The crypto venture space has been thrown for a major loop as the world’s largest crypto exchange Binance first signed a letter of intent to buy rival FTX, which had rapidly crumbled in a wild bank-run-like liquidity crunch, and then just one day later, the deal fell through, with Binance backing out. But the outcome might not matter: Crypto VC has been shaken to its core.
“The narrative is just so negative, and will be for a while now,” says David Pakman, managing partner at crypto-focused firm CoinFund, which owns a small stake in FTX (CoinFund’s investment was made before he joined the firm in 2021 from traditional tech VC firm Venrock, he says).
As they say, hindsight is 20/20, and many of Silicon Valley’s biggest VC firms are surely wishing they had a time machine to go back and pull their check from FTX. But CoinFund’s Pakman tells me his firm has internally been discussing a few key takeaways from the debacle over the last 24 hours.
First and foremost, he notes that for startup valuations, “everything [will come] down even further in our mind than what they were yesterday.” Valuations across the board, including in crypto, have been falling in recent months, but bigger cuts post-FTX are already happening. Pakman tells me he had conversations on Wednesday with four companies that are prospective investments nearing the decision stage with CoinFund. “This is how topical it is: that we're discussing revisiting valuation late in the process, given the market events in the last 24 hours,” he says.
And CoinFund isn’t alone: David Nage, a portfolio manager at crypto investment firm Arca’s $34 million venture fund, Arca Endeavor, says that in the last 24 hours they had a conversation with a project they were interested in funding, during which they told them that “things have materially changed” and the “market is not going to be as open to a valuation that you're trying to fetch as opposed to one that we think is more realistic in this current market dynamic,’” he told me.
Outside of valuations, Pakman notes that the founder profile for prospective investments may be under greater scrutiny now, too. “We need founders who are committed to the core mission and not adding layers of additional risk onto the business. It's a hard thing to assess, but it's part of having the conversation with entrepreneurs at the early stage,” he notes. Of course, no VC firm signs a term sheet imagining the founder’s firm will blow up in spectacular fashion, but Pakman argues that part of an investor’s job is to “understand how risk averse or risk welcoming” the founder is, and “is this founder going to take your acceptable level of risk, or...worse than that?” That’s a conversation investing teams are having that he believes will now be magnified.
Related is the question Arca’s Nage raises: “What type of founder is going to be coming into digital assets now?” If the market takes a further, and longer, plunge, will that dry up the “huge crop” of founders coming into crypto from the traditional tech space?
Lastly, governance, and particularly board-level governance, is something that’s looking ever more critical in light of the FTX mess: “It raises the importance of board seats, which, in traditional tech, investors of our size were always used to getting.…As you saw in crypto [and with FTX], there was less of that,” Pakman notes. Indeed, as Axios’s Dan Primack and others pointed out, it’s murky if FTX even has an actual board. Pakman believes “we'll see a big swing back towards governance and transparency: What kind of reporting are we getting? Some crypto projects have been loose and fast with that,” he suggests, “and that'll change very quickly.”
When capital becomes less available, and valuations go down, “investors will argue not just for better pricing, but for a bunch of more controls,” he argues.
Now, a lot of these points only bring up more questions in my mind: Why would such major VCs like Sequoia and Lightspeed Venture Partners sign big checks and not even get an official board seat? (Sequoia directed Fortune to a tweet regarding the investment, and Lightspeed didn't return a request for comment by press time.) Are FTX investors privately worried about or perhaps rethinking their due diligence processes? Will this dampen LP appetite for crypto, as some analysts have suggested, even more? Will we see VC firms marking down their portfolios six months from now at huge discounts?
There are clearly more questions than answers right now. But Arca’s Nage raises one that I think all of us are currently wondering about: “How much more can the industry handle?”
Twitter’s potential next CEO? Sriram Krishnan has been investing in Web3 for a16z as a general partner for a while, but lately, he’s been spending more time at Twitter HQ with Elon Musk following the acquisition—a homecoming of sorts, given he previously worked in product at Twitter. My colleague Kylie Robison dove into how Krishnan has emerged as a “key lieutenant” in the new Twitter takeover, and why he may be in line for the top job if and when Musk steps down. As Robison writes, “Krishnan is well positioned to walk away with the prize in what may be an audition for the top job.” Read her story here.
Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.
Correction: This story has been updated to correct the size of Arca's venture fund to $34 million, not billion.
