Crypto-AI startups are having a heyday. This year, some of the biggest fundraising in the crypto space has been led by ventures with strong AI connections. These startups are raking in mega-rounds, and some are still in the early stages but have reached multi-billion dollar valuations.
Take PIP Labs, for example. They’re the brains behind Story Protocol, a layer 1 blockchain designed to tokenize intellectual property, ensuring original creators are rewarded in the age of AI. They recently raised an impressive $2.25 billion in an $80 million Series B round led by a16z cryptocurrency. Then there’s Sahara Labs, a crypto AI startup developing a decentralized platform called Sahara AI. The company raised $37 million in a strategic round co-led by Pantera Capital and Polychain Capital, promising to provide fair compensation to AI contributors. And don’t forget Sentient, co-founded by Polygon’s Sandeep Nailwal, which made headlines last month with an $85 million mega seed round. It’s clear that VCs are betting big on the future of crypto AI.
But what’s driving this surge of interest? To get a clearer picture, I reached out to VCs who have invested in several crypto-AI startups.
“AI is a once-in-a-generation 0-to-1 innovation, especially with the advent of large language models (LLMs).” Jed Breed, Founder and General Partner of Breed VCHe told me that he sees the current enthusiasm for crypto-AI startups as part of a “standard hype cycle,” where initial enthusiasm and capital flow quickly even when the real innovation is still ahead.
Rajiv Patel-O’Connor, President of Framework VenturesAI and cryptocurrencies are both “really big stories,” he said, and combining these two “very bullish stories” will create a lot of excitement.
People are realizing some of the drawbacks of relying on centralized, closed-source companies to provide AI models, and there is a belief that these drawbacks can be addressed with decentralized tools. Tom Schmidt, General Partner at Dragonfly Capital“We think that decentralized computing networks can provide an opportunity to access these models without permission and without gates, in the same way that Bitcoin created the first permissionless, gateless currency,” Schmidt told me.
AI is not a fad. Its long-term value is undeniable. Erick Zhang, Managing Partner at Nomad Capital And a former Binance executive. As AI and cryptocurrencies rapidly evolve, their convergence could open up possibilities once unimaginable and draw more attention from investors, Zhang told me.
Overall, the convergence of AI’s transformative potential and the decentralized nature of cryptocurrencies is seen as a powerful combination by investors. But they also express some concerns.
‘Most of these startups will fail’
Dozens of crypto-AI projects have raised money this year and will continue to do so, Zhang told me, but “most of these startups are going to fail.” He points out that many projects are riding on the AI hype without any expertise or clear value proposition to back them up, chasing trends without a solid plan and “sounding more like science fiction than reality.” This often leads to what he calls “ghost chains and ecosystems,” where ambitious promises go unfulfilled and resources quickly run out. Zhang emphasizes that while there is significant capital being invested in crypto-AI, the lack of legitimate AI-native founders is driving up the value of early-stage projects.
Schmidt shares Zhang’s concerns, but from a different angle. He worries that many crypto-AI projects rely too heavily on decentralization without providing any real benefits. “We’ve seen time and time again that this is not a recipe for success,” Schmidt warns. He believes there is a real opportunity in using cryptocurrencies to enhance user experiences in ways that centralized AI platforms cannot.
Adding to the chorus of attention Jack Platts, founder of Hypersphere VenturesHe is wary of certain AI applications that may not be related to cryptocurrencies. For example, he questions whether distributed computing for reinforcement learning and inference really belongs in the Web 3 space. He also sees AI currently taking more mindshare and capital from cryptocurrencies, describing it as the latest “Golden Twenties bubble.”
Framework Ventures’ Patel-O’Connor says achieving product-market fit and building something that has real, scalable demand are some of the biggest challenges for crypto AI startups. Despite these hurdles, he points out that there is a rare influx of talent into the crypto space, particularly in crypto AI, which he sees as a positive sign for future development.
Matt Stephenson, research partner at Pantera CapitalHe emphasizes the importance of “first principles thinking” in the crypto-AI vertical. He cautions against a “new bottle, old wine” approach where startups recycle existing ideas without truly innovating. While experimentation is essential, Stevenson emphasizes that you need a strong, intuitive sense that a project will work before you jump in.
Ultimately, the crypto-AI landscape is as exciting as it is uncertain. Investors are drawn to the promise of groundbreaking innovation, but they are also keenly aware of the risks. Whether these crypto-AI startups can deliver on their ambitious promises remains to be seen, but for now, they are certainly capturing the attention and wallets of the venture capital world.
Click to subscribe to The Funding newsletter for free. here.
Disclaimer: The Block is an independent media outlet providing news, research and data. As of November 2023, Foresight Ventures is the largest investor in The Block. Foresight Ventures invests in other companies in the cryptocurrency space. Cryptocurrency exchange Bitget is an anchor LP of Foresight Ventures. The Block continues to operate independently to provide objective, influential and timely information on the cryptocurrency industry. Below are the current financial disclosures.
© 2024 The Block. All rights reserved. This article is provided for informational purposes only. It is not provided or intended to be legal, tax, investment, financial or other advice.