3 top VCs on how they value crypto startups in a tumultuous market

Look just about anywhere (including this newsletter recently), and there are numerous tales of pain in the broader markets, including, of course, the crypto space. 

Big venture firms like Sequoia Capital are calling the downturn a “crucible moment” and advising their founders to face reality and shore up to come out of it stronger. And in crypto land, which is infamously volatile, some VCs are predicting the sky-high valuations blockchain and Web3-focused startups have been raising will come back to earth.

“Yes, valuations are going to go down,” Ravi Mhatre, founder and managing director of Lightspeed Venture Partners, told Fortune via email. He adds, however, “if you look at the last 2-3 downturns, those are times when some of the best companies were formed.” 

If you’re like me (and by that I mean a nerd who spends too much time reading about crypto startups), you might look at some of these barely-one-year-old crypto startups raking in hundreds of millions of dollars in funding at unicorn status and scratch your head a bit. In some cases, these investments are in equity with a token warrant, which entitle investors to tokens once the project finally launches them (this was the case for blockchain startup Aptos Labs and its $200 million strategic round led by Andreessen Horowitz in March, Multicoin Capital co-founder and managing partner Kyle Samani, who joined the round, recently told me). In some notable instances, like with Solana’s SOL token, betting big on a new project’s tokens can help VCs win big. 

But I’ve always wondered exactly how venture investors actually come up with those numbers and valuations for crypto startups. How do they decide how big of a check to write, and at what multiple? And, of course, how much does hype actually factor into it?  

To that end I recently asked three top VCs to explain their valuation process for crypto companies. 

You can read the full run-down here, but a few highlights: Many of them said the process for valuing crypto companies has a lot of overlap with valuing regular (or more traditional) startups. They still look at the project or company’s books, revenue growth, and comps, if applicable and if the startup is further in development (though Multicoin co-founder and managing partner Tushar Jain, for one, says he “rarely, if ever” hears crypto firms using their competitors’ valuations as a justification for their own). But for an early stage project that perhaps has a token (or will be launching one) but not, say, a typical income statement, things can get a little more complicated. Investors like Lightspeed’s Mhatre look at the token of a project, if it’s launched, to help with some of the math around the valuation and to give insight into what the revenue stream and growth looks like. “There are now Web3 companies that have had successful token launches,” with “highly-traded” tokens that have “implied kind of market values for whatever the platform is, and so we’re looking carefully at those to infer what we think value creation could be for a particular new project and for a token that gets issued,” Mhatre recently told me.

And for others like Multicoin’s Jain, there’s a rough formula: market size x value capture x some element of risk = rough valuation. To be sure, that’s super vague, but he goes into more depth in my story here. And, of course, there’s a lot of subjective judgment at play, too. 

But with things on the rocks in the liquid and illiquid crypto markets lately, I’ve also been wondering how VCs are dealing with their portfolios.

For equity investments in crypto startups, the process, partners told me, is just like any other VC investment: The firms would mark to market whenever their startup does a transaction, like raising a new funding round. But considering those like Ethan Kurzweil, a partner at Bessemer Venture Partners, believe raising funds at the moment might result in a valuation cut, he doesn’t think many are keen to tap the private markets anytime soon—if they can help it. Multicoin’s Jain also doesn’t “expect many companies in crypto to be raising downrounds,” in part because many have already filled their coffers in the past year and are likely holding tight during the downturn. 

For holdings in a liquid token fund, however, which some investment firms like Multicoin have, those investments “will be marked down alongside the market,” Jain says, on an “arbitrarily” frequent basis given how crypto trades 24/7, as my colleague Jessica touched on in this newsletter yesterday. 

Many of these high-flying crypto valuations already look overinflated, and when all’s said and done, it’s likely some VCs will do a bit of collar tugging if and when they have to mark to market a downround for a crypto startup. But as with everything in the volatile space, it’s likely too soon to tell how it will all shake out. 

Thanks for having me. Jessica will be back in your inbox tomorrow.

Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.

VENTURE DEALS

- Booster, a San Mateo, Calif.-based mobile energy delivery platform, raised more than $125 million in Series D funding led by Rose Park Advisors and was joined by investors including Chaac Ventures, Equinor Ventures, Mitsubishi Corporation, Thayer Ventures, Renewable Energy Group, Cercano Management, Conversion Capital, Enterprise Holding Ventures, Invus Opportunities, Madrona Venture Group, Maveron Ventures, Perot Jain, and Version One Ventures. 

- MANTA, a Tampa, Fla.-based data lineage platform, raised $35 million in Series B funding led by Forestay Capital and was joined by investors including Bessemer Venture Partners, SAP.io, Senovo VC, Credo Ventures, Dan Fougere, and European Bank for Reconstruction and Development.

- Rael, a Los Angeles-based holistic personal care brand for women, raised $35 million in Series B funding led by Colopl Next and Signite Partners

- TARGAN, a Morrisville, N.C.-based animal health sustainability company, raised $35 million in Series C funding. Mountain Group Partners and NovaQuest Capital Management led the round and were joined by investors including Merck Animal Health and Oval Park Capital. 

- Flowcarbon, a New York-based blockchain-based carbon climate technology company, raised $32 million in funding and $38 million in a token presale led by a16z crypto and was joined by investors including General Catalyst, Samsung Next, 166 2nd, RSE Ventures, Allegory Labs, Fifth Wall, Box Group, and the Celo Foundation.

- SiMa.ai, a San Jose-based machine learning company, raised $30 million in additional Series B funding led by Fidelity Management & Research Company and was joined by investors including Adage Capital Management, Amplify Partners, Dell Technologies Capital, Wing Venture Capital, Alter Venture Partners, +ND Capital, and Walden International founder and chairman Lip-Bu Tan.

- Indigov, a Washington, D.C.-based constituent service platform for public officials, raised $25 million in Series B funding from investors including Tusk Venture Partners, 8VC, Wicklow Capital, and Valor Equity Partners.

- NeuraLight, an Austin and Tel Aviv-based neurology platform, raised $25 million in Series A funding led by Koch Disruptive Technologies and was joined by investors including Breyer Capital, Samsung Next, VSC Ventures, Viz.ai co-founders Chris Mansi and David Golan, TheKey co-founder and executive chair Lily Sarafan, and others. 

- Common, a New York-based community management platform for DAOs, raised $20 million in funding from investors including Spark Capital, Polychain, and others. 

- Marvin, a São Paulo-based B2B payments company, raised $15 million in Series A funding led by Canaan and was joined by investors including Canary and Maúa Capital. 

- MetaKing Studios, a remote-based Web3 game development studio, raised $15 million in seed funding from investors including Makers Fund, BITKRAFT Ventures, Delphi Digital, Animoca Brands, Shima Capital, WW Ventures, Spartan Group, Huobi Ventures, and others.

- Pleno, a San Diego-based biological target detection platform for clinical testing and biomedical research, raised $15 million in Pre-Series A funding led by Medical Excellence Capital and Alexandria Venture Investments. 

- ZenLedger, a Bellevue, Wash.-based crypto data analysis, accounting, and tax software platform, raised $15 million in Series B funding led by ParaFi Capital and was joined by investors including Bloccelerate VC, King River Capital, G1 Ventures, Main Street Investment, Three Point Capital, Shorooq Partners, VaynerFund, Blizzard the Avalanche Fund, and AngelList Quant Fund. 

- Zowie, a Koszykowa, Poland-based A.I.-powered chatbot built for ecommerce brands, raised $14 million in Series A funding from investors including Tiger Global Management, Gradient Ventures, 10xFounders, Inovo, and Lattice co-founder and CEO Jack Altman. 

- Bubblehouse, a New York-based NFT social marketplace, raised $8.7 million in seed funding led by Cassius Family and was joined by investors including Third Kind VC, SV Angel, Kima Ventures, Watertower Ventures and Ocho Capital.

- Bold Metrics, a San Francisco-based A.I.-based fit and sizing solution company, raised $8 million in Series A funding led by Bessemer Venture Partners and was joined by investors including Lytical Ventures, ValueStream Ventures, and Nanban Ventures.

- Idiomatic, a Palo Alto-based customer intelligence platform, raised $4 million in seed funding led by Freestyle and was joined by investors including Gaingels, Hyphen Capital, Xoogler Ventures, and others angels. 

- Flexa Careers, a London-based hiring transparency platform, raised £2.3 million ($2.9 million) in seed funding led by Ada Ventures and was joined by investors including Auxxo Female Catalyst Fund, HERmesa, and other angels.

- UKIO, a Barcelona-based fully furnished apartment rentals platform, raised €2.5 million ($2.67 million) in funding led by Expansion Fund.

PRIVATE EQUITY

- Clayton, Dubilier, and Rice and TPG Capital agreed to acquire Covetrus, a Portland, Maine-based animal health technology and services provider, for about $4 billion. 

- CorroHealth, backed by Carlyle, acquired Aergo Solutions, an Iselin, N.J.-based revenue cycle management solutions provider for the healthcare industry. Financial terms were not disclosed. 

EXITS

- BELFOR agreed to acquire a majority stake in SSG Group, a Herlev, Denmark-based damage control and industry and property services provider, from Polaris. Financial terms were not disclosed. 

OTHER

- Bolthouse Farms agreed to acquire the Starbucks juice brand Evolution Fresh, based in Rancho Cucamonga, Calif. Financial terms were not disclosed.  

- iCapital agreed to acquire SIMON Markets, a New York-based digital wealth management platform. Financial terms were not disclosed.  

- ShipHero acquired Delivery Net, a Richmond Hill, Ontario-based ecommerce delivery solutions provider. Financial terms were not disclosed. 

- WilliamsMarston acquired Moffett & Associates, an El Segundo, Calif.-based corporate tax consulting services provider. Financial terms were not disclosed. 

FUNDS + FUNDS OF FUNDS

- SYN Ventures, a West Palm Beach, Fla.-based venture capital firm, raised $300 million for a fund focused on early-stage cybersecurity, industrial security, national defense, privacy, regulatory compliance, and data governance start-ups. 

PEOPLE

- Red Arts Capital, a Chicago-based private equity firm, hired Christopher DeLetto as vice president. Formerly, he was with Grey Mountain Partners.

- Ridge Ventures, a San Francisco-based venture capital firm, hired Akriti Dokania as partner. Formerly, she was with Octopus Ventures.  

- SYN Ventures, a West Palm Beach, Fla.-based venture capital firm, hired Ryan Permeh as operating partner. Formerly, he was with Cylance. 

- Victory Park Capital, a Chicago-based investment firm, hired Sora Monachino as principal, investor relations, Alex Cordover as vice president of technology, and Murad Elayyan as director of fund accounting. Formerly, Monachino was with Pomona Capital, Cordover was with Crowd Point, and Elayyan was with Lasalle Investment Management.