The long-awaited re-correction of private tech startup valuations and fundraising expectations has a web3-sized asterisk next to it.
While many funds are returning to more conservative check-writing, with a focus on profitability and business fundamentals, crypto remains a sector in the spotlight that attracts dedicated billion-dollar funds and investment terms that remind us more of 2021 than 2022.
So, is it hype, the promise of innovation in crypto, or a little bit of both? Venture capitalists and founders across all fundraising stages spoke to 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 companies in this space are built upon, and, of course, the non-crypto world’s fear of missing out.
Tokens and the future of future equity
Web3 cap tables typically range across four different categories, Chris Matta, president of 3iQ Digital Assets, explained to TC. The first is the traditional cap table, which is similar to traditional technology companies and follows a classic business model that’s more “accessible and understandable by investors,” but would not include a token model.
The second is a hybrid cap table that has a core list of traditional equity holders along with some investors who are in a token conversion agreement that will grant them token allotments once the token tied to the company is launched. “These business models focus on the token but use the equity as a transition structure,” Matta said.
Third is a token-first structure, which has a “lean cap table” consisting of the startup founders that’s a pure placeholder on the road to a fully tokenized structure, i.e., the primary capital-raising vehicle, Matta said. “These structures were popular in the 2017-2018 [Initial Coin Offering] days and have become less prevalent today.”
Lastly, decentralized autonomous organizations (DAOs) that have popped up in the past 12 months generally have no centralized entity but have typical rights and governance structures that a traditional non-web3 company would have.
There’s also a simple agreement for future tokens (SAFT), where investors don’t own equity in the company, but see value in its token and will eventually get the company’s native coin, Yida Gao, general partner at Shima Capital, said. Alternatively, there are simple agreements for future equity (SAFE), in which a company provides an investor rights to future equity without specifying the price per share during the initial investment.
Influx of cash-rich attention
“The days are long but the years are short in crypto,” Stan Miroshnik, partner and co-founder of 10T Holdings, said to TC. “When we started the fund (over three years ago), the premise was really there was no one tooled up to write a $50 million check into the blockchain space at all.”
In the past 12 months, there’s been a combination of traditional growth investors and crypto-focused investors tapping deeper into the space. Then there are strong existing venture 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 crypto. Last year, about $32 billion of capital pooled into the crypto world, and this year, $11.35 billion has been invested to date, according to data compiled by PitchBook.
There’s a clear difference between traditional equity investing and putting capital to work in web3 and crypto companies in terms of ownership, Gao told TC. “In traditional equity investing you want to have a Series A or seed stage investor have 20 to 30% ownership of the company,” he said. “But having 20 to 30% ownership of a token or of a network is very bad and frowned upon by the community. And web3 is all about the community.”