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Venture Capital and Crypto – Key Takeaways for Family Offices and Institutional Investors

Institutional investors almost doubled the money they poured into venture capital over the past year and a significant proportion of those funds went into the crypto and blockchain space. According to a report published by Galaxy Digital Research in January 2022, venture capital firms invested almost $33 billion into startups active in the crypto and blockchain technology sectors. The venture capital invested in crypto in 2021 was higher than all previous years combined. In 2021, deal count also stood at an all-time high of more than 2,000, almost twice as many as the year before. Venture capital presents an interesting area for institutional investors and family offices to explore, as it offers an alternative avenue for gaining exposure to the crypto space.

Crypto Venture Capital and Family Offices

The companies receiving the most amount of funding – approximately 43% of all crypto funding – were those active in exchange services, trading, investing and lending of crypto assets.  17% of funding went into startups in the non-fungible token (NFT) space, as well as DAOs (Decentralized Autonomous Organizations), and the metaverse. Other areas that attracted significant venture capital attention include decentralized finance, custody and other crypto infrastructure companies.

One interesting trend to note is that the majority of crypto venture capital funding went to late-stage companies. According to an Institutional Investor article, Bill Barhydt, founder and CEO of the crypto wealth management platform Abra, notes: “A few years ago, there was no late-stage funding in the crypto space,”. Now however, crypto companies are becoming more and more profitable and attracting mostly late-stage capital – a phenomenon that can be partially attributed to the growing maturity of the crypto space.

Venture capital investments in crypto are emerging from both crypto-focused venture capital firms, as well as traditional ones. Crypto-focused VC firms include the likes of Coinbase Ventures – the VC arm of prominent crypto exchange Coinbase -, Dragonfly Capital, Andreessen Horowitz’s A16z, as well Electric Capital – the last of which just recently raised $1 billion dollars for two new crypto venture capital funds.

However, crypto VC firms are not the only ones pouring money into the space; traditional venture firms, such as Sequoia Capital, are also entering crypto. Recently, Sequoia Capital has launched a new fund to invest exclusively in cryptocurrency. The 600-million-dollar Sequoia Crypto Fund is part of the venture capital firm’s plans to become more actively involved in the crypto market, more specifically “token-only projects”. The company noted in a statement: “Sequoia Crypto Fund complements our broader commitment to crypto. Our goal with this fund is to participate more actively in protocols, better support token-only projects, and learn by doing ourselves.”

Sequoia’s active involvement in the crypto ecosystem is part of a wider trend of traditional venture firms entering the digital assets space. What this means for family offices and other institutional investors is that there is a continually broadening variety of methods available for investing in the crypto space. Buying crypto tokens directly is by no means the only way to gain exposure to this new and rapidly growing asset class. Going the equity route is a viable alternative and one way this can be done is via venture capital funds. DeFi Consulting Group works with numerous VC funds already active in the crypto space or looking to enter it.

Another interesting avenue for family offices and institutional investors to gain exposure to crypto is via crypto hedge funds – hedge funds focusing solely on investing in crypto assets. To gain more insights on hedge funds in the crypto space, read DeFi Consulting Group’s last blog post here.

In late 2021, BNY Mellon Wealth Management surveyed 200 key personnel at family office firms, including 56 single-family offices and 144 multi-family offices with at least $150 million assets under management. The results showed that almost 80% of the family offices in the study have some level of interest in or exposure to cryptocurrencies. While the majority of family offices with capital already deployed in crypto use exchange-traded funds and crypto trading platforms, such as Coinbase, for their investments, some do choose to enter the space via venture capital firms – thus gaining exposure to crypto through investments in startups active in the ecosystem. Given the operational complexities involved in directly buying crypto tokens – such as having to deal with custodianship and setting up the necessary infrastructure – going the equity route via a VC fund may be a more appropriate fit for some family offices and institutional investors. And with more and more crypto-focused VC funds emerging, the offering in this field is growing steadily. DeFi Consulting Group helps family offices and institutional investors formulate and implement their strategy on entering the digital assets space, and one way to do so is through venture capital.

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