Why VCs are rushing back to crypto startups

FTX seems like a case of massive fraud, along the lines of Enron. There is increasing evidence that founders were syphoning off the money from the business, and there was no board to oversee the management. The big VCs who invested in FTX without any due diligence failed their investors.

So while things don’t look rosy for the crypto industry, most VCs remain bullish on the future of crypto. JP Morgan, one of the world’s leading financial institutions, recently unveiled its plans for launching a cryptocurrency wallet for digital currency transfer and exchange. The hypothesis is simple: Although FTX crashed, blockchain – the technology that powers cryptocurrencies — remains robust. No one is questioning the future of blockchain.

Cryptocurrencies are just one use case of blockchain. Blockchain forms a big part of a wider used term called Web 3.0. Most experts predict the internet to evolve into a more decentralised structure that we call Web 3.0. Metaverse is another cog of Web 3.0. Many experts believe it is the future of the Web. Smart contracts based on blockchain will play a big role in the future.

This FTX fallout was the result of an unfortunate chain of events caused by a big venture capital-backed company with questionable transactions and dodgy ethics. It was an oversight on the part of investors. While this has surely damaged cryptocurrency sentiments, VCs remain bullish on the future of this asset class. Venture capital is patient capital, and VCs play the long game. They fund innovation and understand the risks that come with it. They know the odds of cryptocurrencies playing a big role in the future of commerce are high and are backing such startups.

Web 3.0 startups leverage futuristic technologies with cutting-edge innovations to upend the current business models. From investing in a piece of real estate for as little as Rs 100 to having virtual dates with your long-distance partner in the metaverse, anything is possible in Web 3.0. They know several companies will fail before Web 3.0 becomes a reality.

Venture capital is a risky business with fat tails and asymmetric payoffs. It’s a classic case of winner-take-all. VCs are always chasing the 100x opportunities that come with huge risks. Hence, they continue to back crypto startups because they know future payoffs offset the risks.

Many people, including some LPs, are questioning the massive failure on the part of VCs in investing millions in companies like FTX. Sequoia Capital, the gold standard of Venture Capital and one of the largest backers of FTX, apologised to its fund investors over their lack of due diligence before investing. But unlike traditional investment firms, VCs have a long-term horizon. They and most of their LPs are okay with short-term impacts as long as the fundamentals don’t change.

VCs are betting on a change in user behaviour and see Web 3.0 as that future. If someone would have asked 15 years back, that we would be ordering groceries online through a mobile app without having the contact number of the company, no one would not have believed it. But this is the reality today.

Web 3.0 startups need better mentors and processes that understand the challenges and complexities of Web 3.0. Older governance mechanisms like annual audits cannot keep pace with an ever-changing ledger. Hence, we foresee more money coming in to back players like Web 3.0-focused accelerators & incubators and back-end technology applications that help these companies grow sustainably with increased transparency. The nature of venture-backed startups might change in the future, but the technology is here to stay, and prudent investors will continue to invest in it. With lower valuations because of the current headwinds, most are finding great businesses at attractive prices.

(Author is Pushkar Singh, Partner at Tremis Capital)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)