Opportunities in difficult times
The economic situation is grim and some experts fear that we will end up paying a big price for Russia’s invasion of Ukraine and persistent manufacturing delays from China because of the ongoing Covid pandemic. JPMorgan Chase CEO, Jamie Dimon went so far as to say “Brace yourself for an economic hurricane.”
Everyone is preparing for the heat the recession will bring.
Since the beginning of the year, we’ve read about companies laying off people, hiring freezes, and some even rescinding job offers. From Apple to Meta, Uber, Salesforce, and Twitter the list keeps growing. In the crypto market, Coinbase has been one of the companies impacted by declining markets. Last month, Coinbase laid off 18% of its employees to cut down on costs.
This is not the first time an economic downturn has hit, and every time we try to predict its impact and how long it will last. Elon Musk predicted that this one will last 12 to 18 months.
While recessions can be difficult, they can also present great opportunities for both startups and VCs.
Recessions can challenge companies that are not ready and will go belly up when the first waves hit, and they can challenge people that lose their jobs or face pay cuts. In times like these people will look for a steady job at a good company to weather the storm, instead of building a startup.
But recessions can be an opportunity to capture a market and build new products. Since 1900, the average recession lasted 15 months. If a company can survive and demonstrate both resilience and growth, it may have a compelling case for investors after the chaos subsides. Recession survivors may have an easier time raising more capital to scale, once money is moving again.
When things go sour, usually investors can be more of a problem. Startups generally need to raise some money, and in bad times investors tend to be less willing to invest. But bear markets create great opportunities. It’s smart to invest when things are cheaper and sell when they pick up again. For VCs that want to double or quadruple returns to LPs, this is a perfect time and crypto is the perfect market.
Last year, more than 21% of venture dollars went into fintech startups globally, according to research from CB Insights. One-third of all unicorns created in 2021 were fintech companies.
This year, market conditions are dramatically different – companies are raising less money at lower valuations. Investors valued Stripe at $95 billion last year and this year, Stripe lowered its valuation by 28%.
Recent meltdowns at Celsius, Voyager Digital, and Terraform Labs triggered a flight from the cryptocurrency market that wiped out $2 billion in market value. The cryptocurrency market went from a capitalization of $3 trillion in 2021 to $1 billion. At the same time, Bitcoin is hovering below the $24,000 level at the time of writing, which is down about 70% from its 2021 all-time high.
The fact is that there is still a dynamic and interesting market here that is exploding.
Even after Bitcoin and the entire crypto market tumbled and VCs pulled back on investments in several markets, VC activity in crypto startups remained still high. Cryptocurrency startups raised more than $29 billion in 2022, which is just $2 billion shy of the $31 billion they raised in 2021.
Crypto startups are showing immunity to the valuation reset that has taken over much of the venture capital market. So far this year, early-stage post-money valuations for VC-backed cryptocurrency companies have climbed to $160 million, according to PitchBook.
Quoting Elon Musk:
“Recessions are not necessarily a bad thing. I’ve been through a few of them. And what tends to happen is if you have a boom that goes on too long, you get a misallocation of capital. It starts raining money on fools.”
There’s no better time for building than bear markets. Many of the world’s largest companies were founded during a recession, including Airbnb, Uber, Slack, Groupon, WhatsApp, Venmo, Instagram, and many others. This period can be an opportunity for good startups that continue to build, while empty projects fall flat on their face.
A lot of the crypto industry was built on the idea that decentralization would somehow disrupt centralized giants. But it’s tough to build a business, much less an investment case, on decentralization alone. Crypto startups that innovate and find ways to generate value in both the digital world and the real world will gain the most traction — whether they are building products for investing, payments, banking and finance, NFTs, or other things.
Here’s a video of Bill Gates being interviewed by David Letterman in 1995, talking about the internet opportunity.
We all know how this played out.
Google was founded in 1998, three years after Gates’ interview. The leaders that emerged, Amazon, Google, and eBay dominate the tech industry and are some of the most valuable companies in the world today. The internet became a disruptive force and the entrepreneurs and investors that got in early had a tremendous financial upside.
The same holds for crypto.
When you try to grasp the crypto opportunity, you’ll realize that it’s early and huge, no matter how you look at it. Only decentralized finance was valued at $77 billion a couple of months ago. Payments, digital ownership, identity, and assets will be stored on ledgers and crypto will be the medium of exchange for these assets.
The dot-com boom and bust 25 years echo what we will see from crypto, as it moves from a fringe technology to an indispensable part of our daily lives, just like the Internet did.
by Ilias Louis Hatzis is the founder and CEO of Kryptonio wallet.
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