Andreessen Horowitz Went All In on Crypto at the Worst Possible Time
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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’

By BERBER JIN
Thu, Oct 27, 2022 9:09amGrey Clock 5 min

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.”



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How much income is required to service a mortgage? It depends on where you live

New research suggests spending 40 percent of household income on loan repayments is the new normal

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Requiring more than 30 percent of household income to service a home loan has long been considered the benchmark for ‘housing stress’. Yet research shows it is becoming the new normal. The 2024 ANZ CoreLogic Housing Affordability Report reveals home loans on only 17 percent of homes are ‘serviceable’ if serviceability is limited to 30 percent of the median national household income.

Based on 40 percent of household income, just 37 percent of properties would be serviceable on a mortgage covering 80 percent of the purchase price. ANZ CoreLogic suggest 40 may be the new 30 when it comes to home loan serviceability. “Looking ahead, there is little prospect for the mortgage serviceability indicator to move back into the 30 percent range any time soon,” says the report.

“This is because the cash rate is not expected to be cut until late 2024, and home values have continued to rise, even amid relatively high interest rate settings.” ANZ CoreLogic estimate that home loan rates would have to fall to about 4.7 percent to bring serviceability under 40 percent.

CoreLogic has broken down the actual household income required to service a home loan on a 6.27 percent interest rate for an 80 percent loan based on current median house and unit values in each capital city. As expected, affordability is worst in the most expensive property market, Sydney.

Sydney

Sydney’s median house price is $1,414,229 and the median unit price is $839,344.

Based on 40 percent serviceability, households need a total income of $211,456 to afford a home loan for a house and $125,499 for a unit. The city’s actual median household income is $120,554.

Melbourne

Melbourne’s median house price is $935,049 and the median apartment price is $612,906.

Based on 40 percent serviceability, households need a total income of $139,809 to afford a home loan for a house and $91,642 for a unit. The city’s actual median household income is $110,324.

Brisbane

Brisbane’s median house price is $909,988 and the median unit price is $587,793.

Based on 40 percent serviceability, households need a total income of $136,062 to afford a home loan for a house and $87,887 for a unit. The city’s actual median household income is $107,243.

Adelaide

Adelaide’s median house price is $785,971 and the median apartment price is $504,799.

Based on 40 percent serviceability, households need a total income of $117,519 to afford a home loan for a house and $75,478 for a unit. The city’s actual median household income is $89,806.

Perth

Perth’s median house price is $735,276 and the median unit price is $495,360.

Based on 40 percent serviceability, households need a total income of $109,939 to afford a home loan for a house and $74,066 for a unit. The city’s actual median household income is $108,057.

Hobart

Hobart’s median house price is $692,951 and the median apartment price is $522,258.

Based on 40 percent serviceability, households need a total income of $103,610 to afford a home loan for a house and $78,088 for a unit. The city’s actual median household income is $89,515.

Darwin

Darwin’s median house price is $573,498 and the median unit price is $367,716.

Based on 40 percent serviceability, households need a total income of $85,750 to afford a home loan for a house and $54,981 for a unit. The city’s actual median household income is $126,193.

Canberra

Canberra’s median house price is $964,136 and the median apartment price is $585,057.

Based on 40 percent serviceability, households need a total income of $144,158 to afford a home loan for a house and $87,478 for a unit. The city’s actual median household income is $137,760.

 

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