Top VC investor claims this form of capital is not necessary for crypto

Naval Ravikant thinks crypto does not actually need the VC approach to financing startups. Paradoxically, the leading investor has supported multiple projects with venture capital. 

The crypto model does not require VC funding, said Naval Ravikant, one of the leading US investors in early-stage products. The statement arrives at the tail end of a trend where crypto projects actually drew in more VC funding than ever, to build some of the most prominent chains and projects. 

Crypto VCs are largely unnecessary.

— Naval (@naval) July 17, 2024

VC was key to the latest batch of startups arriving during the 2021 bull market. Previously, crypto projects relied on the ICO model, which provided high-level funding from regular buyers. The ICO fundraising also did not ensure a fair launch every time, adding problems with the credibility of projects. 

The problem with VC funding is that it helps create low-float projects. Retail investors then notice they are the exit liquidity for those projects, which permanently depresses the token price. 

Funds have moved into crypto space for a decade, as in the case of Pantera Capital. Other big names included Andreessen Horowitz, Sequoia Capital, Coinbase Ventures, and Blockchain Capital. 

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Some of the big names in venture funding also worked to give legitimacy to FTX Ventures, the now-defunct exchange. Sequoia Capital, Black Rock and SoftBank were just a few of the backers that took FTX to prominence. The presence of VC funding also accelerates the cycle of crypto startups, leading to faster exchange listings and more aggressive marketing. 

In 2024, however, even exchanges became skeptical, with Binance increasing the scrutiny of projects with a low initial float. Skepticism about VC accelerated as Worldcoin is preparing for one of its biggest insider unlocks in just a week. WLD was an asset to start trading and gain market exposure with a float of just 1.4% of the supply. 

VC inflows coincide with bull markets

The involvement of VC investors, especially from traditional funds, also gave legitimacy to crypto projects. Inflows of VC coincided with the price of Bitcoin (BTC). Not all VC investments come from outsiders, though. Newer projects get funding from older ICO sitting on ETH and BTC treasuries, who can afford to fund a new startup with only a fraction of that treasury.

But even mined projects are not always fairly launched, as several coins have started with a premine for the team. Fair launch tokens became a trend in 2024, reflected in the creation of meme assets that were fully diluted and immediately available to the community.

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In Q2, VC inflows in crypto also showed no sign of stopping. For the last period, crypto projects received $3.19B in 577 deals. The number of deals fell compared to Q1, but each deal received slightly more funding.

Crypto funding is just a fraction of the global VC market, which also achieved overall growth in Q2. But in the case of crypto, the relatively small size of the market has an outsized effect.

The golden age of the VC market inflows into crypto is now in the past, with a peak in 2021. The current market is still absorbing the token unlocks and inflows. The current market prices showed the market’s capability to absorb selling, but have achieved lower returns for late retail buyers.

VC inflows lag behind crypto market hype

In Q2, the expansion of VC inflows lags behind the trend of the current bull market. The previous crop of investments is now re-estimating its potential returns. Projects are also closely watched for delivering utility instead of just hype. 

Some VC funding is flowing into already established projects, such as the Polymarket prediction hub, Eigen Layer, and the Farcaster crypto social media. 

The slowdown of VC has also affected the game sector. Web3 gaming was one of the main vectors of investment, spearheaded by Animoca Brands. 

Web3 gaming also required a bull market to be sustainable. Most game tokens also felt the pressure from unlocks. Even leading tokens like SAND slid further as early investments were available to liquidate. 

Cryptopolitan reporting by Hristina Vasileva