Crypto Venture Funds Look for an Edge in a Crowded Market

With fewer resources than what is available to the larger funds that were raised this year, these investors are finding other means to be useful to entrepreneurs and get into deals. Smaller funds are focusing on a stage, subsector, or way to help with a particular aspect of building a crypto business.

Regan Bozman and Mike Zajko, general partners and founders of Lattice Capital, for example, said they emphasized in their pitches to investors and startup founders their experience running crypto-token sales as early employees of CoinList Inc., a fundraising platform that was used as a launchpad by crypto startups such as Filecoin and Solana.

“We’ve worked on 20 to 30 token launches, and have data points on what’s worked,” Mr. Bozman said. That specialty helped Lattice raise a $20 million venture fund in August from Accolade Partners, Bain Capital Ventures and others.

The crypto-investor landscape is busy and competitive. As of the first half of this year, there were 372 crypto-only funds, as well as 196 traditional funds, based in the U.S., that were active in crypto startup deals, according to a report from crypto-funding database Dove Metrics.

In an effort to stand out from the crowd, some venture funds are investing in a particular type of crypto startup, such as decentralized finance in the case of Framework Ventures, and non-fungible tokens, or NFTs, for Sfermion.

“It’s a testament to how huge the space is, that you can say you are a generalist in crypto,” said Soona Amhaz, general partner at crypto venture fund Volt Capital. “Two or three years ago, if you said you invest in crypto, that in itself was too niche,” she added.

Globally, crypto venture funds collected about $17.8 billion through Nov. 30, nearly triple the $6.1 billion raised by such funds all of last year, according to data provider Crypto Fund Research. The largest crypto funds ever were raised this year, with Paradigm raising the largest crypto fund to date at $2.5 billion, soon after Andreessen Horowitz completed its $2.2 billion crypto fund.

For Evan Tana and AJ Solimine, who are investing out of a $38 million second fund at their firm Script Capital, the influx of capital into crypto from large funds has meant focusing on pre-seed rounds.

“We’ve had opportunities, where a big multistage fund comes in, and we get squeezed out,” Mr. Tana said. But, he added, that has been a good thing in the sense that it left Script no choice but to stick with its strategy of investing in the very earliest stage companies. “It’s a blessing,” he added, “It forces you to partner and get to conviction even earlier.”

Mr. Tana, a former product manager at Dropbox and adviser to startups such as Patreon, and Mr. Solimine, who previously co-managed Eduardo Saverin’s family office, say that they feel best suited to help entrepreneurs who want to pivot into crypto-based business models.

While the crypto venture market is getting increasingly competitive, it is still a sector where smaller venture funds are often given more opportunity to invest in each deal, crypto VCs say.

“In our experience, crypto projects are more likely to distribute ownership across a larger number of early backers than traditional startups. There are philosophical, regulatory and strategic reasons for this,” Lattice Capital’s Mr. Bozman said.

Crypto startups usually seek to build large communities of developers and users, where as many people as possible collaborate. That means that founders have an incentive to tap more investors and their networks, to generate wider interest in their projects. Distributing ownership can also help avoid regulatory problems, VCs say.

As a result, investor syndicates are more collaborative in crypto than in standard tech deals, according to Volt Capital’s Ms. Amhaz. “That’s the perk of investing in crypto right now,” she said.