Big crypto companies invest in small ones. What happens in a crisis?

The sector’s corporate venture funds won’t be sitting on the sidelines in a crypto winter.

Digital generated image of bitcoin sign made out of ice melting on black background.

The crypto industry has seen crypto winters before, but this one is different.

Illustration: Andriy Onufriyenko/Moment/Getty Images

The crypto industry has seen crypto winters before. The price of bitcoin falls, investors pull back as they retreat from losses and startups go lean (or go under) as they try to survive. A major difference with this crypto winter emerging in 2022 is that the companies feeling the frost are also the ones doing the investing.

The last few years saw crypto companies play an active part in the crypto investing explosion. FTX Ventures put aside a $2 billion fund, and Binance raised $500 million to back the next wave of blockchain startups. The challenge now is that, as many companies cut their staff and trim costs, crypto corporate venture capital will have to balance taking advantage of opportunities in a crisis while navigating the pressure to conserve cash. Investors that touted the upside of access to a corporate balance sheet are now feeling the downside pinch.

“The budget going to the venture arm of these corporates is likely going down,” said Oppenheimer analyst Owen Lau, who covers companies like Coinbase. “It’s just hard to find an argument when they’re downsizing that you’re allocating more money into this venture, which typically invests in more longer-term-duration assets and does not generate immediate return for a company.”

It’s a tricky balance between short-term cash needs and the long-term strategic plays that can end up being the “hidden value” in companies like Coinbase, as Lau calls it.

The crypto exchange has one of the most active corporate VC arms across the tech industry, at times doing more deals than well-known Big Tech firms like GV (one of Alphabet’s funds) and Salesforce Ventures. But Coinbase has also been one of the hardest hit in the last few weeks. The company went from instituting a hiring freeze to rescinding offers to new hires. On Tuesday, it announced it was letting go of 18% of its staff.

Coinbase wasn’t spared in the layoffs with at least one team member posting publicly that they were no longer working with the company. (Coinbase declined to comment on the number of folks affected on the team.) But it doesn’t mean that Coinbase will no longer invest or that its budget has been majorly slashed.

“Coinbase Ventures does exist and is still very much alive. We just had our investment committee meeting today,” said Coinbase Head of Corporate Development and Ventures Shan Aggarwal when asked if it also fell victim to cost-cutting plans. “Despite the market conditions and market turmoil, we’re still very much continuing to invest.”

That doesn’t mean it's full steam ahead for Coinbase or anyone like in the market heyday of 2021. The deal pace has slowed down, both because founders don’t need a ton of capital, having raised a ton of money, and because some investors are tightening their belts and raising the bar of what they’re going to invest in, Aggarwal said. Crypto VCs are also in a stage of price discovery as they figure out what the new normal is going to be — which is harder to do when there aren’t many public market comps out there.

The upside of a pause for price discovery is the widespread belief that this is actually a great time to find deals. At the Consensus conference last week, the mood was still buoyant, with no one even saying “crypto winter” (out loud, at any rate).

Whether it’s a crisis or a bump in the road, the market meltdown and uncertainty has some companies taking advantage of the time to go deeper in investing.

Binance Labs just raised a $500 million fund in early June, including from outside investors like Breyer Capital and DST, to fund more blockchain and Web3 companies. The investment group is looking to take advantage of the price uncertainty to get better returns, Binance.US CEO Brian Shroder told Protocol’s Benjamin Pimentel.

“Frankly speaking, Binance Labs is in a really great spot right now because the valuations for a lot of these firms will be depressed given the crypto winter, and the ones that survive this winter will thrive in a bull market period,” Shroder said. “So to the extent that investors are actually investing now, that actually has kind of the greatest amount of return from my perspective.”

Coinbase actually got its start in the last crypto winter in early 2018 when it started investing in companies like OpenSea. Aggarwal isn’t fond of reminiscing on the price swings of that time — when bitcoin fluctuated from nearly $20,000 to $3,000 in 2017 to 2018 — but the turmoil helped investors like Aggarwal find the true believers.

“I'll sound like the ‘Oh, I've been in the space for a long time’ old guy at this point, but I look back on those days and I think I cherish them a lot, because from an investing perspective, the signal-to-noise ratio was a lot higher,” Aggarwal said.

History could repeat itself this crypto winter if other firms follow Coinbase’s path. In a pullback, less-competitive deals means there could be room in the cap table for other, smaller crypto companies and new investors, said PitchBook crypto analyst Robert Le.

What makes the crypto CVC space unique in the broader VC ecosystem is that there’s much more of an openness and a willingness to accept money even from a competitor. That makes the barrier to entry for a corporate VC even lower.

“The whole ethos is a rising tide floats all boats,” Le said. “Because we're at such an early stage of the development of the crypto space, there is acceptance of new projects accepting capital from Coinbase, even though they're developing a competitive product. I think once the market matures, you’ll see less of that, but right now you’re seeing a lot of investing in competitors.”

The question now is whether the tide can rise if the ocean is frozen over.

PitchBook’s Le expects crypto CVC to fall back roughly in line with broader VC investing. Unlike with the last crash, which a lot of CVCs sat out, Le doesn’t think any firm will choose to sit on the sidelines this time. The wild card here is that, unlike the 2018 crypto winter, this one coincides with markets tightening, rising inflation and widespread economic uncertainty.

“The broader implications of that on the funding environment are going to be very different. It could deter many founders from starting companies if they don't feel that there's sufficient investment capital for their business, and that's something that we're still trying to get our heads around,” Coinbase’s Aggarwal said. “It's very dynamic, and it's very fluid.”


Judge Zia Faruqui is trying to teach you crypto, one ‘SNL’ reference at a time

His decisions on major cryptocurrency cases have quoted "The Big Lebowski," "SNL," and "Dr. Strangelove." That’s because he wants you — yes, you — to read them.

The ways Zia Faruqui (right) has weighed on cases that have come before him can give lawyers clues as to what legal frameworks will pass muster.

Photo: Carolyn Van Houten/The Washington Post via Getty Images

“Cryptocurrency and related software analytics tools are ‘The wave of the future, Dude. One hundred percent electronic.’”

That’s not a quote from "The Big Lebowski" — at least, not directly. It’s a quote from a Washington, D.C., district court memorandum opinion on the role cryptocurrency analytics tools can play in government investigations. The author is Magistrate Judge Zia Faruqui.

Keep ReadingShow less
Veronica Irwin

Veronica Irwin (@vronirwin) is a San Francisco-based reporter at Protocol covering fintech. Previously she was at the San Francisco Examiner, covering tech from a hyper-local angle. Before that, her byline was featured in SF Weekly, The Nation, Techworker, Ms. Magazine and The Frisc.

The financial technology transformation is driving competition, creating consumer choice, and shaping the future of finance. Hear from seven fintech leaders who are reshaping the future of finance, and join the inaugural Financial Technology Association Fintech Summit to learn more.

Keep ReadingShow less
The Financial Technology Association (FTA) represents industry leaders shaping the future of finance. We champion the power of technology-centered financial services and advocate for the modernization of financial regulation to support inclusion and responsible innovation.

AWS CEO: The cloud isn’t just about technology

As AWS preps for its annual re:Invent conference, Adam Selipsky talks product strategy, support for hybrid environments, and the value of the cloud in uncertain economic times.

Photo: Noah Berger/Getty Images for Amazon Web Services

AWS is gearing up for re:Invent, its annual cloud computing conference where announcements this year are expected to focus on its end-to-end data strategy and delivering new industry-specific services.

It will be the second re:Invent with CEO Adam Selipsky as leader of the industry’s largest cloud provider after his return last year to AWS from data visualization company Tableau Software.

Keep ReadingShow less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Image: Protocol

We launched Protocol in February 2020 to cover the evolving power center of tech. It is with deep sadness that just under three years later, we are winding down the publication.

As of today, we will not publish any more stories. All of our newsletters, apart from our flagship, Source Code, will no longer be sent. Source Code will be published and sent for the next few weeks, but it will also close down in December.

Keep ReadingShow less
Bennett Richardson

Bennett Richardson ( @bennettrich) is the president of Protocol. Prior to joining Protocol in 2019, Bennett was executive director of global strategic partnerships at POLITICO, where he led strategic growth efforts including POLITICO's European expansion in Brussels and POLITICO's creative agency POLITICO Focus during his six years with the company. Prior to POLITICO, Bennett was co-founder and CMO of Hinge, the mobile dating company recently acquired by Match Group. Bennett began his career in digital and social brand marketing working with major brands across tech, energy, and health care at leading marketing and communications agencies including Edelman and GMMB. Bennett is originally from Portland, Maine, and received his bachelor's degree from Colgate University.


Why large enterprises struggle to find suitable platforms for MLops

As companies expand their use of AI beyond running just a few machine learning models, and as larger enterprises go from deploying hundreds of models to thousands and even millions of models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

As companies expand their use of AI beyond running just a few machine learning models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

Photo: artpartner-images via Getty Images

On any given day, Lily AI runs hundreds of machine learning models using computer vision and natural language processing that are customized for its retail and ecommerce clients to make website product recommendations, forecast demand, and plan merchandising. But this spring when the company was in the market for a machine learning operations platform to manage its expanding model roster, it wasn’t easy to find a suitable off-the-shelf system that could handle such a large number of models in deployment while also meeting other criteria.

Some MLops platforms are not well-suited for maintaining even more than 10 machine learning models when it comes to keeping track of data, navigating their user interfaces, or reporting capabilities, Matthew Nokleby, machine learning manager for Lily AI’s product intelligence team, told Protocol earlier this year. “The duct tape starts to show,” he said.

Keep ReadingShow less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories