Will the craze for crypto startups ever produce the next tech giant?

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TIL HONG KONG office of FTX, a cryptocurrency exchange, is a place where basic needs come after business. Food and alcohol can be found around offices with six screens each. Sam Bankman-Fried, his boss, says he sleeps four hours a night on an ottoman next to his desk, if he’s lucky. He sees little difference between breakfast and dinner, other than “which restaurants are open for delivery”.

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Its turmoil mirrors that of the crypto markets, which never sleep. But it also reflects the speed at which the two-year-old firm is growing. Last month FTX announced a $ 420 million funding round that valued it at $ 25 billion, just three months after investors gave it a price tag of $ 18 billion. The agreement included the the best of the best the investment universe, including BlackRock, the world’s largest fund manager, Teachers’, a $ 170 billion Canadian pension fund, and Temasek, a Singapore sovereign wealth fund.

FTXThe fundraising feast is symptomatic of the growing investor appetite for crypto startups, especially those creating the tools to build a blockchain-based future. In the first nine months of 2021, they raised $ 15 billion in venture capital (CV), five times their total for all of 2020. In the third quarter, 12 crypto unicorns – startups valued at $ 1 billion or more – were born, a record. The heady times remind some venture capitalists of the dotcom era. But they don’t know if they are partying like in 1994 or 1999.

One of the triggers for capital flows is the growing demand for digital silver from retail speculators. who influences CVs to support crypto wallets and exchanges. Investors are also betting that as regulation becomes clearer, institutions will take it more seriously, which will drive demand for crypto tax advisers, analysts and asset custodians, said Matt Burton. of CQFD, a CV solidify. Scorching indicators such as the price of bitcoin, which flirted with a record high of $ 69,000 this week, are fueling excitement.

The boundaries of the industry are also widening. Blockchain startups promote new forms of financial services (decentralized finance), digital ownership (non-fungible tokens, or TVNs) or incentive models (such as in games, where users can earn crypto while playing). TVN companies have raised $ 2 billion so far this year, up from $ 31 million in 2020. Four-fifths of CV the agreements were preliminary rounds.

The most interesting is the arrival of new investors. Successful crypto firms reinvest money in younger ones. The most prolific is Coinbase Ventures, the investment arm of America’s largest crypto exchange, which closed 24 deals in the last quarter. November 5 FTX and other companies started a $ 100 million game fund.

Investors in the deep pockets of traditional finance are also launching. They include well-known venture capital funds, such as Andreessen Horowitz, one of the first backers of Facebook and Skype. SoftBank, a trigger-happy Japanese group, closed six crypto deals in the past quarter. They also include hedge funds and asset managers. These investors have helped complete 15 fundraising rounds of over $ 100 million in the past three months. Together they made up two-thirds of the total CV money spent.

Shan Aggarwal, who runs Coinbase Ventures, says the craze is reminiscent of the dotcom boom of the 1990s, when investors rushed to support the companies that would form the backbone of the web economy. In one respect, the current era is even more impressive: while the dot-com bubble has mainly developed in Silicon Valley, the “bitcom” boom is spreading to Asia ($ 1.4 billion raised this quarter) and Europe ($ 1.1 billion) in addition to America ($ 3 billion). Crypto unicorns are also on the rise in Africa and Latin America.

The question of whether this will produce successes like today’s tech giants remains open. It’s the beginning. The premium collected by crypto companies in 2021 is 16% of the amount collected by fintech companies and 3% of that collected by startups in general. Large deals have taken the average investment round size to $ 21 million, triple the 2020 level, but the median, at $ 4 million, is low.

Some valuations seem silly: In September, Sorare, a fantasy soccer game played on the blockchain, closed a $ 680 million round that valued it at $ 4.2 billion, 22 times sales, or more than the multiple of Facebook when it went public. All of this suggests that some investors will kiss like bandits, while others will burn their fingers. For better or worse, more sleepless nights await.

This article appeared in the Finance & economics section of the print edition under the title “The bitcom boom”


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