Fintech

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.”

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