Why Venture Capitalists Are Stepping Back from New Crypto Startups

• VCs are avoiding early-stage crypto investments due to LPs prioritizing returns that outperform index funds.
• Bitcoin and Ethereum outperform index funds, leading VCs to favour these established cryptos over riskier new projects.
• Despite cooled interest from large VCs, early-stage crypto funds remain active, supporting promising startups from past fundraises.

Venture capitalists’ holdings in the cryptocurrency industry have drastically decreased. The founder of CEHV, Adam Cochran, brought attention to this trend on X.com, blaming the decrease on the demands made on VCs by their limited partners (LPs). Cochran explained that many LPs are primarily interested in returns that surpass index funds. As a result, VCs have taken their eyes off high-risk, early-stage crypto investments.

1/10

VCs have slowed investing in crypto by a lot, and its a bit of a nuanced reason:

1. Most of them have LPs that just want to beat index fund returns.

2. Over a medium term the R:R of owning Bitcoin and ETH will easily beat index funds, and can only be beat by early stage… https://t.co/yOG4TPdkFx

— Adam Cochran (adamscochran.eth) (@adamscochran) August 9, 2024

Preference for Established Cryptocurrencies

Besides, Cochran indicated that Ethereum and Bitcoin were generally chosen by VCs for investments. During the last five years, many more cryptocurrencies surpassed the indicator funds. Particularly, Bitcoin demonstrated a 45% annual return.

The average annual growth percentage with the S&P 500 index fund is approximately 15%. This distinction has caused venture capitalists to choose established cryptocurrencies over more recent, riskier ventures.

Significantly, Cochran pointed out that VCs are hesitant to invest in early-stage crypto startups due to the high risks involved. Instead, they focus on high-profile breakout projects to generate fees and return capital. Cochran also emphasized that the recent cooling of trends like NFTs, AMM forks, DeFi, and layer 2 solutions has left VCs in a holding pattern, waiting for the next big innovation.

4/10

While every VC firm brands themselves as pro-innovation and in the trenches with the builders, most of them don't actually pursue moonshots, they just throw capital at breakout trends.

Because they don't actually have enough industry insights to take novel risk.

— Adam Cochran (adamscochran.eth) (@adamscochran) August 9, 2024

Larger VC firms’ interest in early-stage crypto funds has diminished, but some funds are still functioning. These funds continue to help promising entrepreneurs with money from their fundraises in 2021 and 2022. However, because larger VCs aren’t as involved, later-stage firms are finding it harder and harder to raise money.

Increasing Risks and Market Uncertainty

Furthermore, Cornell University professor Eswar Prasad issued a warning about the growing hazards associated with the Bitcoin sector. Prasad emphasized the perils of centralization, using the demise of FTX and the legal troubles with Binance as instances. Additionally, he emphasized that new risks are introduced when decentralized money is integrated with traditional finance.

While the crypto industry continues to offer high rewards, Cochran’s observations and Prasad’s cautions indicate that there are also a number of pitfalls that investors and venture capitalists need to be aware of. The market is waiting for the next big breakthrough that can spark interest in early-stage cryptocurrency investments once more.

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