A VC who’s been panning crypto since 2017 discusses where he’s investing now
Not all venture investors were bewitched by the promise of cryptocurrencies and the growth of companies like FTX, the crypto exchange that filed for bankruptcy nearly two weeks ago. Some venture capital firms actually ignored the fanfare and passed.
Consider Ramy Adeeb, founder and general partner of 1984 Ventures, who in 2017 took a very public stance against investing in crypto. He published a column on LinkedIn arguing against the sector, likening Bitcoin to a scene in the movie “The Big Short” when Mark Baum and his staff realize that a local mortgage broker in Miami has been duping strippers into taking out high-leverage loans. Adeeb sought to debunk several myths about Bitcoin, including: that there is limited access to the currency; that blockchain makes Bitcoin valuable; and that Bitcoins are safe. (Adeeb is the founder and former CEO of sharing site Snip.it, which was sold to Yahoo in 2013 and is also a former principal of Khosla Ventures.)
Adeeb’s firm, a seed stage venture investor focused on software-enabled startups in sectors such as fintech, infrastructure and healthcare, has never seriously considered investing in FTX or similar companies. At that time, they invested their first fund, a pool of $45 million. “Our biggest concern with crypto was the amount of applications that enabled pyramid schemes or the Greater Fool Theory,” he said, referring to games such as Axie Infinity, which allowed users to exchange in-game winnings for real money. Axie Infinity surged in popularity in 2021, peaking at 2.7 million daily users and achieving a $3 billion valuation. Earlier this year, Sky Mavis, the parent company of Axie, revealed that a hacker stole $600 million worth of crypto from its players and the game has flamed out, Fortune reported.
But in 2017, Adeeb and 1984 Ventures received a lot of eyeballs for their anti-crypto stance, he said. Many of their peers said they would miss out on the next wave of technology. Some limited partners, or LPs, also questioned 1984’s strategy, while others said they would get more money if they switched to crypto. One LP told Adeeb that 1984’s first fund was likely a top quartile or top decile pool. But if crypto funds, all of which traded at 10 to 15 times their multiple of invested capital, or MOIC, were included “then you’re just going to be at the bottom,” LP said.
Sometimes this would lead to moments of doubt, Adeeb said. “But then we wanted to go and dig deep and look for use cases for real opportunities, and we just didn’t find anything,” he said in an interview with Fortune.
Five years later, the crypto space is in disarray after FTX, one of the largest crypto exchanges, filed for Chapter 11 bankruptcy protection earlier this month. Sam Bankman-Fried, the founder and former CEO of FTX, resigned from the company. The FTX failure follows other crypto breakouts this year, including Terra’s LUNA, an algorithmically stable coin; the crypto bank Celsius Networks; and Three Arrows Capital, the hedge fund. On Monday, Blockfi, the cryptocurrency lender, filed for Chapter 11 protection. The industry is currently waiting for the next crypto firm to implode.
Adeeb has yet to utter an “I told you so.” Instead, he said his firm, 1984 Ventures, is simply trying to avoid the taste of the day, whether it’s Google Glass, 3D printing, virtual reality or VR, autonomous driving, crypto or today’s obsession with generative AI. (The latter is a category of machine learning where computers can produce original content, such as images, sounds and videos, that are very realistic.) be in sectors that are hot today,” Adeeb said in an email. Fund 1 has performed exceptionally well and is somewhere between the top quartile and top decile, he said. The pool has invested in companies such as travel nursing platform Trusted; Kyte, a website for rental cars; and Convex, a software platform for businesses.
Adeeb’s ventures from 1984 is taking a similar strategy with its current fund, a pool of $75 million raised by 2021. The venture firm wants to invest in software companies that want to upgrade outdated industries. It sees growth in sectors such as on-demand nurses, AI to improve retail and predictive analytics for grocery orders, he said. “We intentionally avoid hot sectors,” Adeeb said.
Adeeb was not the only one to reject crypto and FTX. It is Alexander Pack, a managing partner at Hack.VC, who in November 2018, when he was a managing partner and co-founder of Dragonfly Capital, considered becoming the first institutional investor in the quantitative trading firm Alameda Research. Alameda, at the time, launched crypto exchange FTX. Pack chose not to invest in the Bankman-Fried venture after spotting too many red flags. Another investor Fortune spoke to said he also chose not to invest in FTX several times because the valuations for the company “didn’t make sense.”
Adeeb attributed much of the interest in crypto startups to FOMO. Silicon Valley is “the world’s best hype machine,” he said. (Adeeb’s firm, 1984 Ventures, is based in San Francisco and a Silicon Valley fund through and through.) Investor appetite for certain sectors goes through pendulum swings, Adeeb said. Whenever there is a new idea that promises quick money, people jump in, and this always leads to some executives going to jail, he said. Adeeb pointed to Michael Milken, who developed the high-yield bond market in the 1980s and went to prison in 1990 for securities fraud. In the early 2000s, the implosion of the dot.com bubble revealed a series of accounting scandals that sent top executives from Enron, Tyco and WorldCom to jail. Then there was the subprime mortgage boom of the 2000s, which led to the Great Financial Crisis, or GFC, in 2008. Lehman Brothers filed for bankruptcy during this cycle, in 2008. (Interestingly, only one banker, Kareem Serageldin, the former global head of structured credit trading for Credit Suisse, who allegedly lied about the value of the bank’s securities, went to prison in connection with the GFC.)
The last cycle was the crypto boom of 2022. Bitcoin rose to a high of more than $68,000 last year when the currency was accepted as a payment method. But that was before the wave of crypto bankruptcies this year. Bitcoin has plunged 76% since then, trading Monday at $15,991, according to crypto exchange eToro.
It is unclear whether Bankman-Fried, or anyone, will go to jail. But these fraudsters play an important role in calling attention to sectors, Adeeb said. Milken’s innovations resulted in the current form of bond trading, while the accounting scandals of the 2000s improved financial reporting by spurring the development of new regulations and legislation, such as the Sarbanes-Oxley Act of 2002. With the GFC, banks learned not to overextend credit to the home, Adeeb said. The crypto meltdown in 2022 could lead to a necessary overhaul of securities regulation, he said. “Current laws do very little to protect investors, as evidenced by the many pump and dump schemes that took place. My hope is for better regulations – ones that protect retail investors, as opposed to those that stifle innovation in the sector to maintain government control over the money supply,” Adeeb said.
The crypto hype is over, and this means that the entrepreneurs who remain are the ones who are serious about solving problems. Which has led to an interesting twist for Adeeb: 1984 Ventures made its first crypto investment. This month, the VC took a stake in a ticketing provider that uses blockchain technology to control prices, prevent fraud and duplicate tickets. Adeeb also sees uses for crypto in developing countries by allowing people in those areas to invest in something more stable than their local currency. Having avoided the likes of FTX which created a huge mess of problems, “We’re going to look at real-world applications of the blockchain that solve real-world problems,” Adeeb said.