Cryptocurrency exchange Binance’s freshly-closed $500m investment fund highlights a new species of CVC investor that has been on the rise — the cryptocurrency company that has set up its own CVC arm and is investing in younger crypto startups at a frenetic pace to build up the ecosystem.
The half-billion-dollar vehicle, which will be part of Binance’s incubation and venturing arm, Binance Labs, will back companies at any stage, from incubation to late-stage growth across Web3 segments such as decentralised finance, gaming, non-fungible tokens (NFTs), cryptocurrency and metaverse. Like its fellow crypto CVCs, Binance is looking to build up the connective tissue on which its core business depends.
“Web3 is both a nascent and burgeoning space — building the ecosystem is critical as the foundation for spurring future growth,” Julian Hosp, co-founder and chief executive of decentralised financial services provider Cake DeFi, which recently launched a $100m CVC called Cake DeFi Ventures, told Global Corporate Venturing.
Some of the largest cryptocurrency exchanges in the world – Binance, Coinbase, FTX, Kraken, 2TM and KuCoin to name a few – actively invest in early-stage companies, most of them through their own CVC units. They are not alone – companies from across the Web3 space, such as decentralised financial services provider Cake DeFi, blockchain gaming developer Animoca Brands and decentralised protocol developer Uniswap Labs, are also following suit.
“In a Web3 environment, the connection between values, people, and economies is essential, and if these three elements come together to build an ecosystem, that will accelerate the mass adoption of the blockchain technology and crypto,” said Binance’s founder and chief executive, Changpeng Zhao, of the new fund in a statement.
A different breed?
These new CVC investors behave somewhat differently to your usual corporate fund.
For a start, they move fast. Coinbase Ventures, for example, averaged an investment every 2.5 days last year, and it made 71 investments in Q1 2022, more than in any quarter last year.
They also don’t shy away from investing in potential competitors. Coinbase has backed crypto financial services platforms BlockFi, Talos and even FTX, in an effort to accelerate the ecosystem, while also benefitting areas of the parent’s core business where investees would be partners rather than competitors.
Every investment is strategic
To a larger extent than CVCs in most other sectors, just about every investment crypto CVCs made into Web3 is strategic by definition. The notion that the tide will lift all boats is especially powerful in an industry where the value of your product or service is largely ephemeral – dependant entirely on the expectation that an ecosystem is being built to give it tangible worth. A boat, even a nice one, is worth a lot more in the open water than it is stuck in the marina.
Cryptocurrencies and other digital assets such as non-fungible tokens (NFTs) are still the subjects of copious scepticism, and even derision, among those who see them as nothing more than speculative instruments. Having common, real-life applications for digital assets – beyond just the boom-and-bust of crypto trading or the social cachet of premium NFT ownership – would go a long way toward changing that perception.
If you could tokenise things like real estate to cut out the middle man, if you could participate in sporting events you watch in real-time or, above all, if you could pay for everyday goods using cryptocurrency, all of a sudden the fad becomes real. There is an implicit understanding that the various strands of Web3, from exchanges to digital wallets, marketplaces, games and esports, metaverse, infrastructure and decentralised finance, all stack and act as multipliers to each other’s value.
This is not to say that the financial aspect is not crucial – au contraire, crypto CVCs’ returns are keeping pace with VC fund managers, many of which are now themselves self-described crypto-native and investing exclusively in Web3, such as Paradigm, Haun Ventures and Electric Capital.
A Binance-led $150m round in April for blockchain game company Sky Mavis – bailing it out and paying users back after it suffered a massive hack – is indicative of how important it is to investors that certain pillars of the ecosystem not be allowed to fail. In late March, hackers targeted and infiltrated a bridge between the Ethereum network and an Ethereum-based sidechain for its flagship game Axie Infinity, fraudulently withdrawing 173,000 Ethereum tokens and 25.5 million USDC US Dollar-linked stablecoins, amounting to over $620m in total.
With Axie Infinity having blazed a trail for blockchain-based play-to-earn gaming, Sky Mavis is still one of the best-known names in gaming finance (GameFi) – itself one of the fastest-growing segments of Web3 – and its collapse would have sent shockwaves through the sector and consumer confidence. Investors recognised the need to respond quickly and the involvement of a player as big as Binance was seen to show how potentially harmful the fall of one big domino could be to the wider cryptosphere.
The corporate advantage
The crypto gold rush has also meant that getting into funding rounds has become more competitive – sought after Web3 startups are no longer beggars and can afford to be choosers. Here, CVCs can bring the weight of their parent to bear in differentiating themselves.
“As natives in the Web3 and fintech space, we have deep insights and immediate visibility to the latest trends, technological innovations and game-changers in this space,” said Hosp.
“We are able to offer more strategic value as investment partners.”
“Because we are entrenched in the Web3 space, we are able to offer more strategic value as investment partners beyond simple capital injections. We are able to give startups access to resources, proprietary R&D and connections that will aid their growth in this space.”
FTX Ventures, the $2bn investment unit FTX set up in January, is big enough to play on the same level as the heavy hitter VC crypto funds like Paradigm’s $2.5bn Paradigm Fund One, the recently launched $1.5bn Haun Ventures and Andreessen Horowitz’s $2.2bn Crypto Fund III, which Andreessen Horowitz launched just last year but has recently followed up with a new $4.5bn crypto vehicle.
Like their VC counterparts, crypto CVCs have been increasing already large venturing commitments they made not very long ago. China-based crypto exchange Crypto.com, for example, launched its Crypto.com Capital unit in March last year with $200m in capitalisation, before more than doubling its size to $500m in January.
Binance is already one of the most prolific crypto CVCs out there, claiming to have incubated or invested in over 100 projects across 25 countries since 2018. It previously launched a $200m fund through its Smart Chain subsidiary alongside blockchain gaming developer and investor Animoca Brands in December, which will focus on GameFi.
Limited partners in Binance’s new fund include DST Global Partners, Breyer Capital and unnamed other corporations, private equity funds and family offices.
Not just building the car but the whole road system
In addition to seeing significant growth in Layer 1 protocols – the underlying blockchain technology itself – such as Ethereum, Polygon and Solana, 2021 brought with it massive investments in Layer 2 technology, which is stacked on top of Layer 1 and facilitates interaction between different blockchains. The industry is not just building the car, but also the roads, traffic lights, roundabouts, bridges and driving schools.
Though across-the-board VC valuations are generally expected to be curtailed, along with the value of cryptocurrency and even the market capitalisation of a behemoth like Coinbase, which dropped nearly 80% since its peak in November, post-money valuations of late-stage crypto and blockchain startups continue their steep climb, according to Pitchbook data, seemingly immune to what is going on around them. There is value in momentum and corporates want to be in the driver’s seat as it continues to rise.
