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How Three of the Biggest VCs Are Building Their Crypto Strategy
Venture Capital, FinTech
When Union Square Ventures (USV) announced in June that it had invested in Multicoin Capital, a “thesis-driven” cryptofund based in Austin, Texas, it was the latest sign that the industry’s biggest venture capitalists are increasingly pouring money into the cryptocurrency space – and arguably embracing the token economy far more aggressively than most segments of the financial services industry.
However, not every VC is taking the same approach to entering the crypto market. Let’s take a look at how three of the biggest players are building their strategy with digital coins.
Union Square Ventures
With its investment in Multicoin Capital, the New York City-based Union Square Ventures has now invested in six “blockchain/crypto/token funds” over the past 18 months, according to a blog post from USV partner Fred Wilson on the firm’s website. The firm has been a player in the blockchain/crypto space since 2011and ghe companies in this sector make up 15 percent of the USV’s active portfolio and roughly 25 percent of its “recent investments,” according to Wilson.
In addition to Multicoin, USV has also invested in Blocktower Capital, Polychain Capital, Metastable Capital, Autonomous Partners and Placeholder over the past 18 months. It was also a lead investor, along with Andreessen Horowitz, in a $12-million fundraising round for Cryptokitties, the popular Ethereum-based blockchain game.
According to Wilson, USV is taking a “network approach” to its investment in the space because “the blockchain/crypto/token sector has some unique challenges for us and others in the venture capital business.”
“This portfolio of token funds gives USV a much broader reach across the blockchain/crypto/token sector than we would be able to get directly on our own and we also benefit enormously from the dialog and information sharing that exists across this network of investors,” Wilson adds.
However, as Recode’s Teddy Schleifer notes, this network approach “is likely to anger some limited partners who wonder why they are paying a fee to a venture capital fund that is merely recycling their money into a different fund.” In other words, why pay fees to a VC that is investing in a fund that you can just invest in yourself?
Wilson, responding to a tweet from Schleifer, said “we understand our LPs and their interests extremely well and take them into account in our actions.”
Marc Andreessen has been a vocal supporter of cryptocurrency – and one of Bitcoin’s highest-profile early champions. Writing in the New York Times about Bitcoin way back in 2014, Andreessen made the case for the then-fledgling digital coin – the headline was Why Bitcoin Matters – using an explainer that four years later we now associate more with blockchain more than Bitcoin. This digital coin, Andreessen wrote, “gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”
However, while an early supporter of Bitcoin, Andreessen and his firm have now set their sights on a much more ambitious strategy: The A16z crypto fund. Launched in June – but highly anticipated after Recode reported on it back in April – this $300-million venture fund will invest in crypto companies and protocols.
The “fund is designed to include the best features of traditional venture capital, updated to the modern crypto world,” according to Chris Dixon, a general partner for A16z. It is designed to hold investments for 10+ years. (Read more about the fund here.)
As the Times notes, Andreessen Horowitz began “dabbling in cryptocurrencies in 2013, when digital tokens were a fringe business.” It was one of the earliest investors in Coinbase, where Dixon sits on the board along with Katie Haun, who has just been named the first female partner at Andreessen Horowitz – and who will serve on the team for A16z.
Lightspeed Venture Partners
There are currently more questions than answers about Lightspeed Venture Partners’ strategy in the crypto space. Recode reported in May that the firm is considering setting aside an “earmarked pool of cash within a bigger fund to be spent solely on crypto investments.”
Although Lightspeed is still debating its approach to cryptocurrencies, according to Recode – and could even follow Andreessen Horowitz’s lead and launch a separate crypto fund – the “most probable outcome” is to set aside cash for crypto investments within a larger fund.
Lightspeed’s ongoing discussions about how to approach its crypto strategy is something a lot of VCs are currently engaged in, as Recode notes:
Lightspeed’s internal deliberations are just one example of the struggle that venture capital firms face: Nearly every top-tier firm in Silicon Valley is deliberating how exactly they should be set up in order to invest in crypto, which some enthusiasts believe is the next wave of innovation.
But skeptics worry about creating a separate fund — a legally-distinct, independent structure — if the sector melts under regulatory risk or if it isn’t as financially fruitful as its evangelists hoped when raising money.
Lightspeed is already an investor – along with Andreessen Horowitz – in Basis, a New Jersey-based cryptocurrency startup that’s working to develop a new stablecoin. It is also reportedly an investor in Telegram’s massive initial coin offering, according to Recode.