Investors prefer ‘breakout trends’ over ‘moonshots,’ VC says

According to venture capitalist Adam Cochran, crypto investments are scarcer these days.

Venture capitalists often face pressure from their limited partners, who are focused on beating index fund returns.

“Entrepreneurs have been very slow to invest in crypto,” Cochran — founder of the firm CEHV — explained in a thread on X.com, [it’s] a slightly nuanced reason: 1. Most have LPs who are simply looking to beat index fund returns. 2. Over the medium term [risk/return ration] “I think owning Bitcoin and ETH will easily beat index funds and can only be beaten by early stage bets.”

See below.

1/10

Venture capitalists have been slow to invest in crypto, and there’s a slightly nuanced reason for this:

1. Most have LPs who are simply looking to beat index fund returns.

2. In the medium term, the R:R of owning Bitcoin and ETH will easily surpass index funds and can only be surpassed in the early stages… https://t.co/yOG4TPdkFx

— Adam Cochran (adamscochran.eth) (@adamscochran) August 9, 2024

Venture capitalists typically target high-growth startups and new technologies that offer significant upside potential.

For example, the S&P 500 index fund, a common benchmark for U.S. stocks, has delivered average annual returns of about 15 percent over the past five years, according to data from curvo.eu.

In comparison, Bitcoin (BTC) has vastly outperformed index funds over the same period, generating an average annualized return of around 45%.

Cochran, an expert in fintech, artificial intelligence and cryptocurrency, emphasized that crypto investments, while high-risk, have historically outperformed index funds in the medium term and offer high-yield opportunities. However, he added that VC funds are generally skeptical of making such investments at an early stage due to the risk factor of digital currencies.

The venture capitalist explained that many venture capitalists prefer to invest in Bitcoin and Ethereum (ETH) to generate fees and generate capital returns, as well as invest in a few high-profile exit projects.

Crypto VC capital investment chart | Source: Galaxy Research

According to a recent study by Galaxy Research, approximately 80% of venture capital funding in the first quarter of 2024 was allocated to early-stage companies, with the remaining 20% ​​allocated to later-stage companies.

Despite waning interest from large mainstream VC firms that have exited the crypto space or significantly reduced their investments, crypto-focused early-stage venture funds have continued their operations.

Many of these funds still have capital from fundraising in 2021 and 2022, allowing promising early-stage crypto startups to raise funds. However, later-stage startups face increasing challenges in raising capital due to the waning participation of larger VC players.

According to Cochran, in the last market cycle, VCs were more active in investing in apps that had already gained momentum, such as OpenSea, in the hopes of capitalizing on late-stage consumer growth.

He also believes that VC firms are on hold, as interest in previous trends like non-fungible tokens (NFTs), AMM forks, DeFi, and layer 2 solutions has waned, and the market is waiting for the next big innovation.

4/10

Although every venture capital firm markets itself as pro-innovation and entrepreneurial, most are not actually pursuing big goals, but are simply investing capital in emerging trends.

Because they do not actually have enough sectoral knowledge to take new risks.

— Adam Cochran (adamscochran.eth) (@adamscochran) August 9, 2024

Some builders continue to develop new ideas without outside capital, but the next big trend has stalled, Cochran noted.

This situation is further exacerbated by the fact that venture capitalists believe that idle capital can generate significant returns in the money markets, discouraging early-stage investments.

He added that this period of inactivity is a litmus test showing the true commitment of VC firms to the crypto sector.

Those with a deep understanding of the space can still make effective early-stage investments. Conversely, others may only invest in later-stage opportunities, revealing a lack of true fit with the industry.