August 30, 2022

The crypto winter hasn’t put off European VCs just yet

Mainstream investors that began dipping their toes into crypto last year still have faith in its inherent value

Amy O'Brien

6 min read

Jessica Holzbach, Pile's CEO and cofounder

It’s always been volatile, but the global crypto market has had a particularly rocky few months amid the wider tech downturn (to make a big understatement). 

Yet at the same time, the world’s biggest asset managers are piling into crypto projects of their own and European VCs like Cherry Ventures and Blossom Capital have launched new dedicated crypto funds. Industry chatter says UK crypto firm Copper will close a massive funding round with backers including Barclays and Dawn Capital any minute now. 

But what of the so-called mainstream venture capital firms in Europe that don’t have a dedicated crypto fund? Amid the 2021 bull market, many started dipping their toes into crypto for the first time. Eight months and a handful of crypto company busts later, have they changed their minds?


Investors in two camps

Last year, VC investment into European crypto startups ballooned — from $431m in 2020 to a record $2.6bn in 2021.

But so far the crash isn’t playing out as badly as some had feared. Instead, investors tell Sifted it’s just reinforcing existing perceptions of the market.

“The investors that I know fall into two camps,” says Ruth Foxe Blader, partner at Anthemis, which has made two bets on crypto this year — digital assets data provider Kaiko’s Series B and crypto API provider Pile’s seed round.

“On one side you have the fintech investors that always hated crypto and feel vindicated by the crypto winter,” she says. 

“And on the other, you have the people who think we’re probably in the early innings of the impact that cryptocurrencies can have on the financial system and that the infrastructure of Web3 can have on the web.” 

VCs without a specific mandate to invest in cryptocurrency projects repeatedly cite interest from asset managers like BlackRock as further validation that crypto is definitely here to stay, beyond temporary market wobbles. 

Last year, VCs poured $2.9bn into European crypto startups, according to Dealroom data, which was a big uptick from the $431m invested in 2020. So far in 2022, the figure stands at $1.9bn — which suggests investment may be in line with last year’s figure, buoyed amid a wider market downturn by some pretty chunky later-stage fundraises from mainstream VCs. 

In June alone, Atomico backed Estonian NFT infrastructure startup NFT Port in its $26m Series A; Anthemis, Point Nine and Eight Roads Ventures backed digital assets data provider Kaiko in a $53m Series B; and Italy’s United Ventures backed crypto exchange Young Platform in a €16m funding round. 

Francesco Filia, partner at Fasanara Capital, says that market weakness and strong percentage losses in coins are often given overdue importance compared with the underlying trend of increasing crypto adoption. 

“Swathes of new participants are joining the sector every month: investors (including institutional ones); builders; developers; infrastructure providers; and users,” he says. 


A question of trust

When Berlin-based digital bank Nuri, which provided both fiat and crypto banking products, filed for insolvency earlier this month, CEO Kristina Walcker-Mayer cited challenges with “the new reality in the financial markets”.

Though European crypto companies like Bitpanda announced layoffs earlier this year, it was Europe’s first high-profile crypto insolvency. And it came two months after the company announced layoffs as it struggled to raise new funds. Nuri’s cap table included Earlybird, Molten Ventures and other mainstream European investors who were early on the scene.

Earlybird partner Dr Christian Nagel tells Sifted that the straw that broke the camel’s back was US crypto lender Celsius’s bankruptcy filing earlier this summer.

“I think Celsius triggered the downward spiral, because Nuri had very good interest from investors and they were about to raise. It was very unfortunate timing,” Nagel says.

“In the end it led to a situation where many investors just turned away because they didn’t know what the long-term effects would be in the market, and they were worried about their reputation.

“When it comes to banking, everything is built on trust. So when things like this happen, amid the wider macro uncertainty, people just lose belief. Unfortunately there was no interest left from the investor side.” 

But this harsh fundraising climate isn’t contained to just crypto. We’ve already seen buy now, pay later fintech Klarna, previously Europe’s most valuable startup, suffer a massive 85% valuation drop in a painful downround this summer. Plus layoffs across the fintech industry indicate that founders are doing all they can to avoid having to "mark to market" with a new funding round. 

Anthemis’s Foxe-Blader says that in the current environment, fintechs that don’t “absolutely” need to raise capital won’t.

"This is such a sentiment-driven business, and it definitely has an impact on investors if everyone on Twitter is saying 'I wouldn't do this deal right now'."

Investors need to believe that the companies they’re investing in now will be able to continue raising capital in the future, she explains.

Keeping the LPs happy

Another factor in VCs’ decision to deploy in crypto: the attitude of their investors — limited partners (LPs) — towards the industry. Investors say that LPs haven't yet become spooked enough to shift VC deployment away from crypto. 

“These days I think most LPs realise that the crypto asset class is here to stay and they need to have exposure to it,” says Fasanara’s Filia. “They can’t ignore it to be future-proof.”

Other investors say their LPs do still seem afraid of crypto, but that isn’t enough to undermine VCs’ theses on the industry. 

“It's really hard to separate what is a broad-based repricing of assets versus something that's really specific to crypto,” says Foxe-Blader. 

“Yes, some different coins and different parts of the ecosystem are crashing. But then it also feels like, is there an asset class you actually feel comfortable in right now?”

Among mainstream VCs who have recently convinced their LPs that they need to be in on crypto, there's an argument that the universal tech downturn has helped crypto maintain its viability.

“Let’s put it this way: very few investors are saying to their LPs — we promise you we’ll do nothing on crypto,” says Foxe-Blader. “That just doesn’t feel ‘of the moment’ if you’re a fintech investor right now.” 

If VCs are still betting on crypto, what are they backing?

There are two recurrent themes we’ve noticed as early-stage Web3 and crypto funding rounds continued to pour into the Sifted inbox over the last quarter. 

Almost all of the startups that have secured funding in the bear market have proven founders, or are providing the infrastructure to underpin crypto products.

One startup that fits under both is Pile, a crypto API provider headed up by cofounder and CEO Jessica Holzbach, who previously cofounded B2B bank Penta.

The Berlin-based startup raised a €2.8m in pre-seed funding round in June that was led by Female Innovators Lab by Barclays and Anthemis, Auxxo, fintech investor Ilavska Vuillermoz Capital and a bucketload of angels.

“As I'm an investor myself I set the bar very high internally. I asked our team to really focus on building a sustainable business with good unit economics,” Holzbach tells Sifted.

There’s also the sense of a "crypto spectrum" among founders and VCs, where startups that are building the infrastructure — or as investors love to say, "picks and shovels" bets — are perceived as less risky investments. They’re seen as an entryway for investing in the sector because they don’t have direct exposure to the ultra-volatile cryptocurrencies themselves.

Smart crypto wallet Argent recently raised a $40m Series B round that attracted mainstream VCs Creandum and Index Ventures, alongside more crypto-focused investors like Fabric Ventures and Metaplanet. 

Its founder and CEO Itamar Lesuisse is a serial entrepreneur, having cofounded two Web2 startups before Argent, which he also says helped him gain traction in the early days. He believes the fact that Argent has a clear, understandable use case and isn’t perceived as "too far along" this crypto spectrum also aided the company’s fundraising efforts. 

“Argent is more Web3, but it’s something that is very clear to investors as having a real consumer application, which I think helped us gain mainstream interest,” he tells Sifted. 

Amy O’Brien is Sifted's fintech reporter. She tweets from @Amy_EOBrien and writes our fintech newsletter — you can sign up here

Amy O'Brien

Amy O'Brien is a reporter at Sifted. She covers fintech and writes our weekly fintech newsletter . Follow her on Twitter and LinkedIn