology will meet 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 across a network, it follows that the larger the network, the greater the potential value of that asset. A Porsche in a garage may look beautiful, but you don’t know its true value until you pick it up on the Autobahn.

“Web3 is all about the shared network effect,” said Yat Siu, co-founder and president of Animoca Brands, a blockchain gaming 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 VC platform tech companies like Salesforce Ventures, Amazon’s Alexa Fund, and Microsoft’s M12. Invest in companies that build on the platform and the value of the platform will increase.

But no one owns the blockchain, so the amount of strategic value captured by an investment in crypto CVC is rarely straightforward.

paying it forward

Startups investing in other startups are usually the exception, but in crypto they seem to be the rule.

Since the beginning of 2021, roughly half of all crypto VC transactions included the involvement of a crypto firm, totaling more than 1,300 transactions, according to data from PitchBook.

Animoca Brands has made over 150 investments and has backed many of the biggest names in crypto, including OpenSea, Dapper Labs, and Sky Mavis. It has done so with a distributed approach to trading. The company has an investment team, but members of the product team can also write checks, Siu said.

Here’s another way blockchain startups are disrupting CVC rules: They’re brazenly investing in their rivals.

This is not totally unprecedented. Ford backed EV truck maker Rivian and Tyson Foods invested in Beyond Meat, for example. But Tyson sold his stake before launching his own plant-based burger. And Ford gave up its board seat and ended a collaboration with Rivian before launching the electric F-150, which Ford reportedly argues isn’t a true competitor to Rivian’s luxury pickup.

Cryptocurrency 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 disruptive was Coinbase’s decision to launch an NFT market after having invested in OpenSea, the leading NFT market. (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 game companies. And OpenSea has repaid Coinbase the favor by investing in Formfunction, another NFT marketplace.

Two theories of cryptocurrency

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

Coinbase’s portfolio of companies, which cost $352 million, could be worth around $6.6 billion, according to Oppenheimer analyst Owen Lau. About 20% of Coinbase’s capital is reserved for strategic investments, and it invests mainly in seed and seed rounds.

For some, the investment loot may be personal: FTX Ventures’ $2 billion fund is funded in part by CEO Sam Bankman-Fried.

And even in a period of flat or declining VC valuations, Blockchain startups can’t stop scaling.

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

This need could explain one of the strangest CVC crypto offerings of all. Earlier this month, cryptocurrency exchange Binance decided to bail out Sky Mavis, whose leading game “Axie Infinity” was stripped of cryptocurrency. worth more than 600 million dollars 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 cryptocurrency industry.

The actions and the message suggest that Sky Mavis is too important to fail. Blockchain needs amazing applications, and the far from perfect game “Axie Infinity”, whose business model is frequently compared to a pyramid scheme due to its reliance on money from new users, is one of the best it has .

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

At the time, no one really knew what a personal computer was or why people might want one. The collaborative approach gave Silicon Valley an advantage over more established electronic corporations because, as a collective, the startups were able to conduct experiments more often than any other company 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 technology today. No one really knows what the ultimate goal of the crypto experiment is, and the industry needs to test as many things as quickly as possible to find out.

The only way to do it is by working together and throwing money away, to hell with the rules.