How VCs Invest In Crypto Will Be Changed By FTX’s Spectacular Fall

As  Sam Bankman-Fried’s apology tour continues and investors and regulators sift through the rubble of FTX, those in the industry say some significant investing trends should emerge in crypto and beyond due to the exchanges’s dramatic collapse as 2023 dawns.

Due diligence, asset sell-offs and increased scrutiny — especially on lenders and exchanges in the sector — are likely.

“I was pretty shocked to see the scope of what happened at FTX and some of the impacts it had across the broader ecosystem — how intertwined it was,” said Christian Lopez, head of blockchain and digital assets at Cohen & Co. Capital Markets.

FTX’s fall also impacted its venture arm — FTX Ventures — Bankman-Fried’s other trading firm Alameda Research, and countless other lenders and exchanges, sending reverberations throughout the industry and likely causing most investors significant reflection.

Big names

Some of the largest investors in both crypto and blockchain — in terms of total amounts of the rounds they participated in — are some of the biggest names in the venture and growth capital game, according to Crunchbase data.

Big players such as Tiger Global, Andreessen Horowitz and Lightspeed Venture Partners continued to place bets in the sector — some at a greater pace than even 2021. However, some of them and others may change how they invest in the industry in the wake of the FTX collapse.

Lopez said while the market favored startups while fundraising the last several years, this year’s venture slowdown has swung the pendulum back to investors. FTX’s problems likely only exacerbated that, allowing investors to do proper due diligence when investing — with VCs no longer in the “go fast, go big” mode.

“In the last cycle, things just moved so fast, so quickly,” Lopez said.

Part of that process of proper due diligence will not just be examining the books of crypto firms, but also having software engineers look at the infrastructure in place at some of these startups to make sure “the rails” that allow for the business are developed and sound.

Lenders and exchanges

The startups many VCs and growth investors look at may not include crypto and lenders, said Yash Patel, general partner at Telstra Ventures, who invests in crypto startups, including FTX.

The fallout of FTX and others, including BlockFi and Celsius may cause investors to shy away from that particular field, at least in the short term. Crypto exchanges Kraken, Bybit and Swyftx all announced layoffs this week.

“Investors will focus on what is on the balance  sheet,” he said. “They’ll look to see if they can generate real fiat revenues. Lenders will need audits.”

Patel said those startups may be dependent on raising debt, cutting cash burn or raising inside rounds to survive what could be a difficult 2023.

Lopez agrees centralized lenders may face a hard road of convincing investors to part with their money after the FTX implosion.

Hunting bargains

On the flipside, decentralized platforms — where customers actually hold their own digital assets such as on Uniswap — should continue to intrigue investors as they could gain in popularity (something we’ve mentioned before).

In general, Lopez said, people can expect to see a lot of crypto financings in the next three to six months focusing on restructuring situations — companies selling off assets or parts as they try to regroup.

That could whet the appetites of many firms looking for a bargain. FTX-owned LedgerX, a derivatives exchange, would be the type of asset that could attract significant interest, he said.

Just this week, Reuters reported Goldman Sachs is looking to spend “tens of millions of dollars to buy or invest in crypto companies” with FTX’s fall tamping down valuations. Other similar big banks also could see an opportunity to come into a market looking for more trust and regulation.

Another aspect related to FTX and its bankruptcy to remember is the nearly 50 investments FTX Ventures made this year since announcing its first $2 billion funding in January. Many of those investments included the contingency that the invested-in startup would allocate some of that money to the FTX platform, Lopez said.

Those startups now have to wait to see what may be left of their assets as FTX is unwound and what their next steps could be.

Beyond crypto

Another question remaining is what effects FTX’s fallout will have on Web3 development. While funding in Web3 is down from last year, it still is a space that excites investors and many see huge potential in the sector.

Companies such as Mysten Labs and Aptos Labs closed huge rounds this year — both received funding from FTX Ventures — as many eye a decentralized web.

“I think it’s already affected it, that I think the tentacles of crypto have affected it a bit, but I think it’s also correlated with the broader market downturn,” Lopez said.

“But that being said, if there is a world, if there is a kind of subspace within crypto that’s less affected by that, it is going to be the … likes of Mysten Labs and the likes of Aptos,” he added. “That’s where investors know that there is a future.”

Patel said there is still significant interest in areas of the blockchain related to sports, entertainment and supply chain.

“I really don’t think you’ll see that area affected as much,” he said.

Illustration: Dom Guzman

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