The long-awaited re-correction ratings of private tech startups and fundraising expectations comes with a Web3-sized asterisk.
As many funds revert to more conservative check writing, with an emphasis on profitability and business fundamentals, crypto remains a sector in the spotlight that attracts billion-dollar dedicated funds and investment conditions that remind us more of 2021 than 2022.
So, is it hype, the promise of innovation in crypto, or a bit of both? Venture capitalists and founders at all stages of fundraising spoke about current investment strategies when it comes to investing in this cohort of startups. The contrasting strategies come down to technical differences in cap tables, the culture of communities that many businesses in this space are built on, and of course, the fear of the non-crypto world missing out.
Tokens and the Future of Future Stocks
Web3 cap charts typically cover four different categories, Chris Matta, president of 3iQ Digital Assets, told TechCrunch. The first is the traditional cap table, which is similar to traditional technology companies and follows a classic business model that is more “accessible and understandable to investors”, but would not include a token model.
The second is a hybrid capitalization table that contains a master list of traditional shareholders as well as some investors who are in a token conversion agreement that will grant them token allocations once the company-linked token launches. “These business models focus on the token but use equity as a bridge structure,” Matta said.
Third, a token-first structure, which has a “lean cap table” made up of the founders of the startup which is a pure placeholder on the way to an all-token structure, i.e. the main capital-raising vehicle, Matta said. “These structures were popular in the 2017-2018 season [Initial Coin Offering] days and have become less prevalent today.
Finally, the Decentralized Autonomous Organizations (DAOs) that have emerged over the past 12 months generally do not have a centralized entity, but have rights and governance structures typical of a traditional non-Web3 enterprise.
There is also a simple agreement for future tokens (SAFT), where investors do not hold equity in the company, but see the value of its token and will eventually obtain the company’s native coin, said Yida Gao, partner. general of Shima Capital. Alternatively, there are simple agreements for future shares (SAFE), in which a company provides an investor with rights to future shares without specifying the price per share during the initial investment.
Cash-rich influx of attention
“Days are long but years are short in crypto,” Stan Miroshnik, partner and co-founder of 10T Holdings, told TechCrunch. “When we launched the fund (over three years ago), the premise was that there really wasn’t anyone to write a check for $50 million in the blockchain space.”
Over the past 12 months, there has been a combination of traditional growth investors and crypto-focused investors delving deeper into the space. Then there are strong existing VC asset managers with more dedicated crypto strategies like Andreessen Horowitz (a16z), Lightspeed Venture Partners, Bain Capital, and Sequoia Capital, to name a few.
Yet things are accelerating across the board in the crypto realm. Last year, around $32 billion in capital was pooled in the crypto world, and this year, $11.35 billion has been invested so far, according to data compiled by PitchBook.
There is a distinct difference between traditional equity investing and equity investing in Web3 and crypto companies in terms of ownership, Gao told TechCrunch. “In traditional equity investing, you want a Series A or early-stage investor to have 20-30% ownership of the company,” he said. “But having 20-30% ownership of a token or a network is very bad and frowned upon by the community. And web3 is above all the community.