Cryptocurrency and Web3 startups may have experienced a hefty fall in funding and valuations in the past 18 months, but activity is now beginning to pick back up, according to Brandon Gath, managing director of corporate cryptocurrency and blockchain VC firm Kraken Ventures.
“In the last six months we’ve really begun seeing things take off again,” Gath tells Global Corporate Venturing.
“There’s been big excitement around certain rounds, rounds have been oversubscribed and valuations are coming back up. Maybe not to what you saw at the peak of 2021, but I also think maybe that was way too frothy. Now, you’re seeing them come up in a more reasonable way.”
In fact, he believes that Web3 adoption is following a similar pattern to what we saw with the internet – periods of hype and setback, but overall a trend towards global coverage.
“I think there’s a core thesis that if you look at the trends with the overall number of wallets and overlaying the growth of stablecoins, it looks very similar to internet adoption,” Gath says. “There’s a thesis that there are 10 billion people in the world, and the number of wallets will just continue to rise towards that 10 billion mark, similar to what we’ve seen in internet adoption.”
Kraken Ventures provides up to $2m per deal at early stage, focusing on the core infrastructure of Web3 – the collective name for crypto, blockchain, NFT and decentralised finance. US-based Kraken, one of the five largest cryptocurrency exchanges worldwide by volume, anchored Kraken Ventures’ $65m first fund in late 2021, but the venture team invests independently, something Gath says enabled it to retain focus despite the recent bear market. A bear market is, in any case, the best time to invest.
“Over the last 18 months…we’ve come in at much more attractive valuations and got higher ownership percentages in companies, and we’ve seen a lot of great founders at very early stage, building really great products,” Gath says.
Now there are several signs Web3 is making a recovery. The price of Bitcoin – the reserve currency for the entire ecosystem, according to Gath – has doubled in the past year, and approval was recently given for the first Bitcoin exchange-traded fund (ETF), something he believes will be replicated by several more crypto-related ETFs coming to market in the next year.
Many fintech CVCs have seen consumer-facing offerings like cryptocurrencies and NFTs as just a distraction and have preferred to focus on the underlying blockchain technology. Gath disagrees.
“I think it’s more complex than that,” Gath (left) says. “I wouldn’t discount the consumer side of it and the excitement around NFTs, whether it’s from the perspective of digital art or whether NFTs can give you title to something like a car or a house. You can look at the underlying NFT technology in both ways. It can be used for digital art or for other things in the ecosystem – both have tremendous upside.”
Gath says Web3 investors are increasingly focused on payment, remittances and stablecoin (digital currencies with a steady price) technology, with some companies picking up serious traction in payment volume. Markets are also coming together. One example is a portfolio company called D-Block, a French neobank that is also providing a non-custodial wallet – a crypto wallet completely secured by the user as opposed to the provider.
In general, Gath says companies are increasingly using blockchain technology as part of more consumer-friendly applications, even if you don’t notice it running in the background, similarly to how HTTPS is used to secure websites without most people knowing how it works.
A second fund for the second half of 2024
About 80% of Kraken Ventures’ portfolio is in equity stakes and the remaining 20% in tokens – an unusual approach for a conventional investor but not with blockchain and crypto startups, especially those developing decentralised finance projects.
Press reports in August suggested the four-person team was busy raising $100m for a second fund, and while Gath is unwilling to discuss precise amounts, he confirms it has been working on a sophomore fund for several months. It’s just that fundraising took second place to investing in the last quarter of 2023.
“It’s lining up for us to move on to the next fund at some point maybe in the second half of this year.”
“We closed six deals that quarter and we’ve ramped up this year,” he says. “But that is still on track. We’re still investing out of Fund I; we have a material amount of capital to continue to invest into new opportunities in Fund I and we also reserve 40% of the fund for follow-on investments.
“So, we plan to continue investing through the series A and B rounds of the seed investments we’ve done over the past 18 months or two years. It’s lining up for us to move on to the next fund at some point maybe in the second half of this year.”
Gath can’t disclose whether Kraken is returning as anchor investor for that fund but says the blend of limited partners for Fund II will largely be the same as its predecessor: large asset managers, family offices, other VC funds and trading firms together with a couple of founders from the Web3 ecosystem.
Regardless of when the fund closes, Kraken Ventures plans to keep investing in the same kinds of startups. And with a portfolio now numbering more than 40, it’s now time to push those existing investments to the next stage.
“We have several opportunities in the pipeline that we’re going to close just in this quarter,” Gath says. “So, I think we’re going to be more focused on helping the companies we believe have a really good product vision in 2023 scale in 2024.”
