FTX, once one of the largest cryptocurrency exchanges in the world and among the most prominent startups in the emerging industry, is in bankruptcy.
The firm, valued previously at $32 billion, filed for bankruptcy protection earlier this month and CEO Sam Bankman-Fried resigned amid catastrophe for the crypto company as users withdrew funds en masse, leaving FTX with an $8 billion shortfall.
Bahamas-based FTX, along with its U.S.-based arm FTX US, raised $2.4 billion since its founding in 2017. FTX's implosion would rank as "the largest capital loss in VC history," according to Robert Le, an analyst at VC data firm Pitchbook. Sequoia Capital, an FTX investor, said its $214 million investment in FTX is a total loss.
FTX’s incineration of venture capital would be more than twice as much as blood-testing startup Theranos burned through. Theranos raised $1.1 billion from investors before its founder Elizabeth Holmes was charged, and ultimately found guilty, of fraud.
The closest comparison to FTX's collapse, from a venture capital dollars lost perspective, would be drug therapeutic company Intarcia, according to Pitchbook, after its Type 2 diabetes drug was rejected by the FDA.
Venture investing in the crypto space was facing challenges even before the FTX collapse. VC firms invested $4.44 billion in crypto startups in the third quarter of 2022, a 37% decline from the same quarter in 2021. It's down from the highs of 2022's first quarter, when VCs invested a record $8.83 billion into crypto firms.
Pitchbook expects VC investments in crypto to "recede in 2023" and limited partners, who are investors in venture firms, "may rethink capital call requests for what's now widely viewed as the riskiest investment areas."
Even during a tough 2022, crypto deals continue to get done, however. Joepegs, an NFT marketplace, raised $5 million from now-defunct FTX ventures and Avalanche Foundation. Matter Labs, an Ethereum-scaling startup, raised $200 million. TRM Labs, a San Francisco blockchain startup, raised $70 million in Series B funding.
Decasonic, a VC firm that invests in crypto and blockchain startups through its $49 million fund, told American Inno that the FTX situation creates an "opportunity" for the firm "given the ample dry powder in our fund."
"I am cautiously optimistic that these near-term events set a foundation for a longer-term healthier ecosystem, similar to the early dot com incumbents in the 2000s who had made strategic missteps for innovators to thrive," founder Paul Hsu said. "While general investor confidence has been shaken, we will further adapt to the new normal. We will raise the bar for our investments, along the three parameters of narrative, product market fit, and execution."
Hsu said Decasonic had "had zero direct impact" from the FTX situation and none of its portfolio companies were impacted. He said deal flow is "stronger than ever."
FTX's downfall is already seeing negative impacts across the crypto industry. Crypto lender BlockFi said it has significant exposure for FTX and withdrawals from its platform continue to be paused as it prepares for a potential bankruptcy. San Francisco-based Solana, a company that developed the Solana blockchain, saw its SOL token value halved over the past week as holders of the coin sold off en masse over its perceived entanglements with FTX. And the lending arm of the crypto firm Genesis said it's pausing new loan originations.
Nevertheless, Pitchbook analyst Le remains bullish on the long-term impacts of the crypto space.
"Still, we believe the long-term prospect for crypto and blockchain technologies remains favorable, and those with longer time horizons on investments will likely continue to find valuable opportunities," he said.
