Crypto VCs are ready to deploy, but want firms to tighten their belts

Earlier this month, I wrote about how a looming recession could pump the breaks on fundraising in the cryptocurrency market. 

Since then, the S&P 500 has shed an additional 18% and the possibility of a global economic slow-down tied to the spread of COVID-19 continues to loom above markets. Indeed, this morning, the White House and U.S. Senate agreed on a $2 trillion stimulus package to prop up the American economy during a period in which most hotels, restaurants, bars, and other key components of the country remain shuttered. As I noted, the impact has already been felt in the market for initial public offerings, which sources say has been put on ice.

Still, the market for crypto fundraising may not be as bleak as I originally presented in the piece. While I still think fundraising will be more difficult and companies who are looking to raise should take into consideration the current backdrop, I don't think that venture capital firms in the space are going to sit on their capital. Indeed, a number of VCs have either closed funds or are working on closing funds and are ready to deploy dry powder. 

"Many of the big players—Polychain, A16z, et al—have either just closed funds or are still sitting on a ton of cash," one crypto exchange executive noted in a recent conversation. 

"They're going to want to deploy that. So I think you still see some big raises, but it will thin the herd a little which I think is a good thing," the person added.

Therein lies an important point. The space will likely see more fundraising rounds close, but based on several conversations with VCs, the type of companies that actually close will meet certain characteristics:

• New to the market
• Able to cut costs
• Sector

"VCs have moved quickly to encourage portfolio companies to reduce burn, but some capital will go to rescue rounds," one hedge fund manager told The Block in an interview. I'm sure most folks would welcome more discipline to the Wild West crypto world. 

Of course, the sector matters as well, as noted by Pantera Capital's Paul Veradittakit. Deals in less profitable markets like Open Finance and more crowded markets such as custody could slow. 

"We all have dry powder, but valuations are going to drop," he said.