Times are hard for venture capital investors right now. But for VCs who’ve raised billions of dollars to invest in the crypto space, things are looking even tougher.
The way that crypto VC operates is full of quirks, one being that the presence of coins like Ethereum, Solana, and countless projects' tokens has added a liquid, and public, element to venture. Investors who bought into crypto tokens saw massive returns for their funds when those tokens were going to the moon—but as they came crashing back down to earth over the last year, those once-juicy returns are looking a little less ripe. The trouble is, for the unaccustomed limited partner, that can be a jolting ride.
My colleague Leo Schwartz and I teamed up for a new deep dive on the state of crypto venture capital in 2023. And what we found paints a fairly bleak picture.
As Robert Le, a crypto analyst at PitchBook, put it to us: “There’s no way to hide behind the opaqueness of the private markets for a crypto fund with token holdings.” Case in point:
Kavita Gupta, the founding managing partner at the crypto-focused Delta Blockchain Fund, told Fortune that at the height of the bull market, her fund was up 600%, buoyed by its token investments. Today, it’s up just 18%. Like many crypto-native VCs, Gupta said she’s not concerned.
“If you believe in those projects and you hold them long enough, there’s going to be a bull market again,” she told Fortune…The tricky part is convincing LPs to remain calm. Gupta’s investors include crypto founders, but also high net-worth individuals, family offices, and institutions—and not all of them are accustomed to the cyclical whiplash of the industry.
“We continuously have to educate the family offices who are, like, a shipping family industry from Vietnam,” she said. “They’re like, ‘What the hell did you do? You were 6x up!’”
Even mega hedge fund Tiger Global is now contending with what to do with crypto tokens. In late 2021, the firm invested in crypto-powered recruitment platform Braintrust—but instead of equity, Tiger received tokens. We reported Tiger has been selling those tokens since early 2023:
For Tiger, the broader meltdown translated into hefty losses in its venture investments, prompting the firm to reportedly look into selling some of its holdings to pacify LPs. Ordinarily, this would entail seeking buyers for its shares on the secondary market, a laborious process compared to dumping tokens. In the case of Tiger’s BTRST tokens, however, the firm could simply sell them directly on crypto exchanges as soon as a lock-up period expired.
According to on-chain data reviewed by Fortune, Tiger wallets have been dumping Braintrust tokens since January, tapping institutional investment firm FalconX to sell hundreds of thousands of tokens, which contributed to the price slumping over 20%. Tiger declined to comment.
Cratering token prices creates a dilemma for venture investors: Unlike private companies, where a decline in valuation isn’t immediately apparent during a bear market, losses at token-based projects like Braintrust can be seen by everyone right away.
Meanwhile, many VCs are moving onto other buzzy areas like A.I. as the crypto and Web3 space lost much of its allure for more generalist VCs following the spectacular collapse of FTX late last year. Even crypto-native VC firms like Paradigm began this month to downplay their crypto emphasis on their website, but one LP told us they hadn’t communicated changes to their investors. (Alana Palmedo, Paradigm’s COO, told us in a statement that “We remain as excited and committed to crypto as ever.”)
Ever-optimistic VCs still see plenty of signs for hope and a rebound—even for token strategies (Bitcoin and Ethereum, meanwhile, are on the upswing in recent months). I’ll let you dive into the whole story here, but suffice to say, investors in crypto need a strong stomach.
See you tomorrow,
Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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