Venture capital investments in blockchain startups soared to a record $25.2 billion in 2021, driven by bullish optimism and financing surges for non-fungible tokens (NFT) and decentralized finance projects. In 2022, funding slowed dramatically and is projected to be about one-third of 2021’s record, following a wave of fallen companies including hedge fund Three Arrows Capital, lender Celsius Network and exchange giant FTX.
David Pakman, managing partner and venture investing head at crypto-focused venture capital firm CoinFund, discussed in an interview with CoinDesk what the investment landscape will look like in 2023 and what crypto verticals could emerge stronger in the post-FTX world.
"Crypto has seen a lot of self-harm in 2022 and it feeds the narrative that we’re already fighting against: ‘Oh, scammy people doing scammy things.’ And here’s yet another example,” said Pakman, noting that the downfall of FTX was due to human behavior, not technological failure. “Hopefully, we’re weeding them out of the system."
2023 investment landscape
CoinFund was an early investor in FTX and had a small amount of equity, which has now been written to zero, said Pakman. The firm didn’t hold any FTT tokens but had what he believed was a “very small trade” in progress when the exchange collapsed. The FTX investment predated Pakman, who joined CoinFund last year after spending 13 years at tech and healthcare-focused venture capital firm Venrock.
“We were nervous even at the beginning of this year, and getting more nervous as the year went on given the macro environment and the stuff happening in crypto.” Pakman said of CoinFund’s own fundraising efforts. “But we’re very fortunate that we have [limited partners] that actually prefer to see us investing in this pricing environment.”
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Pakman thinks crypto investments will continue focusing on areas that were in progress before all of the turbulence, including layer 1 and layer 2 blockchains, NFTs, gaming and the Web3 development stack that’s maturing enough to entice Web2 developers to make the jump. The collapse of a centralized exchange has also put more focus on decentralized finance (DeFi).
"The FTX and Celsius stuff – and all the other failures – might be creating renewed interest in productizing DeFi in a way that’s easier to access by both institutions and individuals. Because DeFi is not super easy to access,” said Pakman.
Post-FTX path forward
“How do we get out of this loop of bad events happen – largely because of a human-led CeFi mistake – that exposes all sorts of other risky behaviors that lead to this domino effect of more companies failing?” asked Pakman, referring to centralized finance. “We don’t want lots of companies failing.”
Companies should focus on risk management and the conservative use of leverage, he said, though startups should try to avoid using leverage at all.
“Creating a startup is one of the riskiest things you can do. It almost never works,” noted Pakman.
“When you have some success, you don’t want to then bring in a bunch of extra risk by using leverage or doing other stupid things because it’s hard enough to get to a success scenario,” Pakman said. “Retire risk as you move on, don’t create more.”
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