Andreessen Horowitz Went All In on Crypto at the Worst Possible Time
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
5 min
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As cryptocurrency prices soared last year, no investor bet more on the sector than Andreessen Horowitz.
The storied venture-capital firm had developed a reputation as Silicon Valley’s greatest crypto bull, thanks largely to a 50-year-old partner named Chris Dixon who was one of the earliest evangelists for how the blockchain technology powering cryptocurrencies could change business. His unit was one of the most-active crypto investors last year, and in May announced a $4.5 billion crypto fund, the largest ever for such investments.
The timing wasn’t good.
Prices for bitcoin and other cryptocurrencies have plunged this year in the midst of a broad market downturn, erasing billions of dollars in paper gains for Andreessen’s funds. Consumer demand has vanished for some of the firm’s most-prized crypto startups, while others are facing increased scrutiny from regulators.
Andreessen’s flagship crypto fund shed around 40% of its value in the first half of this year, according to people familiar with the matter. That decline is much larger than the 10% to 20% drops recorded by other venture funds, which have largely avoided the risky practice of purchasing volatile cryptocurrencies, according to fund investors.
Despite the record cash pile, Andreessen has dramatically slowed the pace of its crypto investments this year.
Now Mr. Dixon has to convince nervous investors that Andreessen didn’t overplay its hand for the May fund, which other crypto venture capitalists said is too large for a sector headed into a so-called crypto winter.
“They’ve just pushed it so far with crypto that I’m not sure they can rebalance,” said Ben Narasin, a general partner at the VC firm Tenacity Venture Capital.
In an interview, Mr. Dixon said he remains faithful to the crypto-centric vision of the internet called Web3 that underpins Andreessen’s push into the sector—a view that blockchain versions for a range of services will return financial control and power to users in the form of cryptocurrencies they can earn and trade.
Mr. Dixon said that the sector is still in the early stages of acquiring users and that he isn’t sure when mass adoption of blockchain services will occur. Crypto “is about the political and governing structure of the internet,” he said. “We have a very long-term horizon.”
Mr. Dixon’s path from the periphery of Andreessen mirrors the firm’s transformation into a crypto powerhouse.
A coder from childhood who earned master’s degrees in both philosophy and business, he helped found and sell two startups—one in cybersecurity and the other in e-commerce—and co-founded the VC firm Founder Collective. He also nurtured interests in such emerging technologies as virtual reality and 3-D printing.
He joined Andreessen in 2012. The firm, founded three years earlier by Marc Andreessen and Ben Horowitz, was quickly becoming one of the biggest and most influential tech investors, driven by Mr. Andreessen’s famed mantra that “software is eating the world.”
When many major investors still dismissed bitcoin as little more than a haven for money launderers and speculators, Mr. Dixon championed its possibilities, penning blog posts—something of a gospel among young crypto entrepreneurs—that described how bitcoin would create a new, decentralised financial system. Within two years, Andreessen had invested almost $50 million into bitcoin-related projects, including the cryptocurrency exchange Coinbase.
Mr. Dixon’s zeal for the area increased with the 2015 launch of Ethereum, which used the same type of blockchain-based, distributed record-keeping to let developers build applications beyond payments. Mr. Dixon likened Ethereum’s arrival to the creation of the iPhone App Store and said it showed that the crypto-investing universe was larger than imagined. He told Messrs. Andreessen and Horowitz that he wanted to shift his focus away from traditional investing and start a dedicated crypto fund, said people familiar with the matter.
The $350 million crypto fund, launched in 2018, was the first of its kind created by a traditional venture firm. Andreessen remained a bull that year as bitcoin and other cryptocurrencies lost the majority of their value, and raised a second crypto fund in 2020 totalling $515 million.
Mr. Dixon and his team also increasingly touted their vision for Web3. They argued that blockchain’s creation of currency-like tokens for users could give them more control and financial benefit for blockchain-based versions of services such as ride-sharing and social media, undermining the power of dominant tech monopolies.
In addition to investing in crypto companies, Andreessen purchased the tokens they created, effectively betting separately on the company and its product. The unconventional strategy delivered windfalls during the crypto bull market but also made the deals riskier.
As of the end of last year, the first crypto fund had multiplied its initial investment by 10.6 times after fees, making it the best-performing fund on paper in Andreessen’s history, according to documents viewed by The Wall Street Journal.
Andreessen returned over $4 billion of shares to its investors in the two months after Coinbase went public through a direct listing in April 2021, public filings show, making it one of the most-lucrative bets ever made in venture-capital history. Andreessen’s third venture fund, which backed Coinbase in 2013, saw a paper gain of 9.7 times after fees as of Dec. 31, trailing only the first crypto fund in terms of performance at the time, the documents showed.
Buoyed by the returns, Andreessen went on a fundraising blitz. It set out to raise $1 billion for its third crypto fund and ultimately raised $2.2 billion in June 2021.
Mr. Dixon said the crypto team’s strategy was to use its cash pile to write large checks into startups promising to reinvent everything from digital art to online gaming using the blockchain. The aggressive approach often precluded it from coleading rounds with other investors and made the firm a significant shareholder.
Andreessen backed 56 U.S.-based crypto deals last year and was the second-largest crypto funder in terms of investment volume after Coinbase Ventures, according to PitchBook Data Inc. Some early investments seemed to take off. The valuation of OpenSea, a nonfungible token marketplace, soared by over 100 times to $13 billion in January 2022, ten months after Andreessen led an early funding round.
In its push to dominate the sector, Andreessen discarded established investment norms. In November, its investors tried—and failed—to invest in Magic Eden, an NFT marketplace, even though the firm already backed OpenSea, said people familiar with the matter. Venture capitalists have long avoided backing potential rivals because it damages their reputation with founders who dislike the practice. Mr. Dixon said the fund doesn’t back companies that directly compete with its existing portfolio.
Within months, the market turned.
Demand for many Andreessen-backed companies vaporised as users dumped their crypto holdings. OpenSea’s monthly trading volume has plummeted since its December funding round in the midst of a broader collapse in the market for NFTs, while Coinbase’s monthly active users declined 20% in the second quarter from last year’s fourth-quarter peak of 11.2 million. Both companies have cut around one-fifth of their staff this year.
Andreessen is also contending with harsher regulatory scrutiny of crypto startups and the funds that backed them, which is threatening to put an end to the era of loose oversight that enabled the creation of thousands of cryptocurrencies.
The firm is making adjustments. It announced nine crypto startup deals in the third quarter, down from a high of 26 crypto deals in the fourth quarter of last year, according to PitchBook. The firm also marked down the value of its second and third crypto funds this year, though the declines aren’t as severe as what the first crypto fund endured, people familiar with the matter said.
Meanwhile, the firm’s crypto investments are plunging. Solana, an upstart cryptocurrency that the firm bought in June 2021, has shed over 80% of its value since the beginning of the year. In the first six months of this year, Andreessen lost $2.9 billion of its remaining stake in Coinbase as the crypto exchange’s stock price cratered by more than 80%.
Mr. Dixon said the market’s downturn is an opportunity for the fund to continue backing crypto entrepreneurs, similar to what it did in previous down markets.
“What I look at is not prices. I look at the entrepreneur and developer activity,” Mr. Dixon said. “That’s the core metric.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
There’s more to building substantial savings than putting away what you can after paying your bills
4 min
Whether you’re starting your wealth creation journey in your 20s, 30s, 40s, 50s or beyond, the core principles remain consistent. Create more income, manage your savings, and invest intelligently.
We look at the best wealth creation strategies depending on which decade you’re in right now.
In your 20s
The key to wealth creation is to start early. So if you’re reading this and you’re in your 20s, you’re well ahead of the game.
Accept that the greatest investment you can make is in yourself and your ability to earn an income.
“If you want to build wealth in Australia, you need to have a plan to be earning more than $100,000 per annum either now or within the next five years,” financial planner Chris Carlin says. “Most finance experts focus on ways to reduce your expenses, which is important, but for sustainable long-term wealth creation, we believe that you should be focusing on ways to increase your income rather than just focus on reducing your expenses.
For more stories like this, order your copy of the latest issue of Kanebridge Quarterly magazine here.
“If you need to change careers, study, start a business or ask for a pay rise, do whatever it takes to get your income above that level while you’ve got time on your side. Next step is to buy a house, because the sooner you get your foot in the door of the property market, the easier it will be for you to build wealth over the long term.”
Bear in mind that your first home doesn’t need to be your forever home. Think of it as your foot in the door to build wealth.
“If you’re accessing a first home buyers grant, you only need to live in it for 12 months and then you can consider converting it into an investment property or selling it,” Carlin says.
In your 30s
This is the time in life to establish a regular investment strategy. Consider long-term investments that you can lock up for five to 10 years. You can take on more risk at this time of your life, which can generate higher returns.
Set your priorities for life, and don’t take on more debt than you can afford to pay back.
Also, keep track of expenses and income with budget planners — a great habit to get into now.
There are many other things you should be considering too, such as topping up your super above the Super Guarantee and reviewing your personal insurance and investments.
In your 40s
This can be an expensive time of life, particularly if you’re supporting a family. But you’re probably in a more stable financial position by now, giving you a good springboard into investments such as a diversified portfolio of shares.
Investing in property is the best option at this age, whether it’s the family home or an additional property that can be utilised for an Airbnb. Also, make sure you rein in your debt. A bank loan for a mortgage is one thing, but debt on credit cards is hard to justify by this stage of your life.
Invest in your retirement by topping up your superannuation. Even an additional $50 a month will benefit from the wonders of compound interest.
Generally speaking, shares outperform other investments over the longer term. And if you invest in companies that pay dividends, you’ll benefit from being paid part of the company’s profits, generally twice a year. While dividends are less common in a downturn like we’re having now, they are likely to increase once company profits recover.
In your 50s (and beyond)
If you’re in your 50s or older, traditional financial planning tends to encourage less aggressive asset classes as people near retirement.
If you’re in a low asset position due to divorce and having to start again or you’ve missed the real estate boom and are still renting, the main focus should be on controlling spending and pumping money into super and savings and then investing aggressively, advises financial adviser and money coach Max Phelps.
“Property investing is either an option through super, or outside of super if the deposit can be raised,” he says. “Outside of super, properties with scope to improve, extend or subdivide will help build capital faster than normal market growth, to help catch up.”
Share investing could also be an option, with particular focus on high growth funds, such as international securities.
“Controlling spending at a level just above the aged pension should be a key focus, otherwise it’ll be a big step down when you finally stop work. Use a good budgeting and planning app,” Phelps says.
However, if you own your own home, and have a standard super balance, focus on the home and perhaps look at downsizing opportunities in the future.
“Maximising super contributions is likely to be beneficial to get the tax savings, potentially using a transition to retirement strategy,” he says. “For those looking for a sea or tree change, we would always recommend keeping the family home until a year or two after moving to a new area to make sure it really suits.
“For those wanting to stay in the same home forever, releasing equity to buy a couple of high yielding investment properties could be a good option, with the time to pay down the mortgages and keep them for additional income for retirement,” Phelps says.
If your own home is paid off and you have a high super balance and a strong asset position, the focus will likely be on asset protection and less risky asset allocation for investments, he says.
Whatever age you are, consider getting help now. The right financial advice early can set you on the right track.
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