Why crypto’s VC kingmakers are backing rival startups

Although most crypto companies claim to be decentralized, a small number of venture capital firms possess tremendous influence within the industry — and it is common practice for these investors to back rival projects. 

Andreessen Horowitz (a16z) is perhaps the most striking example. It has raised $7.6 billion for its crypto fund and has backed close to 100 startups in the sector, including several Layer 1 blockchains.  

But a16z is not an outlier. Multicoin Capital, Paradigm, and FTX Ventures — to name but a few heavyweights — are also investing in multiple rival startups.  

Although the approach isn’t exclusive to crypto, many traditional venture capitalists find it jarring. Crypto VCs, on the other hand, contend that it makes sense given how early the industry still is in its development.  

Webs of cash 

The crypto industry is still so small that the shared interests of prominent VC firms are hard to miss. The graphic below, for example, highlights the overlapping investor rosters of the entities behind Aptos, Solana and Sui, three much-hyped Layer 1 blockchains.

FTX Ventures will lead a $200 million round for Mysten Labs, the startup behind the Sui blockchain at a $2 billion valuation, according to The Information. FTX Ventures was also the lead investor in Aptos Labs’ $150 million raise in July. Mysten Labs and Aptos Labs, both run by former Meta employees, are seen as rivals. 

Paradigm, the crypto venture firm set up by former Coinbase co-founder Fred Ersham, has led investments in OpenSea, Fractal Labs, and Magic Eden — three non-fungible token (NFT) marketplaces — this year alone.  

Another example involves cross-chain bridge projects. Multicoin Capital co-led an investment in interoperability protocol LayerZero Labs in September 2021. Yet Multicoin will also invest in a competing project, crypto bridge Wormhole, in an upcoming raise that The Block reported in April, according to two people familiar with the matter. A spokesperson for Multicoin declined to comment. 

Barry Silbert’s Digital Currency Group has backed so many crypto startups that it would be hard-pressed to avoid backing at least some rivals. The most prominent example may be its investments in both Chainalysis and Elliptic, the two leading blockchain forensics outfits.

The approach raises ethical questions, Ollie Richards, a partner at MMC Ventures said. “Having insights on things such as new product development plans, what’s working and what’s not, pricing, market dynamics, and so on, from two competing businesses in one VC fund, causes conflicts,” he explained. “Entrepreneurs are also very uncomfortable in a situation like that.” 

“It’s not just an ethical decision but pragmatic,” said Ophelia Brown, founder and partner at Blossom Capital. “Why fund two companies to compete when in most markets it’s winner-takes-all?”  

Still early? 

But Brown — whose company raised $432 million for a new fund in January, with a third set aside for crypto bets — then answered her own question. “In crypto, where the market is so early and the size of outcomes are likely to be very, very large, especially with infrastructure plays for example, VCs are wanting to spread bets,” she said. 

It’s a strategy that borders on “hedging your bets” — akin to investing in Jeff Bezos’ Blue Origin, Richard Branson’s Virgin Galactic, and Elon Musk’s SpaceX, on the basis that each company has a different approach to getting average Joes into space.  

Alokik Advani, managing partner at Fidelity International Strategic Ventures, put it more diplomatically: “In crypto, given many of the projects are very early in their proof points, the tendency is to take a ‘portfolio’ approach to fund winners.” 

Take, for instance, the Layer 1 blockchains.  

“On L1s, many investors believe in a multi-chain future, potentially where some blockchains have distinct category expertise and advantages based on their architecture,” said FTX Ventures lead Amy Wu. “That and also how early the space still is has led investors to back multiple blockchains.” 

Besides, not all crypto startups that appear to occupy the same niche are competitors, according to Multicoin Capital’s managing partner Tushar Jain. 

“To an outsider it can seem like these things are directly competitive, but really they have chosen different tradeoffs in their technical design. They’re not competing for the same thing,” he said, adding that Multicoin wouldn’t back two teams focused on the same tradeoff.  

This style of investment, while unusual, tends to crop in other industries where investors are flush with cash. MMC’s Richards pointed out that Tiger Global Management and SoftBank — investors known for writing huge, late-stage checks for tech startups — are also in the habit of backing rivals. The SoftBank Vision Fund has invested in at least four taxi startups: DiDi, Uber, Grab and Ola.  

What is perhaps unique to crypto is that there is a widespread sense among institutions and retail investors alike that a rising tide lifts all boats. It is a belief that has led critics to draw comparisons between crypto investments and Ponzi schemes. But it also appears to have persuaded executives in the sector that what is good for one startup may well be good for others.  

“I think all these things are positive sum because getting more people using this stuff is positive sum for the whole ecosystem,” said Jain. “It doesn’t matter who brings them on, whether it’s Solana, Aptos, Ethereum, Polygon, even Bitcoin … I think it’s value accretive for the whole ecosystem.”