Crypto startups are rewriting the rules for corporate venture capital

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Crypto tends to distort and intensify everything it touches.

The value of art is subjective. The value of an NFT defies explanation. Game companies make money from users. Blockchain players earn money from each other. Day trading stocks are risky. Day trading cryptocurrencies is like jumping into one of those flying squirrel suits.

So it’s no surprise that corporate crypto venture capital weapons are shaking up the norm.

CVCs typically try to make money in a way that benefits the parent company’s strategy. In this regard, CVC cryptos are not that special: they have made money and developed the ecosystem, to the benefit of everyone involved.

These startups that have become investors are remarkably active. They back rivals and underwrite bailouts – and some make their fortunes along the way. Which inevitably makes them strange.

Crypto startups can simply borrow from the “coopetition” approach that gave early Silicon Valley garage entrepreneurs an edge over tech conglomerates. They are just stepping it up a notch, playing both the role of founder and funder.

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The “ride together, die together” approach to crypto CVCs fits the collectivist culture of the industry. The blockchain experience still proves that it is not just a solution in search of a problem, that decentralized technology will meet needs in ways that powerful platforms have failed. Coopetition may be the way to meet this challenge.

In a world where digital assets are expected to move across a network, it follows that the larger the network, the greater the potential value of that asset. A Porsche in a garage may look nice, but you don’t know its true value until you take it out on the highway.

“Web3 is all about the shared network effect,” said Yat Siu, co-founder and president of Animoca Brands, a blockchain gaming company that frequently invests in other startups. “It makes sense for us to invest in all businesses that can add value to each other.”

A similar argument underlies the VC arms of platform tech companies like Salesforce Ventures, Amazon’s Alexa Fund, and Microsoft’s M12. Invest in companies that build on the platform and the value of the platform increases.

But no one owns the blockchain, so the amount of strategic value captured by a CVC crypto investment is rarely straightforward.

pay ahead

Startups that invest in other startups are usually the exception, but in crypto they seem to be the rule.

Since the start of 2021, about half of all crypto-VC transactions included the participation of another crypto company, or more than 1,300 transactions, according to data from PitchBook.

Animoca Brands has made over 150 investments and backed many of the biggest names in crypto, including OpenSea, Dapper Labs, and Sky Mavis. He did this with a distributed approach to trading. The company has an investment team, but checks can also be written by members of the product team, Siu said.

Here’s another way blockchain startups are shaking up HVAC standards: they’re shamelessly investing in their rivals.

It’s not entirely unprecedented. Ford has backed electric truck maker Rivian and Tyson Foods has invested in Beyond Meat, for example. But Tyson sold his stake before launching his own plant-based burger. And Ford gave up its seat on the board and ended a collaboration with Rivian before launching the electric F-150, which Ford says is not a true competitor to Rivian’s luxury truck.

Crypto startups, on the other hand, show little sensitivity to apparent conflicts.

Coinbase, arguably the godfather of the CVC crypto, has invested in rivals BlockFi and FTX. Coinbase’s decision to launch an NFT marketplace after investing in OpenSea, the leading NFT marketplace, changed the standards even further. (Andreessen Horowitz has led tours for both companies, a possible sign that the weirdness of crypto is contagious.)

Meanwhile, Animoca Brands has invested in dozens of blockchain game companies. And OpenSea repaid Coinbase’s favor by investing in Formfunction, another NFT marketplace.

Two theories of crypto-coopetition

The simplest explanation for why crypto startups enthusiastically invest in each other is that they get rich.

Coinbase’s venture capital portfolio, which cost $352 million, could be worth around $6.6 billion, according to Oppenheimer analyst Owen Lau. Around 20% of Coinbase’s capital is reserved for strategic investing, and it invests primarily in seed and start-up rounds.

For some, the spoils of investing may be personal: FTX Ventures’ $2 billion fund is funded in part by CEO Sam Bankman-Fried.

And even in a period of stable or declining venture capital valuations, those of blockchain startups can’t stop climbing.

Another explanation is that the crypto community, and especially trading platforms like Coinbase, need to diversify away from bitcoin and the boom-bust cycles of cryptocurrency trading. The proliferation of venture capital funds in blockchain startups is one way to ensure that no good idea goes unfunded.

This need could explain one of the weirdest CVC crypto offerings of all. Earlier this month, crypto exchange Binance decided to bail out Sky Mavis, whose flagship game “Axie Infinity” was stripped of cryptocurrency worth over $600 million in a hack.

Justifying the decision, Binance CEO Changpeng Zhao said it was “necessary” to help Sky Mavis, given the gaming company’s prominent position in the crypto industry.

The actions and message suggest Sky Mavis is too important to fail. Blockchain needs killer apps, and the far-from-perfect game “Axie Infinity” – whose business model is frequently compared to a pyramid scheme due to its reliance on new user money – is among the best he has.

In his recent book “The Power Law”, Sebastian Mallaby argues that the success of Silicon Valley in the early days of personal computing was due to a large number of small companies engaged in “coopetition” with each other.

At the time, no one really knew what a personal computer was or why people wanted one. The collaborative approach gave Silicon Valley an edge over more established electronics companies because, as a collective, the startups were able to conduct more frequent experiments than any in-house company.

Venture capitalists facilitated the network effect both directly, through their networks, and indirectly, through the shared language of money.

A similar argument could be made within blockchain technology today. Nobody really knows what the end goal of the crypto experiment is, and the industry needs to try as many things as quickly as possible to find out.

The only way to achieve this is to work together and invest money, to hell with standards.

Related Reading: Market map: VCs rush to collect NFT startups

Featured image by Boris Zhitkov/Getty Images

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