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A16z in the UK: a marriage of cryptovenience?

There’s nothing worse than having $7bn in your back pocket and not being able to spend it. Just ask Chris Dixon, Sriram Krishnan and the 104 other people on Andreessen Horowitz’s crypto team. 

A16z’s prolific crypto allocation — around $7.6bn, more than a fifth of the firm’s entire assets under management — was built up over several halcyon years in which the Fed exorcised interest rates and financial excesses sloshed around the system, before eventually finding a home in venture capital.

But here’s the thing: more than half of this money, $4.5 billion, was announced after the crypto industry started to freeze over. The coinciding announcements of ‘a16z’s flagship crypto fund loses 40 per cent of value!’ and ‘a16z has raised another $4.5bn for crypto!’ created whiplash amidst a backdrop of interest rate hikes and overdue regulatory scrutiny. 

The latter factor is more prominent that ever, with the US’s Securities and Exchanges committee somewhat upset that crypto exchanges like Coinbase, once valued at $112bn, and Binance, once valued at $45bn, seem to have been operating as unregistered brokers.

Unfortunately, those pesky US regulators have created a $7bn problem for a16z. Web3 and DeFi investments into startups in Miami, the home of US crypto, have all but dried up. The city’s bitcoin conference Bitcoin 2023 had half the number of expected attendees this year. The “Miami Bathtubs of Champagne” Index is at an all-time low.

A16z has three clear options, in rough order or desirability : 1) diversify out of the United States, 2) diversity out of crypto, or 3) return the fund to its investors.

Assuming the fund’s partners would rather die than forego $140mn in fees revenue a year, let’s look at the firm’s only two real options: opportunistic geographic expansion or saying “we’re investing in AI but we’re pretending it’s crypto”.

Finding ports in a storm

With El Salvador having officially signalled a Game Over for crypto the day that its HODLer president, Nayib Bukele, removed bitcoin from his Twitter profile along with his laser eyes profile picture, a16z needed to scrape the barrel.

They settled on one of the few remaining non-regulated crypto geographies in the modern world of business and finance: Singapore-upon-Thames the United Kingdom. And the timing actually works quite well here. Because just as the pesky SEC cracks down on crypto across the pond, the UK has managed to get rid of its own pesky regulatory overlords in the European Union (or, so we’re told) and pick (ok not really pick) a wannabe crypto bro, Rishi Sunak, as prime minister.

Just as Bukele changed his Twitter profile picture to “laser eyes” during zero-interest-rate madness, Sunak has changed the door of 10 Downing Street to, uh, this:

Perhaps the long-term pain of Brexit worth the short-term gain of becoming the new global hub of crypto scams innovation?

A16z partner Chris Dixon is delighted with the deal reached with Stanford MBA alum Sunak:

While there is still work to be done, we believe that the UK is on the right path to becoming a leader in crypto regulation.

Thank God — the UK might finally be world-beating at something

Diversify or die?

The other way to generate returns on a $7bn crypto fund is, of course, to just not allocate it to crypto.

We know that the fall of crypto created a vacuum in VC-land, which was very quickly filled by throwing hundreds of millions of dollars at AI startup pre-seed rounds. Why not just spend it there? The likelihood of the crypto fund’s limited partners deeply understanding what crypto actually does is pretty small. The likelihood of the LPs still wanting their money to be ploughed into it is even smaller. It’s a win-win.

Earlier this week, a16z led a $43m deal for Gensyn.ai, saying:

. . . building AI systems requires ever-larger deployments of computational power for the training and inference of today’s largest and most powerful models . . .

We have always described blockchains as a new kind of computer. What makes them unique is that developers can write code making strong commitments about how that code will behave in the future. This permissionless component of blockchains enables the creation of a marketplace for buyers and sellers of compute power — or any other kind of digital resource like data or algorithms — to trade with no middlemen on a global scale.

Talk about killing two birds with one stone.

So what, then, will come of this $7bn struggling in search of crypto? Opening its first international office during a venture downturn suggests that a16z’s London-meets-AI investment strategy is a last attempt to offload a pile that is 100x the size of the median European VC fund. 

The impact of this strategy will clearly not go unnoticed, and some European VCs are privately questioning whether European deal flow can absorb such a large amount so quickly. But it may lift the tide for the wider European startup community, which will welcome deep pockets to replace a now-absent Tiger and SoftBank.

I suspect the days of a16z announcing new crypto funds are well and truly over. But it may still find a way to put this money to work and to hold onto those management fees. 

In which case, European startups could get silly money thrown at them for the first time ever, and LPs will get… well, probably not the 1,000x crypto returns they had once hoped for.

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