2021 was a record year for crypto venture capital funding.

Propelled by loose monetary policy and the aftermath of pandemic lockdowns, investors' increased risk appetites meant that more money than ever before flowed into crypto.

Venture capital funding analysis showed that crypto startups received $25.2 billion in 2021 compared to $3.1 billion in 2020 the year before — a 713% increase. All sectors in the crypto industry saw strong growth, with VC funding for NFT firms exploding to $4.8 billion from only $37 million in 2020. In total, the share of blockchain venture capital funding of the entire global venture capital market grew from 1% to 4%.

2022 is shaping up to be a more challenging year for crypto venture capital firms. But risk-aversion capital will continue to flow to the growing crypto industry in the coming years. As a retail investor, knowing the main players in the crypto VC market can make the difference between a profitable and unprofitable investment.

 

How Crypto VC Funding Works

Crypto VC funding has a few commonalities, but also differences, with general VC funding.

Generally speaking, VC funding describes a pool of investors looking to multiply their investment by investing early in a company. Before investing in a company, they review different projects by assessing their growth potential and the potential positive return on investment. VC funds spread their investments in order to minimize their downside risk and potential volatility.

Standard venture capital funding happens in five stages:

  • Pre-seed: the project is at a very early stage (often no more than an idea) and investments come from family and friends.
  • Seed round: the product is testing its viability, which includes market potential analysis, competitor analysis and developing a minimum viable product. At this stage, pitch decks, cash flow, roadmaps and other materials are used to seek out investors actively.
  • Series A: the product is validated, growing and backed by a strong community. Investments at this stage are less risky for investors, but more expensive and focus on marketing and advertising.
  • Series B: the product has a massive user base and is expanding, investment focus is on marketing, sales, human resources, business development and customer service.
  • Series C: focus lies on diversifying product lines and access to international markets; the product is commercially viable.
However, crypto VC funding is quite a bit different, because many projects never get past the initial two stages. While there are some examples of Series A fundings (Praxis, Rarify) and Series B fundings (Dune Analytics, Palm NFT Studio), only a few companies have reached the maturity of FTX, which raised $32 billion in a Series C funding. The crypto industry is still comparatively new, and most projects do not have validated business models.

However, a few other factors make crypto VC funding different so that even big companies with massive market capitalizations do not necessarily open additional funding rounds.

For example, most cryptocurrency projects raise money through tokens instead of equity.
While tokens effectively mean equity in the project, raising money through an ICO or an IDO instead of selling stocks means that investors take on a different type of risk. Buying tokens through an ICO lets investors cash out their stake earlier and more easily, but products are often less sound and less trustworthy than their stock-selling equivalents.

Furthermore, crypto projects require a different type of marketing, as platforms like Google and Facebook restrict the extent of "traditional" digital marketing for cryptocurrencies. This has led to cryptocurrencies heavily relying on influencer marketing and guerilla marketing methods, limiting the extent to which a product's viability can be tested before launch.

In conclusion, crypto VC funding is quicker but more trial-and-error based and involves much less regulation. VC funds can and often do support projects with influencer marketing, utilizing their relationships in the industry. This can raise a project's legitimacy (if established VCs back it). However, it can also backfire, as crypto VC funds face headwinds for introducing tools from traditional finance, which goes against the decentralized ethos of the crypto industry.

The Biggest Crypto VC firms

Several investment funds have emerged as the top crypto VC funds over the last few years.

3AC - Three Arrows Capital

Founded in 2012 by Su Zhu and Kyle Davies, Three Arrows Capital is considered one of the top hedge funds and market makers in the space. 3AC holds stakes in several big blockchains like Ethereum, Avalanche, Bitcoin, Polkadot, Terra, Solana and many others. It also has investments across several DeFi and GameFi projects like Axie Infinity, Aave and countless others. 3AC invests in equity-based blockchain projects, too. For instance, the fund has stakes in BlockFi, Deribit and Starkware.

a16z - Andreessen Horowitz

Founded in 2009 by Marc Andreessen and Ben Horowitz, Andreessen Horowitz (known as "a16z") is a Californian crypto VC firm that also invests in non-blockchain-based technology companies. Like 3AC, a16z has stakes in many top crypto companies like Coinbase, Celo, MakerDAO and others.

Alameda Research

Alameda Research is a crypto hedge fund founded by FTX founder Sam Bankman-Fried and now headed by Sam Trabucco. It also has stakes in most important blockchains and blockchain-based companies. Messari lists that Alameda Research has stakes in Bitcoin, Ethereum, Binance, Solana, Uniswap and countless others.

Jump Crypto

Jump Crypto is the investment arm of Jump Trading, another crypto trading fund with offices in Europe, Asia and North America. Its mission statement is called "Modern Slavery Statement" in a tongue-in-cheek way, presumably referring to the uniform nature of comparable mission statements. Jump Crypto has stakes in Solana, Terra, Wormhole, Fantom and many other projects.

Digital Currency Group

Digital Currency Group calls itself the "epicenter of the bitcoin and blockchain industry." Its mission is to build and support bitcoin and blockchain companies by leveraging its insights and capital. Digital Currency Group has investments in Coinbase, Coindesk, Kraken and countless other blockchain protocols in its portfolio.

Coinbase Ventures

Coinbase Ventures is the investment arm of Coinbase, a popular centralized exchange for cryptocurrencies. While several other crypto VC funds have investments in Coinbase, Coinbase Ventures itself also is an investor in projects like BlockFi, Compound, Starkware and many more.

Binance Labs

Binance Labs belongs to Binance, yet another famous centralized exchange. Binance Labs leverages the Binance DEX to invest in new crypto projects, and its portfolio includes stakes in Terra, Moonbeam and Coin98, among others.

The Top Crypto VC Funds

Crypto VC firms and crypto VC funds are essentially identical, although funds in this category are often owned by the venture capitalists and hedge funds mentioned above.

Paradigm

Paradigm is a crypto VC fund backing crypto companies with stakes between $1 million and $100 million. It follows a "flexible, long-term, multi-stage, and global" approach to crypto investing, helping teams with technical and operational questions. Examples of Paradigm's portfolio include Argent, Optimism and Opensea.

Multicoin

Multicoin is a "thesis-driven investment firm that invests in cryptocurrencies, tokens, and blockchain companies." It is a crypto-native fund that participates in staking, liquidations, and other crypto operations. Its portfolio includes stakes in Audius, Arweave and Near Protocol.

Pantera

Pantera pitches itself as the "first U.S. institutional asset manager focused exclusively on blockchain." Since 2013, Pantera has been investing in essential blockchain infrastructures like exchanges, custodians, institutional trading tools, decentralized finance and more. Its portfolio features stakes in Coinbase, FTX, Polkadot and others.

Draper VC

Draper Associates was founded in 1985 by Tim Draper and has turned into a venture capital firm for "industry-transforming companies." While Draper also has investments in technology companies, its blockchain investments include positions in Bancor, MakerDAO and Tezos.

Polychain

Polychain is a VC focusing on blockchain-based digital assets. Its most notable investments are in Acala, Celo and dYdX.

Framework Ventures

Framework Ventures focuses on "the global transition to decentralized technology." As a "thesis-driven venture firm," Framework Ventures partners with founders and teams building crypto economies and scalable communities. The VC firm holds several investments in the DeFi space in protocols like Fei, Rari and Zapper.

3 Big DeFi VC funds

Besides crypto VC funds that are focused on investments in blockchain technology and crypto companies in general, there are also specialized DeFi VC funds. These often take smaller positions and are comparable to boutique venture capitalists in tech.

PetRock Capital

PetRock Capital is a Singapore-based VC focusing on multichain protocols. It was founded by alumni from Goldman Sachs, BCG, and PwC. Investments include Step Finance, Klima DAO and Raydium.

TRGC

TRGC is a DeFi fund based in Amsterdam and New York, focusing on DeFi applications. Its portfolio consists of investments in Polkadot, Reef, KAVA and other DeFi-focused startups.

Fabric Ventures

Fabric Ventures is a DeFi VC based in London. It backs investments in the "open economy," with a focus on decentralized finance. Among its 20+ investments are stakes in Angle, Liquid and Hashflow.

3 Big Metaverse VC funds

With the emergence of NFTs as a major blockchain technology, dedicated NFT and metaverse VC firms have popped up. Like DeFi VC funds, they are mostly smaller and specialize in investing in metaverse and GameFi projects only.

Animoca Brands

Animoca Brands is one of the leaders in the metaverse VC firm space and was ranked in the Financial Times list of high growth companies in the Asia-Pacific region in 2021. It has investments in several significant metaverse and NFT-related projects like The Sandbox, Axie Infinity, OpenSea, Dapper Labs and several others.

Genblock Capital

Genblock Capital has been involved in the blockchain space since early 2017 and is a VC fund with a focus on decentralized finance and the metaverse. Some of its main gaming-oriented investments include Aurory, Efinity and Bloktopia.

Metapurse

Metapurse is an NFT investment fund and production studio that specializes in identifying early-stage projects across blockchain infrastructure, finance, art, unique collectibles, and virtual estate. It has investments in Decentraland and Nifty Gateway.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.