Where Crypto-Focused VCs See Opportunity Now in Web3

• Web3 startup funding is finally getting less frenzied, VCs told Insider at the Consensus conference.
• In the past few weeks, one crypto investor said he’s focused more on tokens than startups.
• But overall, investors are optimistic, saying 2018’s “crypto winter” has prepared today’s founders.

Investors who were all in on Web3 startups during the crypto market’s peak are now beginning to sing a different tune in the wake of its drastic downturn. 

At the Consensus conference in Austin, Texas, investors overwhelmingly struck an upbeat note on the long-term future of Web3 — the term encompassing crypto-enabled startups and applications such as non-fungible tokens and the metaverse. 

But the steep drop in cryptocurrencies — over the past six months, bitcoin has fallen more than 40%, while ether has plunged more than 60% — has tempered the immediate outlook for some.

For instance, Joey Krug, the co-chief investment officer of Pantera Capital, whose portfolio includes Coinbase, FTX, and Alchemy, told Insider that he has focused most of his attention on public investments and individual crypto tokens rather than equity investments in Web3 startups in the past few weeks.

While competition for Web3 deals has increased as more venture firms throw their hat in the ring, relatively few firms have moved to invest in tokens, he said. Krug said he evaluates token investments similarly to deals in startups: based upon the strength of the team and the market opportunity.

More broadly, though, cryptocurrency prices likely need to fall further to provide clarity to investors, Krug said.

“It’s hard to know what to price things right now,” he said.

Mike Novogratz, the CEO of the investment firm Galaxy Digital, lent support to that view during a panel at the conference. He said that he believed bitcoin would continue to tumble as the

Federal Reserve

raises rates and tightens its monetary policy in response to rising inflation.

Jocelyn Cheng, the CEO of Luno Expeditions, the early-stage venture arm of the crypto-investment company Luno, said that deals are happening at a slower pace and valuations are falling. Startup valuations had been bid up earlier this year even in emerging markets, where Luno does much of its investing, she said.

But even with the market slowdown, the pipeline of potential deals hasn’t narrowed, Cheng said. In regions such as Africa and Southeast Asia, for instance, she is particularly interested in decentralized finance, or DeFi — services that use crypto to allow customers access to financial services — for applications such as remittances.

“We see more real-life use cases there,” she said. 

Cheng is also looking to invest in Web3 startups that address security in DeFi. High-profile breaches, such as the hack in April that stole more than $600 million in tokens from the blockchain linked to the popular game Axie Infinity, have put crypto developers and startup founders on high alert, she said.

Despite the gloomy market backdrop, several attendees at the Consensus conference offered many doses of glowing optimism. Novogratz said he thought that bitcoin would reach its eventual bottom and begin to rebound before equities. Amy Wu, the head of FTX Ventures, even questioned whether crypto was actually in a

bear market

.

Several investors, such as Rumi Morales, the head of venture and growth investing at Digital Currency Group, said that the community of Web3 developers and founders has proven it can withstand downturns such as 2018’s “crypto winter.”

Krug seconded that view. He told Insider that many of the founders Pantera has backed had already begun to take measures to cut costs without prompting from investors. As a result, he said, he sees the current generation of Web3 startups being much more prudent with their capital even after last year’s record sums of funding.

“People now remember how bad 2018 was,” he said.