VC Investment into Crypto Culture to Spawn a Reckoning with M&E

A Crypto Reckoning in M&E

The very traditional $2.3 Trillion Media & Entertainment industry is the primary market target for Web3 technology companies that embrace a distinctly different corporate culture.

Private equity and venture capital firms are dramatically increasing their investments into crypto technologies critical to Web3 and a “metaverse” future that bets heavily on entertainment content consumption and its underlying licensing of intellectual property rights as the primary revenue driver. 

The Media C-Suite notes reporting of increased investment interest being pursued by professional private equity and venture capital, including well-established VC managers with dedicated crypto strategies and experienced teams such as Andreessen Horowitz (a16z), Lightspeed Venture Partners, Bain Capital and Sequoia Capital. 

In an article published 3 May 2022, Reuters reports that sudden, increased VC investments into Web3 and metaverse-supporting technologies defy trends historically tracking the value of bitcoin and other crypto-currencies. 

Collective Investment Geist

“Scared of being left in the digital dust, private equity investors are stampeding towards crypto projects – blockchain-based apps and platforms fuelled by cryptocurrencies that are native to the virtual economies of the metaverse and Web3.”  Reuters’ journalists Medha Singh and Lisa Pauline Mattackal wrote in their analysis.

According to Reuters, analysis of data published by Dealogic shows that VC managers have closed over seventy deals for investment into Web3 and metaverse infrastructure technology firms so far this year, compared to only 51 deals in the whole of 2021. 

Similarly, analysis of PitchBook’s published data indicates that VC has increased its investment into Web3-critical, crypto-related technology companies from $3.4 billion in 2019 to $32 billion in 2021, with over $10 billion invested during Q1 this year already, which is over twice the investment level of Q1 2021. 

Read the full Reuters article here.

Despite a general trend in investor involvement historically tracking crypto valuations, the recent bear market in crypto assets, what the crypto community calls a “crypto winter”, has not dampened the enthusiasm of venture capitalists for the potential of Web3 technologies to transform the economic landscape being shaped by the next generation of consumers.

In an article published on July 28, 2022, Fortune reports that VC continues to raise funds for investment into Web3 innovations. VC manager Variant announced a $450 million raise for its third fund focused on Web3 and the effort to take the crypto community mainstream writes Fortune journalist Taylor Locke.

Quoting Li Jin, co-founder of Variant, Locke notes the internet that consumers use today is controlled by a small handful of companies, such as Google or Facebook. This concentration of power over ubiquitous infrastructure, commerce and user data is a key frustration and issue of concern for today’s emerging consumers with an eye on fairer distribution of control, and profits.

Read the full Fortune article here.

Decentralised Economics Meets Capitalism

Conceptually, the Web3 economy is based on community ownership and decentralisation in direct contrast to the traditional commercial interests of corporate ownership and distinct legal rights over securities such as share capital in companies or intellectual property. 

The infrastructure for Web3, including the interactive promise of the “metaverse”, is being designed by tech companies as block-chain enabled for the next generation of media consumers.  These critical technology companies tend to be initially supported by capital from their dedicated communities in a manner consistent with their principles of decentralised economics. 

Founders of these new tech companies often accept capital from their consumer communities through the sale of “non-fungible” assets denominated in a cryptocurrency, or as a form of tokenised equity such as an NFT, with or without some contractual rights. Once termed an “initial coin offering” or “ICO”, such community capital support is not insignificant, and has evolved into a relatively new form of legal entity gaining in popularity within the cyrpto-world, the decentralised autonomous organisation, or “DAO”.

Such decentralised ownership and control of commercial assets is in stark contrast to what professional investors expect for their money.  The highly sophisticated legal and finance teams of VC firms are focused on equity rights to profit distributions and legal interests in corporate governance.  The recent avalanche of traditional VC investment provides a degree of acknowledgement to emerging tech companies that are critical to the commercial development of Web3 and the decentralised utopia of a media “metaverse”.  

The stage for a clash of cultures with serious legal, financial and regulatory implications is being set.  

These diametrically opposed economic cultures are already seeing the result of friction. Founders are increasingly persuaded to align their companies with the interests of traditional VC based on the perception of increased corporate and social credibility that comes with the top VC names backing them.  These deals would seem to contradict the principles around which blockchain was conceived by the very communities of consumers now targeted as a market demographic. 

In an article published on 9 April 2022, Techcrunch reports that traditional VC investors are running headlong into the crypto-world’s decentralised culture. 

Techcrunch journalists Jacquelyn Melinek and Natasha Mascarenhas report a distinct evolution in the capital structures being embraced in these VC – crypto-world transactions as Founders and eager investors seek some form of common ground.

“The contrasting strategies come down to technical differences in cap tables, the culture of communities that many companies in this space are built upon, and, of course, the non-crypto world’s fear of missing out.” Melinek and Mascarenhas write. 

Read the full Techcrunch article here.

And who wants to miss out on a brand focused, globally diverse, fan-base infused consumer utopia enhanced by social media algorithms and based on decentralised crypto-currencies that can be fully insulated from global market economics?  Not a capitalist. 

Not a chance. 

However, a decentralised asset by definition is not controlled by a single sub-set of interests.  This distinction has not stopped venture capital firms from pouring investment into these nascent tech companies and taking ownership interests while their community investors are accepting “tokenised” equity interests without the same legal rights to have a say in the corporate governance of the company, or its distribution of profits. 

While this difference in culture may be tolerated by communities, or ignored by VCs for the moment, once content consumption commences and profits are distributed by established legal rules of intellectual property rights, the tokenised equity holders may feel more like “token investors”. 

Whatever form of resolution the immediate clash between centralised capitalism and decentralised economics takes, it’s intended trajectory is most heavily influenced by the next generation expected to enjoy the benefits of Web3 and its promise of a decentralised metaverse where commerce, media and entertainment converge. 

Meanwhile, the staid, omnipresent Media and Entertainment industry has a preference for tradition. 

Long-established and internationally accepted corporate, accounting and legal principles surround control of intellectual property rights and form the foundation for one of the world’s most lucrative business models.  Maintaining a highly-centralised, insiders-only corporate culture for over a century has been key to keeping that model pumping money into the Media Majors.

That tradition has generally included a strict preference for keeping professional private equity and venture capital investors at arms’ length. 

Now, it seems, PE and VC have found an indirect way into an industry long denied them.  But their strategy may create a Trojan Horse-like mechanism for the next generation of decentralised entrepreneurs, content creators and content consumers to assert themselves in a way the Media Majors never imagined.  

(A previous version of this article was published on August 8, 2022).

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