Cryptocurrency Mania Fuels Hype and Fear at Venture Firms

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Bart Stephens has found himself in high demand lately. After four years of investing in cryptocurrency and preaching its gospel, his venture-capital peers are finally listening.

During a recent briefing at a storied Silicon Valley venture-capital firm, the young analysts in the room nodded along to his words in excitement, Stephens says. But not everyone was sold. In the middle of his presentation, a gray-haired senior partner stood up, yelled “PONZI SCHEME!” and stormed out. “Most generalist venture capitalists do not believe in this sector,” Stephens says.

If investing is driven primarily by greed and fear, few subjects elicit either more greed or more fear among venture capitalists these days than cryptocurrencies. Some big-name venture investors, including Andreessen Horowitz and Sequoia Capital, are plunging deeper into the arena, excited by the prospect of big returns, and perhaps, changing the nature of venture investing.

Crypto-evangelists believe their “initial coin offerings,” or ICOs, employing a new way to fund startups, could upend the $500 billion, 50-year-old institution of venture capital itself. In most ICOs, entrepreneurs sell “digital tokens” related to a service they plan to build using blockchain technology; in some cases, they sell options to buy the tokens. If the service is successful, the value of the tokens will presumably rise, and its creators will have funded their companies without ceding any of their ownership stakes to venture capitalists. Tim Draper, founder of venture firm Draper Associates, is forcefully bullish on the trend. “I think it’s a bigger deal than the internet. I think it’s a bigger deal than any of the industrial revolutions. It’s an opportunity and a new technology that we can all use to transform society,” he declared at the Web Summit technology conference this week.

This year cryptocurrency startups and projects have used ICOs to raise $3.2 billion, according to ICO tracker Coinschedule. In some months this summer, ICO funding eclipsed that of traditional venture startups. In the second and third quarters, 90% of venture funding for blockchain-related startups came through ICOs, according to a report by Silicon Valley Bank. “It is already significantly changing the venture landscape,” says Greg Gilman, a partner at venture firm and incubator Science Inc.

Others are reluctant, seeing cryptocurrency as a bubble, a fraud, or worse. “People are raising obscene amounts of money for companies that are not yet at the stage where they are good stewards of that much money or would know how to deploy it,” says Mark Suster, a managing director at Upfront Ventures. “It’s being done with a get-rich-quick mentality, and it never ends well.” Even some longtime cheerleaders for the sector lament today’s hyped-up gold rush mentality. “You know how you feel when that band that you saw in a 20-seat club and fell in love with plays Madison Square Garden?” asks Fred Wilson, a partner at Union Square Ventures, who was an early believer in cryptocurrency. Still, Union Square’s partners believe the hype will fade and the tech will persist. “That’s what we all experienced with the internet from 1990 to 2000,” he says.

A Debate Inside Firms

The debate is playing out between firms, but—as Stephens’ recent incident dramatizes—also within firms, largely between younger partners and their older colleagues. Venture capitalists make their living taking big risks, but when it comes to cryptocurrencies, most are proceeding cautiously. They’re reading books by bitcoin gurus, opening digital wallets on Coinbase, and dabbling in crypto speculation. They’ve assigned research projects to analysts and hired evangelists to give presentations. Several have purchased mining rigs for the office. But they’re not yet allocating any of their investors’ cash.

General Catalyst’s partners recently heard a deep dive on blockchain technology, outlining the opportunities and risks. The firm is still deciding on its stance, says managing director Hemant Taneja. General Catalyst has ruled out buying bitcoin and ether directly, even though owning those currencies has generated the best returns so far, because that’s not a proper use of the firm’s funds, he says.

Hyped tech trends come and go with the wind in Silicon Valley, but this one is more complicated, more arcane, more legally dubious, and more glorified. Blockchain, the technology that powers digital currencies like bitcoin and ether, and its growing ecosystem of related software and startups, has been called a revolution, with growth opportunities comparable to those of the early consumer internet. And as with the early…

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