"No one is more confident than Dixon": The behind-the-scenes story and future of a16z Crypto's success

Original Title: “Chris Dixon Keeps the Crypto Faith”

Author: Cory Weinberg, The Information

Translation: Biscuit, Chain Catcher

Andreessen Horowitz (a16z) has become the king of cryptocurrency with its billions of dollars in investments in the crypto space, but now the sector is filled with negative news such as price declines and regulatory scrutiny. Dixon is not backing down; he will continue to invest in cryptocurrency startups.

This summer, at entertainment executive Michael Ovitz's 28,000-square-foot mansion in Beverly Hills, Ovitz and venture capitalist Chris Dixon had dinner conversations about politics, venture capital, and the economy. The topic shifted to one that Dixon is very familiar with: cryptocurrency.

Dixon is the head of crypto investments at Andreessen Horowitz, and he has just helped the firm raise billions of dollars specifically for blockchain startups, even though these companies are currently facing negative news. The price of ETH is down to three-quarters of last year's peak, financial regulators are swarming in, and entrepreneurs and investors are starting to discuss a "crypto winter." Ovitz said that Dixon seems unfazed by the turmoil; he has been a longtime friend of Dixon for ten years and is also a long-term advisor to a16z.

"I always call him, and if there’s some bad headline, I joke with him, 'How do you feel about crypto now?' But he has never wavered," Ovitz told The Information in an interview. "He doesn’t react. He just calmly says, 'No, there’s a long way to go.'"

Summary

• a16z's first crypto fund has delivered three times the returns for investors
• Trouble for OpenSea, Helium threatens Dixon
• "Crypto faith" helps Dixon win early investments

Dixon relies on cryptocurrency more than any other investor. In the venture capital space, he has supported many crypto startups and is known for valuing the success of the crypto industry more than any of his peers. Over the past four years, he has raised $7.6 billion for Andreessen Horowitz to invest in crypto startups, nearly three times the amount of capital he managed when he joined a16z in 2012.

Thanks to Dixon's precise bets on companies like Coinbase and Dapper Labs, Forbes named him one of the world's top venture capitalists this spring. He has arguably become a key figure for a16z's future, alongside the firm's iconic founders Marc Andreessen and Ben Horowitz.

a16z's first crypto fund raised about $300 million in cash, and four years later, Dixon has returned some profits to clients, with a16z reportedly returning an amount to limited partners that is roughly three times the original size of the fund, cashing out BTC and ETH, shares of Coinbase, and some tokens from crypto startups as returns.

The remainder of the fund has yet to be realized. Two insiders stated that theoretically, the fund's paper return could reach 10 times, but the ongoing downturn in cryptocurrency could narrow that. According to data from Cambridge Associates, by the end of 2021, venture capital funds established in 2018 had generated an average investment return of about 1.7 times.

a16z co-founder Ben Horowitz, image source: Bloomberg

However, amid the cryptocurrency downturn, Dixon's investment record began to show flaws this year. In March, Axie Infinity, a blockchain game developed by Sky Mavis, which was invested in by a16z, suffered a hack in which hackers stole $600 million worth of cryptocurrency. The trading volume on the NFT marketplace OpenSea, where Dixon serves as a board member, plummeted.

"These are catastrophic disasters," said Liron Shapira. He is an entrepreneur and angel investor in Silicon Valley who has attracted a following on Twitter by editing videos and cutting podcasts to expose venture capitalists' motivations for hyping blockchain technology.

"For a long time, many skeptics have believed that such models are flawed," Shapira added, who was an early investor in Coinbase before becoming a cryptocurrency critic. "Now we are seeing the skepticism play out empirically, and it has not been corrected…"

Dixon's new model promotes cryptocurrency, allowing investors to buy early shares of tradable tokens from crypto startups, but it also creates legal and financial uncertainties. For the 18 crypto startups that a16z has invested in, token prices have dropped an average of 68% over the past six months. In April, crypto companies that Dixon invested in, including the well-known crypto portfolio company Uniswap, were sued by a token investor who accused them of illegally promoting securities after the token devalued.

Crypto startups generally hope for higher valuations, and while some cryptocurrency founders have slowed their fundraising pace, Dixon's team is still making deals. In the past month, the firm has announced several new financings, including Sardine, which provides fraud detection for cryptocurrencies; Arpeggi Labs, which collaborates on music using blockchain technology; and knowledge graph network Golden, among others.

As regulators investigate securities fraud related to cryptocurrency and NFT exchanges, Dixon's work may become more challenging. The U.S. Securities and Exchange Commission has charged a former Coinbase employee with insider trading, while Kim Kardashian failed to disclose that she was compensated for promoting a cryptocurrency security. The murky regulatory environment has made venture capitalists hesitant to serve on the boards of crypto startups.

Note: Kim Kardashian is an American socialite who has agreed to pay a $1.26 million fine to the SEC for failing to disclose a $250,000 payment she received for promoting the Ethereum Max token and has agreed not to promote any crypto assets for three years.

The company's former partner Alex Pruden stated that Dixon has built a team of about 80 employees in a16z's crypto investment division and has long sought to avoid critics. A copy of Satoshi Nakamoto's Bitcoin white paper hangs on the wall of Dixon's home office, where he tries to recruit new investors and others who see cryptocurrency as a way to reshape social structures.

"The culture that Dixon fosters in the company is: everyone is a missionary," Pruden said, who now runs a blockchain privacy startup Aleo supported by a16z. "It's still early; how do you measure success? It's not a simple question. You just have to believe that success will come."

Screenshot from the Axie Infinity game. From Sky Mavis

Despite this, Dixon also privately worries to colleagues about the price volatility of cryptocurrencies—including the collapse of cryptocurrency hedge funds and the wild speculation on NFT artworks and other crypto assets, which have diverted attention from the blockchain technology that fundamentally aims to reconnect the internet. He even helped promote another term for this category—Web3—because the association with financial scams has severely tainted the word cryptocurrency.

The Web3 future he envisions could be intoxicating. Databases running on a computer network called blockchain can maintain transparent and secure records of transactions or decisions. Users of blockchain services can even gain economic benefits from these blockchains, incentivizing them to grow the network and collaboratively make governance decisions.

In Dixon and other Web3 followers' vision, it will ultimately cut down the size of internet giants. Musicians, writers, artists, and other creators will receive a larger share. Users will be able to vote on whether their social networks should ban certain types of content. Huge advances in computing and security, along with many advanced mathematics, will make all this possible.

Critics do not accept the utopian rhetoric of cryptocurrency. Adam Fisher, a partner at Bessemer Venture Partners, stated that even some of Dixon's VC peers remain skeptical about whether cryptocurrency can live up to the hype of these concepts. Many crypto projects may sound good but have yet to prove they can replace or improve existing financial services, social networks, or applications.

"You've never seen such a polarized investment space," Fisher said.

"The whole blockchain model is very clever. That's why it attracts so many geniuses. But it's based on speculation. You can't separate the two. It's a new high-tech thing for people," Fisher added, "It has attracted too much money and too many projects. I hope something truly practical comes out of it."

Through a16z's spokesperson, Dixon declined to be interviewed on the topic.

Discovering the Allure of Bitcoin

Dixon's friends, peers, and former colleagues unanimously agree that his unconventional background has shaped his ability to pitch his ideas to entrepreneurs and the public. As the son of an English professor, Dixon learned programming as a child in Springfield, Ohio. He developed an interest in early versions of artificial intelligence and studied philosophy at Columbia University before heading to Harvard Business School in 2001.

After working at Bessemer Venture Partners for a while, he founded and sold two companies in the 2000s and early 2010s—a security startup SiteAdvisor, which he sold to McAfee for about $75 million, and an AI recommendation engine Hunch, which he sold to eBay for $80 million. This was all accomplished before Dixon turned 40, after which he became a prolific angel investor, writing checks for companies like Foursquare, Hipmunk, and Kickstarter, and he ran a small New York tech circle before the 2008 financial crisis. Dixon began to build his reputation in the startup community by blogging and providing entrepreneurs with advice on everything from naming startups to learning the law.

Shaival Shah, a former employee at Hunch who now runs a real estate startup Ribbon, said Dixon is thoughtful, direct, geeky, and "a bit of a puzzle." He is not one to engage in small talk, but he has clear advice on building a personal brand. Dixon once encouraged Shah to blog about his own business ideas.

"As an individual, you need to represent something," Shah recalled Dixon telling him, "You have to have an identity, not just float along."

When Dixon moved to the West Coast in 2013 to join Andreessen Horowitz as its seventh general partner, he had already discovered the allure of Bitcoin. At that time, Dixon said his fascination with the first cryptocurrency to gain mainstream acceptance stemmed from his habit of studying "what the smartest people do on weekends" to predict technology trends. "Today, the cutting-edge tech hobbies include: mathematically-based cryptocurrencies like Bitcoin," he wrote on his blog.

In early 2014, after a16z's initial investment in Coinbase, Dixon told Wired that he believed the value of a single BTC would one day reach $100,000. While BTC peaked at about $64,000 last year, it has currently dropped to around $20,000.

Around this time, Dixon also completed early investments in internet giants, which may have influenced his later enthusiasm for blockchain alternatives. In 2014, Dixon led a16z's investment in media site BuzzFeed, which has become one of the most popular media URLs on the internet, partly due to significant traffic from Facebook. However, while serving as a board member of BuzzFeed, Dixon also saw the company's growth hit obstacles as Facebook adjusted its algorithms, disrupting BuzzFeed's growth.

Dixon also benefited from investments in large tech companies. One of them was virtual reality startup Oculus VR, which was sold to Facebook for $3 billion in 2014.

The "Red Pill" of Crypto

In 2016, Dixon began to express frustration after a dispute among Bitcoin developers over whether to use Bitcoin as a commercial application platform or continue to focus on it as a digital currency. However, friends of Dixon said that by the following year, he found another option in the rise of Ethereum, which seemed to change his attitude.

Ethereum, created by Russian-born programmer Vitalik Buterin, aims to use blockchain technology and cryptocurrency to build a new computing network, not just create digital currency. "Ethereum is the reason for his success. You can have a new computing paradigm owned by a community," Pruden said.

Meanwhile, with the entire cryptocurrency bull market in 2017, Dixon seemed to be "red-pilled" by cryptocurrency that year. Dixon told friends he was going all in on the crypto space.

Dixon got his wish. In 2018, he began to build a dedicated crypto fund within a16z, recruiting former U.S. Department of Justice prosecutor Katie Haun, who also served on the Coinbase board. The fund started with $300 million and several employees. It registered with the SEC as an investment advisor—rather than a venture capital firm—so Dixon and Haun could legally invest its capital in cryptocurrencies rather than being limited to holding equity in private companies. The following year, a16z also registered as an investment advisor.

Former a16z partner Katie Haun. Photo by Bloomberg

Dixon's focus on the future of cryptocurrency has also helped his competitors win key early deals. One of them is Anchorage Digital, a $3 billion cryptocurrency bank in which Dixon invested five years ago. The bank's co-founder Diogo Mónica stated that the bank initially hoped to raise funds from Sequoia Capital, as the firm had invested in his previous company, software maker Docker. But Sequoia did not have enough "crypto faith," Mónica said (the firm ultimately did not invest in Anchorage).

"No one is more confident than Dixon," she said.

Dixon continuously increased investment amounts, raising $515 million for the company's second and third crypto funds in the spring of 2020, followed by another $2.2 billion about a year later. He and Haun built an independent team outside of a16z's core business, allowing them to better control their staff for events, communications, and other key functions.

They hired more experts from cryptography and engineering fields and attracted more investment partners from across the company. The company's Slack chat software buzzed constantly, and Dixon often asked the firm's investors to defend their decisions or explain why they missed investment opportunities. Friends and former colleagues of Dixon stated that despite being over 6 feet tall, Dixon does not have a domineering personality. He speaks softly, rarely mentions names, and often wears casual Crocs outfits in the office.

While a16z has avoided some of the biggest crashes in the crypto industry—including the crypto lending platform Celsius, which has filed for Chapter 11 bankruptcy, and the collapsed stablecoin protocols Luna and UST—Dixon has also had several failed investments. Last year, the token value of a cryptocurrency project called DFINITY, which aims to build a decentralized world computer, plummeted about 95% after its initial token issuance.

Helium, a heavily promoted wireless IoT startup backed by a16z, rewards people for setting up hotspots in their apartments with tokens. Helium ran into trouble after being accused of exaggerating its relationships with business partners. These accusations intensified questions about the distribution rewards ratio of its products. According to a Forbes report, half of the mined HNT went to the company's employees, their friends and family, and early investors.

Meanwhile, a16z also saw executive departures earlier this year. Haun left the firm before raising the fourth crypto fund, which totaled $4.5 billion when announced in May. Haun—who founded her own crypto investment firm, Haun Ventures—recently told The Information that she left on good terms.

Now, a16z is placing more of its future on cryptocurrency than on any other mainstream Silicon Valley company. About 22% of its managed assets are specifically allocated to funds for cryptocurrency and blockchain startups. Venture capital firms can sometimes become notorious for premature technology bets, such as Kleiner Perkins' failed investments in clean technology two decades ago.

Sebastian Mallaby, a senior fellow at the Council on Foreign Relations, said, "If you bet everything on a mirage, you could ruin your reputation."

As skepticism about cryptocurrency spreads, Dixon has indicated that he is spending more time on online forums that are less hostile to the technology. He has recently started posting more frequently on Farcaster, a small social network primarily used by programmers and built on blockchain. a16z is supporting the network.

"The positive sentiment on Farcaster is so striking compared to the negative sentiment on Twitter," Dixon wrote on Farcaster in early October, although his disdain for the tone on Twitter has not stopped him from using it frequently.

Colleagues and friends say that, like many of his VC peers, Dixon has recently reduced his time in the San Francisco Bay Area, opting instead for New York and Los Angeles. He maintains a relatively low profile online. He does not have a LinkedIn account. His Instagram account mainly features photos of food and restaurants. His wife Elena Silenok's Instagram account does not post any photos of her husband.

Entertainment executive Ovitz stated that he believes Dixon will be vindicated in his bets on cryptocurrency.

"When history is written, there will always be early people who miss it and early people who take huge risks and then succeed. Dixon took risks; he took risks based on his intuition. It turns out he was right," Ovitz said, "He has done very well."