We’re living in the post-FTX crypto era and everything has changed. Just to showcase that fact, a recent article in TechCrunch cites a class action lawsuit against Sequoia, Paradigm and Thoma Bravo for pumping FTX resulting in retail investors losing money. The lawsuit is being spearheaded by the law firm Robbins Geller Rudman & Dowd of San Diego.
Here’s the article: If Sequoia, Paradigm and Thoma Bravo settle a new lawsuit, it could upend VC; here’s why
The TechCrunch writer asks “Is such promotion a crime? If it is, the entire industry is guilty of it. VCs see part of their ‘value add’ as helping to extend the brand of the startups they fund. They’ve been ‘talking their book’ since the industry got off the ground many decades ago. With the advent of social media, it only became much more annoying.”
I'm sorry to upset the apple cart for my VC friends, but they should be accountable and bear some responsibility for hyping their crypto portfolio firms and the whole space in general – and beyond mere reputational risk as indicated in the TechCrunch article.
In May of 2022, Tim Draper use his PR megaphone to predict #bitcoin would reach $250k by the end of 2022. On December 31st, 2022, it was $16,604.02.
My lawyer friends tell me that VCs can do what they want because they aren’t regulated. But it was materially different in the past to “talk up your book” when the only people that could co-invest were other accredited investors. Prior to crypto, the mass of retail investors could only get in on the action once a company made it to the regulated public markets (… unless the deal qualified under an exemption like Regulation Crowdfunding).
With crypto and token drops, that all changed. VCs had a new off-ramp for their investments. They could get in early and then sell their tokens to the less informed public. A public that, OF COURSE, could be swayed by their stamp of approval. It was a no-lose prospect for the VCs – offload a portion of their tokens to recoup their investment + profits to a public that often made their investment decision based on the VC’s hype machine, and then hold a portion in case the remaining tokens went “to the moon.” No wonder a16z Crypto was able to raise a $4.5 BILLION dollar web3 / crypto fund in May of 2022 -- less than one year ago. But my, how times have changed -- and how they will continue to change as US regulators amp up enforcement efforts. Let’s see how many 2022 crypto investments make it to a series B in the current environment.
If a16z, Sequoia, Paradigm, Thoma Bravo, and other VCs would like to redirect their crypto funds into dedicated matching funds for crowdfunded deals, I’m sure there are plenty of funding portals and entrepreneurs that would like to help them. Under Regulated Investment Crowdfunding, those VCs -- and any other investors -- CAN talk up their book and evangelize for their portfolio companies. In fact, I’d recommend it. You can be your own VC (investor), and a customer, and a promoter for a company you believe in under Regulated Investment Crowdfunding (#RIC).
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VCs have a significant influence on the crypto market: VCs play a crucial role in the success of startups, and their investments and endorsements can significantly impact the value and perception of a crypto project. Given that the crypto market is still relatively new and often volatile, retail investors may be particularly susceptible to the hype generated by VCs. As such, the call for VCs to be more accountable and responsible for the way they hype their portfolio firms and the space as a whole is reasonable.
Regulation can help protect retail investors: As the author suggests, VCs in the crypto space are not currently subject to the same level of regulation as they are in other industries. While some argue that this allows for greater innovation and flexibility, it also leaves retail investors at risk of falling prey to scams or investments that are not adequately vetted. By redirecting their crypto funds into dedicated matching funds for crowdfunded deals under Regulated Investment Crowdfunding, as the author suggests, VCs would be operating within a regulated framework that could help protect retail investors while still allowing VCs to support and invest in promising crypto startups.