Ongoing regulatory pressure on the crypto sector, most recently the SEC’s targeting of the Binance exchange, has led to concern for its future in some quarters. However, Andreessen Horowitz, a high profile Silicon Valley VC fund and major investor in the crypto and blockchain space, clearly still has plenty of faith after this week announcing its first international office.
The VC’s new office will be home to a UK branch of its crypto fund and will open in London later this year. It’s a move that can be seen as a significant vote of confidence for not only the future evolution of the crypto and blockchain sector but in the UK and its capital’s tech sector.
Andreessen Horowitz, often referred to by the abbreviation a16z, is a Melo Park, California-based VC well known for making its investors a fortune from taking early stakes in some of the biggest and best known tech companies in the world. Companies it backed as startups include Facebook, Airbnb, Pinterest, Lyft, Skype, Slack, GitHub and the crypto exchange Coinbase.
Why London?
The new a16z London office represents the star VC’s first ever international expansion. For now it is just the investor’s crypto fund that is expanding across the Atlantic but that could potentially change in future.
The blockchain tech investment unit, which last year raised $4.5 billion for its fourth crypto fund and has about $7.6 billion in capital under its management, has a number of stakes in UK-based startups. These include Arweave, a blockchain-based database product company, Aztec, which offers a privacy-focused extension for Ethereum smart contracts and Improbable, which makes metaverse infrastructure and applications.
a16z’s crypto fund’s head of policy Brian Quintenz explained the choice of London as being informed by what the VC sees as the UK’s “robust entrepreneur and founder ecosystem”.
He also said of the capital:
“It has a great history of a robust capital market system as well as a strong regulator. The team is very excited about the entrepreneurial culture in the crypto ecosystem in the UK”.
The reference to the regulatory environment around crypto-sector startups is particularly significant, especially against the backdrop of a heavy-handed crackdown on the sector in the VC’s domestic US market.
The current government led by Rishi Sunak has openly courted the crypto sector with prime minister last year stating
“it’s my ambition to make the UK a global hub for cryptoasset technology.”
That stands in contrast to the approach to the sector in the USA and there can be reasonable suspicion that the London office is at least partly motivated by the desire to hedge against a further downturn in relations between the crypto sector and SEC.
a16z’s move sounds like it may well be the result of a combination of worries about the regulatory environment at home and successful lobbying by key UK figures, with Quintenz commenting:
“We’ve approached this with all political parties in the UK, with policymakers across both chambers of parliament and we’ve heard an openness to the technology and its promise in all those conversations. When we think about that balance between customer protection and innovation, frankly I don’t see the administration in the US doing either.”
London and the UK have been on the sharp end of negative comments by tech sector leaders recently, with post-Brexit red tape hindering business with Europe coming under particular fire. In April, the Microsoft president Brad Smith expressed the opinion that the EU was now the better location for U.S. companies to operate from.
Comments made last month by the co-founders of London-based fintech unicorn Revolut, who said the country was being held back by regulation and a dearth of talent, also stung.
Against that salty backdrop, a16z’s positive stance on the UK and London, picking the capital as the base for its blockchain startup incubator from next, year comes as a welcome boost.
Ash Arora, a blockchain-focused partner at LocalGlobe, another VC fund, was not, however, surprised by its Silicon Valley peer’s decision to choose London for its international debut. He is quoted by The Times newspaper as reasoning:
“One of the biggest use cases for blockchain technology . . . is decentralised finance and London is the financial hub of the world. So if finance and blockchain are going to interact, London is going to be the breeding ground for it.”
What does Andreessen Horowitz’s international expansion say about the future of the crypto and blockchain technology sector?
There are a couple of ways to interpret a16z’s move to London. A glass half empty view would be that the VC has been forced into the move. Just after the fund announced closing its new $4.5 billion capital raise last May crypto and blockchain startup valuations collapsed, ushering in a sector reset dubbed a “crypto winter”.
Combined with the intense regulatory pressure the sector is currently facing in the USA, the VC may well have felt it necessary to widen its net in the pursuit of the most promising new blockchain technology companies to invest in.
With billions already raised from investors which a16z would be loath to refund, cynics might question if the move should be seen as a really meaningful vote of confidence in the future of the crypto sector.
The negative interpretation would be the UK’s desperation to attract new IPOs to London sees it courting a post-bubble tech sector still to prove itself commercially and being chased out of town by regulators elsewhere. And that a16z is simply hedging its bets for the same reason, unwilling to publically give up on a tech sub-sector it has championed and already raised billions of capital to invest.
By contrast, a glass half full view would be that the next generation of post-bubble blockchain startups will be focused on genuine problem-solving commercial use cases. Free from the speculative frenzy that fed an ecosystem of hundreds of cryptocurrencies, few with any obvious potential or genuine use case, second-wave blockchain businesses will go on to prosper like the internet businesses that followed the bursting of the dotcom bubble.
And if, as is the general consensus, financial services infrastructure becomes one of the key established use cases of more mature blockchain technology, London indeed has at least as much going for it as international rivals like Singapore or Dubai – both of whom also attempted to lure the new a16z office.
How significant the choice of London as a blockchain investment hub by one of Silicon Valley’s biggest VCs will prove to be, time will tell. But if the crypto and blockchain sector does indeed bloom again after its winter fades, and financial services infrastructure is a major use case of the technology, it puts London in a stronger position to become a sector leader than it was before the announcement.
