From paragraph xyz by 0xAntidote.eth

It is the end of the year and this means you will likely be flooded with 'our top crypto predictions for the next year' articles and podcast (spoiler: You will read about how stablecoins will get even wider adoption or that there will soon be more AI agents than humans using crypto). However, one prediction is commonly missing: A rekindled interest of generalist VCs for crypto.

Anyone who has been working in the crypto space has experienced a wild ride over the last couple of years. During the bear market, crypto largely stayed under the radar, and when it did make the news, it was often linked to scams and criminal activity.

I still remember an interaction with a generalist VC colleague when I decided to join a crypto startup after having worked at a generalist VC. I discussed my decision with him at the beginning of 2023. The conversation went like this:

This interaction was symptomatic of my experience with many generalist VCs. Just 12 months earlier, we frequently had catch-up calls, primarily sharing crypto dealflow. What was once considered the hottest category for generalist VCs had become something they no longer wanted to touch. How did this happen?

How generalist VCs got interested in crypto – and eventually abandoned It

To understand generalist VC interest in crypto as a category, we need to look a bit into its history. I consider there to be four distinct phases that best portray the development of crypto as an investment class – each phase shows how investing in crypto startups evolved – and how generalist VCs reacted to it.

Phase 1: The early days (June 2014 - January 2017)

We are talking about the early, early days here. In July 2014, Ethereum ICOs and goes live one year later. Challenger networks such as Cardano start ICOing shortly after (October 2015). After the 2013 boom and the subsequent crash, Bitcoin lingers in the sub-$1,000 category. The DAO raises $150M in ETH only to be hacked in 2016, leading to an Ethereum hard fork.

This period also marks the beginning of the professional crypto VC industry, with many original crypto funds either launching or starting to deploy capital, such as Blockchain Capital, Polychain and Multicoin.

Overall, deal frequency remains quite low, and generalist VCs maintain a low but steady participation in deals. On average, generalist VCs participate in 25% of all deals. This might sound like a lot, but it is unusual for an industry that considers itself to be investing in frontier sectors. This time around, they leave the majority of investments to crypto VCs or retail investors. Such low participation from generalist VCs is usually reserved for hardware DeepTech investments or healthcare, making it an anomaly for a largely software-dominated category.

Among the top 460 generalist VCs (according to Dealroom), only 104 invest in one or more crypto companies during this timeframe. Professional investors either still perceive crypto as a scam, or it simply has not hit their radar yet.

Nevertheless, generalist VCs start investing in seed rounds of long-forgotten companies or doubling down on some winners in larger rounds. These larger rounds focus more on centralized companies creating services around crypto. Examples of this are Coinbase's and Circle's Series C rounds.

Phase 2: The first craze (February 2017 - January 2019)

Things start to change in the following years. Bitcoin steadily climbs until it reaches an all-time high in November 2017, achieving a 15x increase in a matter of months.

Dealmaking accelerates similarly. Larger and larger ICOs hit the market, such as Tezos' eye-watering $232M ICO. Crypto VCs continue raising larger funds and deploying more capital. We see increased investments in more sophisticated vertical DeFi projects (MakerDao, dydx, Synthetix) and ETH Layer 2 scalability solutions (Scroll, Starkware, etc.).

Crypto VCs and retail investors outpace generalist VCs, who are now capturing less than 20% of all deals in the crypto space.

We are also starting to see a correlation forming between the total number of deals per month and the Bitcoin price. While total number of deals follows the Bitcoin price almost exactly, generalist VC deployment experiences a delay of six months between Bitcoin reaching its all-time high and generalist VC peak crypto dealmaking. This is how long it takes for many generalist investors to get familiar with crypto as a topic, build investment thesis and start generating dealflow.

Still, overall, generalist VCs intensify their deployment in the crypto space. The average number of deals per month with generalist VC participation increases by 160%, reaching 8 per month. Almost a third of our top 460 investors have invested in at least one crypto deal during this timeframe (161), up considerably from the last phase.

Phase 3: ZIRP party (February 2019 - February 2022)

Here is where things start getting crazy. At the end of 2019, COVID-19 hits the world and completely changes our lives. No one knows what will happen, and the same holds true for the VC industry. Initially, most investors are scared. Sequoia releases its COVID-black Swan paper and it sends ripples through the email lists of generalist VCs. The paper implies softening demand, reduced marketing spend, and harder fundraising.

Safe to say this prediction turned out to be almost entirely wrong. Governments around the world react with stimulus checks. Money becomes cheaper, fundraising becomes easier, and people, stuck at home and bored, are more than willing to spend money on seemingly stupid things to entertain themselves – including crypto.

Once again, we see the correlation between Bitcoin price and the total number of deals done per month. Fundraising reaches record highs, surpassing the 100 deals per month threshold in February 2021, along with another Bitcoin all-time high.

However, this time generalist VCs follow the Bitcoin curve to a T, particularly between October 2020 and December 2021. Gone is the six-month time lag between Bitcoin reaching an all-time high and peak generalist VC investing that we observed in Phase 2.

This is a clear signal that crypto has become one of the main sectors in which generalist VCs invest. The crypto industry has captured their attention, and generalist VCs respond by investing aggressively - across all categories from infrastructure to entertainment and games.

They recover market share and now participate in 27% of all crypto deals, averaging over 15 crypto deals per month. Out of our top 460 generalist VCs, 211 have invested in at least one crypto deal. Is this the time when generalist VCs will finally capture the market?

Phase 4: Post-FTX hangover and recovery (March 2022 - December 2024)

Every party must eventually stop, and the same holds true for the economy. After the COVID-19 frenzy of cheap money, inflation kicks in, and interest rates rise. Multiples compress and fundraising dries up.

The crypto industry is hit particularly hard. This is because many of the crypto assets invested in during Phase 3 are high-risk backed by low fundamentals - and as a result crash even more severely than the average high-multiple SaaS startup.

While many non-crypto startups shut down or get acquired, crypto dominates the news cycle with scandals: In May 2022, Terra/LUNA collapses, and just a few months later, in October 2022, FTX crashes and burns. Bitcoin falls below $18,000 in November 2022, and generalist VC interest cools off. During this time, the GPs in many generalist VC firms, who were previously sceptical but supportive of crypto deals, publicly revert to their old position of believing that crypto is just a scam or speculation. They don't meet much resistance.

After a long crypto winter, Bitcoin starts to gain momentum in 2024. However, this time the response from generalist VCs remains flat. While crypto VCs and retail investors follow the investment curve to the local high in March 2024, generalist VC participation in deals does not gain any momentum this year and remains below the levels of autumn 2022, when Bitcoin dipped below $20,000. As a result, generalist VCs did not gain any additional share in deal participation.

In fact, many generalist VCs no longer invest in crypto at all. Below is the deal activity of three top-tier generalist VCs in the crypto space (I have anonymized them because it is not about these three VCs in particular; there are numerous funds that show similar trends).

Why did generalist VCs lose interest in an industry that is striving both in terms of price as well as technological advancement?

What caused generalist VCs to disengage from crypto?

The reasons for this are multifaceted. The list below is non-exhaustive, but I believe consists of the main factors:

A bad first impression: Many generalist VCs got in at the worst time

As we saw in the data earlier, many generalist VCs only started to truly pay attention to crypto during the COVID-19 period, which was arguably the worst time. Due to the macroeconomic environment, it was hard to invest in startups profitably: high deal velocity and high multiples on deals are not exactly a recipe for success.

It wasn't just about the price, though. Many crypto startups from that era were also severely capped in potential. There was a large cohort of opportunistic builders entering the crypto space, and startups were struggling with technology that wasn't ready for mass adoption: Ethereum Layer 1 transaction costs were prohibitively high, many scaling solutions had not yet launched, and Ethereum competitors had not reached product-market fit yet.

We can expect the majority of generalist VC funds from that period to underperform. This is not exclusively due to their crypto investments but also applies to other regular software and FinTech startups.

However, in contrast to their experiences with crypto, these generalist funds have had positive prior experiences in other categories. It is easy to invest in a category where you have had success in the past, and it can be exciting to invest in a completely new one. However, it is much harder to commit to a category where all your experiences so far have been negative.

Opportunism over belief: Generalist VCs were never truly on board

VC as an industry is driven by trends and narratives. VCs essentially sell the possibility of outsized outcomes to their limited partners (LPs). LPs want to deploy capital into funds that invest in the next Facebook, Uber, Airbnb, Revolut, etc.

Achieving such outcomes usually requires seismic shifts in technology or community behavior. As a result, the VC industry is constantly searching for the next narrative to pitch to LPs to raise funds. Whether this narrative turns out to be correct is often secondary; it's better to have an incorrect narrative than to have none at all.

Around phase three, crypto became the main narrative in the generalist VC world. This was the time when you saw a lot of VCs using NFT pfps on their Twitter accounts.

However, as fast as you can adopt a narrative, you can drop it, especially when there is a shiny new one around the corner (AI).

How many generalist VCs truly believed that crypto would disrupt the entire FinTech stack? If they did - they could have expected it to take a similar amount of time as cloud adoption did for SaaS. If they did, they would have also considered the tremendous amount of technological advances crypto has had in the last 24 months (zkEVMs, DA solutions, Restaking, ERP4844) as bullish signals.

Crypto investing is hard

Investing in crypto is likely one of the most idiosyncratic categories you can invest in. There are a number of particular characteristics that make it hard for many generalist VCs to invest effectively in this category.

High Noise / Frauds: X discourse often presents a dichotomy regarding crypto: It is either all fraud and gambling or it is going to change the entire world. This is the wrong mental framework because both can be true at the same time, and, in fact, are. While you have fraudulent and shady behaviour in general software investing as well, it is much less frequent than in crypto. This makes it harder to select legitimate projects and also subjects investors to higher reputational risks in the event of a scam or hack.
Fewer moats: VCs benefit from the structure of private markets, which includes restricted access to investment opportunities (startups) and restricted access to information (who is raising, traction of companies, etc.). Compared to public markets, this makes private investing less efficient and, as a result, makes it easier to create outsized returns.Investing in crypto is interesting because, on the spectrum between private and public, it lies somewhere in the middle as an asset class. While there are typically private rounds, on average, there is less equity reserved for private investors. Performance information about startups is usually completely public, making the markets more efficient for early stage startups. As a result, it becomes harder for VCs to achieve outsized returns compared to private investors.(You are also subject to scrutiny from the X crypto mob)
Crypto winter was either completely degen or deep tech investing: In the last bearish cycle, few net new users were onboarded. What remained were a number of high conviction degen crypto users and deep infra builders. This mostly narrowed investing down to a barbell of speculative degen investing (aka memecoins) and frontier-tech investing. This was a stark contrast to phase three, where there was a stronger narrative for crypto as a disruptive technology for gaming and entertainment (they called it Web3). While there were still opportunities in these categories during the crypto winter, they primarily catered to a crypto-native consumer crowd initially (Farcaster, Pudgy), something the average generalist VC does not really have a playbook for.

Regulation & LPs

During the administration of President Biden and after the FTX crash, the crypto industry found itself in an increasingly uncomfortable spot. Particularly under chairman Gensler, some of the most prominent projects came under the scrutiny of the SEC. Besides a number of genuinely fraudulent cases, even successful projects in the crypto space carried significant regulatory risk.

This is not a great framework for generalist VCs to invest in, particularly when many have fund setups that don't allow them to invest in tokens. Due to the regulatory uncertainty, many LPs preferred not to be exposed to crypto, making it harder for generalist VCs to invest in this category.

All-In Podcast E125

Why generalist VCs might take a second look at crypto

Despite the reasons mentioned above, I believe there is a fair chance that generalist VCs will regain interest in the crypto space. Several catalysts could accelerate this trend.

Bitcoin price: As discussed before, investment interest in the past has correlated with the Bitcoin price. While generalist VC engagement decoupled from the Bitcoin price in the last phase, it is hard to imagine that generalist VCs could ignore the space if Bitcoin continues to rise. Would they still resist the temptation if Bitcoin reaches $200k?
Regulatory shifts: Crypto has gained momentum with the new US administration, which was publicly pro-crypto, winning the election. With Gensler stepping down, the US will likely become a less crypto-hostile environment, although the extent remains unclear. In any case, we can expect large winners like Coinbase to face less regulatory scrutiny, and capital to become more accessible for crypto startups. LPs will be less worried about being exposed to crypto, and as a result, so will generalist VCs.
Stablecoin PMF: Stablecoins are arguably the category with the largest PMF in the crypto space right now. Large-scale traditional FinTechs started buying or building their own capabilities in this space. As stablecoins are adopted by more Web2 FinTechs, they will act as a funnel for directing generalist VCs' attention toward crypto infrastructure.

Can generalist VCs pick the crypto ball up again?

Even if generalist VC interest in the crypto space will re-activate, the question remains whether they can pick the ball up again. By this I do not mean simply deploying capital, but actually select and win the best deals.

I believe this will be incredibly hard for a large number of generalist VCs, because the years of relative inactivity puts them at a large disadvantage against crypto native VCs for two main reasons:

Winner portfolio and networks: Because many generalist VCs largely tapped out of crypto as a category, they did not participate in many startups that will come out as winners of this cycle. Participating in winners provides several benefits: Networks into the next generation of builders (often times VCs source opportunities from founders they had previously invested in) and also the ability to win deals going forward. Instead, crypto-native VCs built out these networks, making it easier for them to win the next generation of hot deals. There are many revered generalist VC brands that crypto builders have never heard of.
Knowledge / Talent: Crypto is complex, particularly on the infrastructure investing end, and crypto VCs have now gained years of advantage in terms of knowledge. This knowledge gap will be hard for generalist VCs to close. The alternative for them is to buy talent. However, in the last cycles many people at the intersection of being knowledgeable about crypto and being a good investor have joined crypto VCs or created their own funds and have little economic interest to jump ship.

Not all generalist VCs are alike

It is important to note that not all generalist VCs are alike. Some continued investing in crypto after the ZIRP days, and some even accelerated their investments. Ironically, in the venture world, which seemingly chases alpha as its raison d'être, it takes a lot of courage to zig when others are zagging.

USV's Fred Wilson in memo to LPs in 2023

Slow Ventures' Sam Lessin presentation in 2023

Some of these funds set up specific crypto teams or vehicles, such as a16z and Bain, while others just continued deploying from their main vehicles. These generalist VCs that continued deploying capital are naturally better positioned than other generalist VCs to select and win competitive deals going forward.

Summary

Crypto is one of the most intriguing categories in investing, as it remains arguably the only software category where generalist VCs have largely left the field to specialized investors. After gaining interest in crypto and investing aggressively in the category from 2020 to 2022, many generalist VCs have recently stepped back, despite significant technological progress and Bitcoin price momentum.

We can expect generalist VCs to regain interest in 2025, but it will be challenging for many of them to compete with tier-1 crypto VCs or those generalists that continued or accelerated their investments over the past two years.

(Disclaimer: All the data is based on DeFiLama and was personally cleaned afterward. As always - quality of input determines quality of output. Consider this data as directionally correct, rather than 100.0000% accurate)