Venture capital and blockchain was always going to be a bit of a match made in heaven. VC was the first group to pony up capital for institutional investment in crypto assets, with significant investments being made from the likes of Union Square Ventures and Andreessen Horowitz as early as 2013, far before the hype (mania??) of 2017. You could probably make the argument that they're still the class of investors who have the best intuitive grasp on the space's potential as well. If you're an optimist, you might say the reason for this is because crypto's explosive growth dovetails nicely with VC's strategy of placing risky, 'moonshot' bets in the hope of 100x returns. If you're a bit more cynical, you might say the industry is keeping an eye on the competition as token issuances offer an attractive, alternative method of raising capital. As is often the case, the truth likely falls somewhere in the middle of these two ideas. The takeaway for the purpose of this article is that venture capital, for the time being, looks to be VERY into the blockchain / crypto space. So who are the major players and how are they making investment decisions?
The Major Players
No surprises here. Turns out the 800lb gorilla in the venture capital space also has plans to become the 800lb gorilla in the blockchain space. Andreessen Horowitz (aka a16z) has announced the creation of a $300M fund dedicated solely to the burgeoning field of crypto assets and blockchain technology. The fund will be headed by Katie Huan, an alumna of the US Department of Justice and rising star in the San Francisco bay area, as well as current GP Chris Dixon.
It's pretty hard to overstate the significance of this fund. While the nine year-old VC giant is no stranger to crypto, with early investments in Coinbase, Ripple and Cryptokitties, this will be one of the first and by far the largest funds dedicated solely to crypto assets from an existing VC player. Yes, this fund represents a large injection of institutional capital to the space that will support promising projects and entrepreneurs. More importantly though, at least in my view, is the credibility the fund will lend to a space that desperately needs it. The sooner institutional money begin to view this space as a legitimate, high-growth opportunity and and less like some conspiracy nuts writing code out of their garages the better off crypto will be.
Union Square Ventures deserves a big shout out here as well. Fred Wilson, a personal hero of mine and an early advocate for crypto, has arguably advanced the space as much as many of the early blockchain designers and pioneers. Fred has been outspoken in his belief of blockchain as a technology as well as crypto assets, and if you haven't checked . USV also has early investments in crypto giants such as Coinbase and OpenBazaar, often co-investing with Andreessen Horowitz.
I also personally love USV's approach to crypto investing, which emphasizes the role of governance in blockchains and the value of dApps (decentralized applications). Wilson highlighted this in a recent blog, stating "If the second half of 2016 and all of 2017 was about raising capital to fund development efforts (and speculating on all of that), then it sure feels like 2018 is the year we start getting decentralized applications we can use." As far as governance goes, I don't want to get too far into the weeds but the general theory is that better governance structures will attract better developers and therefore produce superior blockchains. You can check out a more complete explanation of how governance will drive value here.
Andreessen Horowitz and Union Square Ventures are not the only two VC's involved in crypto. A number of existing funds such as Lightspeed and Draper Associates have made significant investments in crypto and blockchain, and a number of blockchain only VC's have been created. One in particular I want to shout out here is Placeholder Ventures, headed by USV alum Joel Monegro and author of "Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond" Chris Burniske. Laura Shin's podcast 'Unchained' has great episodes with both of these guys, if you haven't given it a listen yet check em out. Anyway, here's a list of the funds by number of investments as of March (I know I know I'm sorry, latest data I could find).
Also... DCG casually taking over the world here? Kind of surprising to me that there isn't more talk about how much of a monopoly these guys will eventually have... guess we'll cross that bridge when we come to it?
How the Smart Money is Investing
Turns out that there's more than one way to skin the proverbial cat when it comes to investing in blockchain. In a recent episode of Laura Shin's podcast Unconfirmd (can you tell I'm a fan?) Kyle Samami of Multicoin Capital outlines the three ways VC's are beginning to invest in the space.
1. Create a stand-alone fund to invest solely in crypto
This is what a16v is doing with its new $300M fund. When it comes to crypto investments, VC's have a make vs buy decision to make. That is, do I develop the competencey to invest in blockchain and crypto internally or do I outsource that expertise? Andreessen has chosen the former, which probably makes good sense for them. They already have a number of investments in the crypto space, and additions increase the possibility of commercial synergies.
Andreessen also believes that crypto will eventually become mainstream, so it makes sense from their perspective to develop this particular area of expertise sooner rather than later. Finally, there's advantage in the way they've structured their crypto fund. Andressen has a specific sub-set of LP's have produced the capital for this fund, i.e they understand the volatility of the space and have a long term view on it. Another fund that simply carves off a certain percentage of capital from an existing fund may have investors that aren't familiar with the space or happy that you're risking their money on this particular asset class. The downside to Andreessen's fund is pretty straightforward: they are assuming a LOT of risk. $300M is a lot of money, and if blockchain turns out to be a passing fad OR if value doesn't accrue significantly over the next 10 years, they're going to have some very unhappy investors on their hands.
2. Method 2: Invest in other 'blockchain only' VC's
This is the approach Union Square Ventures has taken, although they have also made direct investments into blockchain ventures themselves. Since 2014, USV has allocated capital to several blockchain only VC's, including Multicoin Capital and Polychain Capital. If we return to our 'make vs buy' analogy, it would appear that for the time being USV has leaned towards 'buying' blockchain and crypto competence. Investing in funds like Multicoin allows USV to maximize its information flow and profit from prudent investors whose operational focus is entirely geared towards blockchain / crypto. This indirect form of investment also allows USV to limit its exposure to blockchain / crypto and actively manage its risk. They also get the benefit of unlimited access to investor's whose sole focus is on this space. This arrangement makes a lot of sense to me, although I suppose some investors may question why they aren't just investing directly in Multicoin Capital if they want exposure to the space instead of indirectly through USV.
3. Carve off part of an existing fund
Lightspeed's M.O for blockchain investment. This approach is somewhere in the middle of the first two, where instead of raising a fund solely dedicated to blockchain and crypto the idea would be to carve off part of an existing fund. The advantage of this approach is that it allows funds to 'test the waters,' so to speak, while still gaining exposure to the space. To be honest, I don't love this framework. True, you get avoid some of the risk that Andreessen is assuming and you may end up with a stronger internal competence than USV. To me though it doesn't feel as well thought our or developed though as either of the first two approaches, both of which have a distinct set of strategic advantages.
Who's Investing the Right Way?
All of the hype around blockchain reminds me of one of my favorite quotes by Zhou Enlai, the first Premier of the People's Republic of China. When asked on a diplomatic mission what he thought of the French Revolution, he now famously replied "It is too early to say."* The truth is that we are still in such early days, only time will tell which investment approaches and fund structures will yield the greatest results. Andressen Horowitz's fund was only launched one week ago at the time of this article. That being said, I'm not going to end this article on a complete cop-out like that so here's my take: the funds that will succeed in this ecosystem will be the ones that can maintain the discipline to weather the upcoming bouts of extreme volatility.
This is an unpopular opinion in the crypto community, but guess what haters - cryptocurrency, in its current state, is 99% useless. Ethereum has only a handful of apps with 1,000 monthly users. A thousand monthly users! There are 8th grade science projects out there with more awareness out there. Yes, I know there's potential, we all know there's potential, but the fact that virtually any of these tokens on the top 100 of coinmarketcap are valued at what they are is bonkers.
Eventually, the market will realize its mistake. It almost always does. And when that happens, a lot of people are going to lose a lot of money. Investors will panic, and the drawdowns will be massive. But, funds that are disciplined in their approach, hold conviction in their theses and continue to deploy capital in a strategic way will ultimately be rewarded.
*Side note: it turns out that Zhou's famous 'too early to say' quote was actually a translation error. He thought he was being asked about the French protests of 1968, which had occurred just three years earlier, as opposed to the 1789 French Revolution. Most people like the quote better in the context of the French Revolution though, so historians have largely agreed to just let him 'have this one'