Individual holders of UST and luna, the token that’s part of the peg mechanism for the algorithmic stablecoin, are now deeply in the red, and tweets lamenting dashed fortunes have flooded crypto Twitter this week.
“The biggest losers from all of this will be retail [investors] that didn’t understand the risks they were taking,” said Kyle Samani, co-founder and managing partner at crypto VC firm Multicoin Capital.
Venture capitalists
Other losers include the venture capitalists and investment firms that have backed Terraform Labs, the start-up behind UST, and Luna Foundation Guard, the non-profit managing the luna token. Galaxy Digital Holdings Ltd, Pantera Capital and Lightspeed Venture Partners invested in Terraform’s last $US150 million fundraising in July, and Jump Crypto and Three Arrows Capital participated in a $US1 billion sale of luna tokens in February.
These backers, who once hoped that their investments would deliver massive returns, instead found themselves being solicited to prop up UST and luna in a $US1.5 billion backstop. In essence, they were asked to “put their money where their mouth is,” a test of whether these institutions actually believe in what they’re investing, said Billy Dishman, investment and research analyst at crypto VC firm CoinFund. So far, they haven’t shown much interest.
Terraform Labs is working on another contingency plan in which ownership of the blockchain network would be distributed to investors, according to a blog entry posted Friday that was attributed to co-founder Do Kwon.
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Investors and start-ups with no direct connection to UST are also finding themselves on unsteady ground. Chris McCann and Edith Yeung, general partners at Race Capital – a VC firm that focuses on early-stage crypto start-ups – have heard of deals falling apart or being repriced and said founders were getting “ghosted” by potential investors. They’re urging their portfolio companies to take caution and ensure that the funds they’ve raised so far are in fiat, not crypto.
“If you’re in the middle of a fundraise period, close it,” McCann added. “If you’re not, don’t do it now. Now’s not the time.”
‘Downstream impact’
Yeung said she also had a playbook in case a portfolio company found itself in crisis. She said part of Race’s strategy was to find a better way for founders to communicate – lengthy Twitter threads have the potential to spur rumours and spread discord.
“I have a blog post template ready to go,” she said. “It’s kind of silly, but it’s happened now so many times now.”
Castle Island Ventures’ Walsh said that later-stage companies were more likely to see valuation hits as they raised more funds because of their proximity to public markets, where stocks such as Coinbase Global Inc have plummeted. The Coinbase stock slumped 35 per cent this week and ended with a market value of $US15 billion.
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“Coinbase trading at $US17 to $US18 billion market cap, that’s going to have a downstream impact on the venture community in the crypto space,” Walsh said in an interview.
This will eventually trickle down to the seed stage, where newer crypto start-ups could take valuation cuts, Walsh added. He said there could also be a shift in the types of firms investing in crypto, noting that many traditional funds had become more interested in the industry over the past year.
Traditional take
“There’s a question of are some of those funds just tourists that in the bear market back away,” Walsh said.
Dana Stalder, a general partner at tech VC firm Matrix Partners, said it was important to note that it was not just cryptocurrencies caught in a downturn: tech stocks were struggling as well.
“There’s a flight to safety out of the equity asset class,” Stalder said in an interview.
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The firm is still excited about its investment in crypto start-up Lightspark, which it announced on Thursday. The company was founded by David Marcus, who left Meta Platforms Inc last year after overseeing its crypto efforts. Lightspark is building infrastructure to help support payments for bitcoin, which traded at less than $US29,000 as of Saturday morning in New York and is down about 25 per cent this month.
“I don’t think this cycle will have any impact on what the Lightspark team is building – it is a very long play,” he said.
Peter Fenton, a general partner at Benchmark, said there would probably be a slowdown in crypto investing as many VC firms were likely to be “playing out of their winnings” and using returns from previous crypto investments to fund new ones in the space.
However, his firm, which has already backed crypto start-ups Chainalysis and Sorare, is still committed. Fenton said Benchmark plans to pursue three to five crypto investments a year because it still has confidence in the industry and its start-ups.
“People forget that Google’s best financings were done in really the worst venture years,” he said.
Bloomberg
