Crypto Venture Capital can often seem murky to outsiders and is widely known to be one of the most competitive and cutthroat subsects of the space. New funds pop up all of the time, rounds close at lightning speed, and Twitter threads (written by disgruntled founders) have popped up recently about “vulture capital” funds who don’t allocate resources but expect to get into deals. Some founders are now avoiding taking capital from funds themselves, preferring instead to work with a large network of angels or DAOs.
Whenever I think about who has had traditional success in crypto primitives, I always think about a great scene in a wildly underrated film called “Margin Call”. In what can be described as one of the most titillating parts of the film (because it’s supposed to mirror the reality of Lehman Brothers pre-2008), Jeremy Irons, who plays the big shot CEO who knows nothing while at the same time knowing the most important thing - that the market will tank before it does - tells his associates “why [he] earn[s] the big bucks”.
“What if I told you that there were three ways to make a living in this business?” he asks the room rhetorically.
“Be first. Be smarter. Cheat.”
This heuristic can be applied to most of the crypto funds that you’ve probably heard about (with a slight modification). However, there is a new framework for understanding these funds that we will also merge with these three categories. As Advanced Blockchain AG Head of Operations Richard Malone so eloquently put it, there are three basic categories for funds today: Brand Funds, Specific Value Add Funds, and All-Purpose Service/Value Add Funds (usually begun and continued on as Incubators and Accelerators). I will add some nuance and sub categories to further elucidate these Types.
You can think of those that came First as being Brand funds. They have their roster, they have their Big Shot Investors Making a Name for Themselves, and they have the LP base that will stay forever. Everyone knows who they are. To get investment from these funds would be equivalent to attending an Ivy League university, having the most exclusive of all Birkin bags, owning a Bugatti, or [insert other status symbols]. These Brand funds become self fulfilling prophecies: when other funds hear they are investing, they fight to get into these deals and consequently bring a panache that did not previously exist, which in turn brings more resources and becomes a network effect. (This isn’t a new phenomenon and happens in traditional VC as well.)
Brands are important because, like stereotypes, they are often steeped in reality. But they aren’t everything. If there is any critique to be made of Brand funds it’s that they can sometimes be seen as resting on their laurels. Further, economies of scale make these funds less likely to do early stage deals as time goes on: the larger their AUM, the less able they are to write smaller checks. Paradigm recently stated that they won’t be writing checks under 2 million USD. This automatically eliminates the vast majority pre-seed deals that are on the market.
Sometimes brands are tied to Twitter profiles and the Cult of Personality of the General Partnership, which many find to be a shallow metric when it comes to actually getting business done. When I asked an investor-turned-operator why she made the move recently, she said she didn’t want to have to be involved in “shitty Twitter thought leadership battles''. Touché.
Let’s talk about who came First and why this was important. As someone who loves thinking about crypto but who also has an affinity for mafia movies, something I haven’t been able to stop mulling over lately is who would be the Five Families (or, in our case, Four) of crypto. If crypto were a mafia, as we all know it to be (wink wink nudge nudge), who would be the most VIP of all VIP funds?
To me, the answer is obvious.
Blockchain Capital comes to mind as an “OG fund” with roots as far back as 2013 with Brock Pierce being one of the three founders. BCap, as it’s colloquially known, is a marquee name boasting some of the biggest success stories in its roster and one of the largest AUMs in the space.
Then you have Pantera Capital. It’s hard to compete with famed macro investor-turned-early-crypto-enthusiast Dan Morehead, who spearheads one of the most successful funds (by returns alone) to date, and was amongst the earliest well-known funds to begin investing into crypto, with a bitcoin fund launched in 2013 as their first foray into the space. Not to mention that they’re now innovating with a new rolling fund structure and aiming to raise billions.
Fenbushi comes third, having started in 2015 in Shanghai, boasting billions in AUM as well, and superstar young partners now launching their own funds. A lot of their AUM comes from being so early in the space.
Digital Currency Group, founded by Barry Silbert in 2015, is now valued at 10 billion USD and is one of the oldest, most storied, and most prestigious firms for crypto in the world. Technically they are not a fund as they do not take outside LPs, but must be on this list for the aforementioned reasons.
However, Brand Funds are not just famous for being first. Many of them have evolved to become formidable because they have specific value that they bring. (They would fall into Specific/All Purpose Value Add if – and only if – they weren’t such strong brands).
Paradigm, started in 2018, is not just an early fund or a brand name, but one of the best funds period. Fred Ehrsam is a legend, having gone from being a Coinbase co-founder to an absolute killer investor. Now having raised the largest crypto fund ever, they are notoriously tough to compete with. Among founders (and investors), they are certainly a crowd favorite for their unparalleled technical expertise. (On the conference circuit, Justine Humenansky [justinehy.eth] and I queried every founder we could about who their Dream Crypto VC would be to work with. Each and every one said Paradigm).
A16Z Crypto was also started in 2018, so it counts as a fund that was started early in the space. While many funds purposefully fly under the radar, A16Z does the opposite. It has developed an unparalleled media/PR machine. With former Assistant U.S. Attorney Katie Haun at the helm until recently, their regulatory/legal/lobbying expertise and influence was known as the best in the business by other investors.
Parafi Capital, started in 2018 by Benjamin Forman, is another example. They have a clear focus on decentralized finance (in fact, they were one of the first-ever DeFi-focused funds), but they also have unparalleled participation in protocols they back by way of governance. In a way, they’re kind of the new activist investors, my friend Justine Humenansky pointed out during a conversation about this list.
Multicoin Capital, which was started in 2017, is up about 200x on their first fund. You could say that they, too, are both brand and smarter: known for contrarian positions (i.e. Solana) that usually work out, we can’t ignore them.
When it comes to firms that didn’t start as brands per se (or aren’t vintage enough to automatically assume the category of Brand Fund), there are a few that totally count as being Smarter and that have value adds that are not super specific and that are now brands unto themselves.
Miko Matsumura’s Gumi Cryptos, started in 2017, has one of the best rosters right now. They just closed a second fund in October, and they have returned Fund I having invested at the seed stage into category-killers like OpenSea, Yield Guild Gaming, Celsius Network, and Agoric. I personally know founders who will keep their rounds open so that Miko, the deep thinker who leads many of the fund’s investments, will invest. As a personal friend of Miko’s, I have yet to find anyone that can match his breadth of knowledge, his critical thinking, and his ability to understand, foresee and tie trends together.
Arrington Capital, also started in 2017, is another fund that’s managed to grow to manage billions in AUM and to have some of the smartest, most nimble investors on their roster. Their founder, Michael Arrington, was already known as a savvy Silicon Valley investor, and was his own brand. As someone who has co-invested with the firm before, I can attest to the deep research that they do and the brilliance of their team, and am continually impressed by their ability to aggregate deal flow, do due diligence, and work quickly to close investments.
We can’t leave out Polychain Capital and Dragonfly Capital here, either. Or Reciprocal Ventures, Digital Finance Group, Bixin, Nima Capital, Kenetic Capital, Republic Crypto, Blockchange, Galaxy Digital (which is technically a merchant bank for crypto and not just a crypto VC), Coinfund, or Distributed Global.
Each of these are smarter and brands (but brands BECAUSE they are smarter, not necessarily because of chronology alone, even though they were started in 2013 (Nima Capital), 2014 (Bixin), 2015 (Digital Finance Group, Coinfund), 2016 (Polychain, Reciprocal Ventures, Kenetic Capital), 2017 (gCC, XRP Arrington, Distributed Global, Republic Crypto, Blockchange) and 2018 (Dragonfly, Galaxy Digital)).
Then we get to firms that have intelligently positioned themselves so as to be useful to founders looking for investment. In fact, just as venture capitalists ask founders “What’s your tech stack?”, so will founders eventually ask venture capitalists “What’s your venture capital stack?”. Investors that qualify as All-Purpose Value Adds will be “full stack” VCs.
Funds that understand this reality count as being Smarter. With regards to specific value adds that we have not spoken about under the Specific Value Add silo, we see one that has become wildly popular: liquidity provision for decentralized finance. For projects that have yet to get on their feet, there is more and more need (now requirements for investment at times) to have investors that will back the project with liquidity. GSR, LedgerPrime, Coral Capital, Jump, Alameda, Efficient Frontier, Wintermute, CMT, Blocktower, and CMS are all some of the biggest market makers out there that firms launching (defi) protocols kill to work with.
A lot of specific value add funds that are popping up in recent days are forming as DAOs. DxDAO specializes in providing liquidity to its DAO members and friends. Santiago Ramos recently started a venture DAO with his friends. Some DAOs exist to help certain kinds of founders (Komorebi Collective is for female and non binary ones in the crypto space). Operator DAOs are starting to pop up. Even DAOs that focus on Shitcoins have gained popularity. ByBit DAO, as an example of an exchange that became decentralized to form as a DAO, which was seeded by Pantera - in what can be seen as one big loop from centralization to decentralization – is going to be one of the most interesting social experiments with regards to how VC in the space can happen with large AUM in a decentralized manner.
Sometimes funds aren’t the vehicle for investment, but the firm is still a brand unto itself. For example, Kenetic Capital (helmed by the great Jehan Chu) and NIMA Capital (both were mentioned before) are family offices, but known to be some of the most aggressive and successful crypto investors. HOF Capital is another family office that in the last few years has carved out an elite niche and reputation as being insanely aggressive investors, led by Corby Pryor. LD Capital is another example of an amazing family office (based in China and focused a lot on East Asian investments) that we’ve seen do great deals.
Another specific value add that’s popped up in recent times is design. IDEO Co-Lab specializes in helping founders design their products and marketing materials as well as Twitter presences.
Electric Capital is known for publishing amazing research that everyone from developers and investors rely on when surveying the market.
Variant Fund specializes in Web3 and creator economy investments and in connecting their founders to others in the creator vertical.
Tribe Capital is known for its machine learning technology that is best-in-class at sourcing deals.
Other types of specific value add funds that we can think of are Silo Specific funds. NFT funds have popped up in recent times: SFermion comes to mind here as they specialize in NFTs and are soon moving towards DAOs. Wave Financial is said to have an NFT fund as well. Collab + Currency have also pivoted to focus mostly on NFTs and Arca just launched an NFT fund. Metaverse funds, some of whom even invest into in-game assets have gained popularity (Galaxy Interactive is likely the most marquee of these funds, Gemini’s metaverse fund is as well, Metaversal, a JV with CoinFund, and Republic Realm is another that just popped up). Katie Haun’s new fund is going to focus on metaverse. Some themes are even tied to geography. Folius Ventures focuses on East and Southeast Asia as a main part of their mandate, as does Sky9 Capital, GBIC, David Gan’s OP Crypto, and a few others. Kosmos VC is the biggest blockchain VC out of Australia.
Ecosystem funds are another example of specific value add funds. Their main purpose is to prop up an L1 Ecosystem. Hypersphere will give you DOT exposure as they focus mainly on Polkadot ecosystem investments. Parity Ventures is another DOT ecosystem fund. Cosmos has Tendermint’s new fund. Terra has the new Terra Ecosystem Fund. Avalanche has several ecosystem funds. Algorand has Borderless Capital. Zilliqa has Zilliqa Capital. Solana alone has at least three: Solar Ecosystem Fund, Solana Foundation, Evernew Capital. NEAR has MetaWeb.VC. Flori Ventures is CELO’s bet. Even companies in the space have their own. Chainlink is said to be starting their own, for example. Most of the big exchanges have their own venture arms in the same vein (Coinbase Ventures, Huobi Ventures, OKEX, etc.).
[Sometimes funds focus on certain ecosystems but not as only an ecosystem fund. Our friends at Valhalla Capital focus a lot on the Algorand ecosystem, for example.]
Grants programs are a kind of ecosystem fund in their own right without the returns, and worth mentioning because they bring so much value to the ecosystem themselves, with lightning speed as they are not meant to function as investment. Certain grants programs are more active than others (Polygon has a well-known grants program, not without its controversy, NEAR has an aggressive grants program where grants under 10k always get accepted, Flare Network has tons of grant money, Uniswap, the list goes on and on…).
There are also more general, nebulous “value add funds” that may have smaller, scrappier teams (and a good roster because they’ve been around for a while) and a Head of Platform whose responsibilities are nebulous at best and too far reaching at worst. These teams find it harder to get an “edge” into crypto deals. These funds are usually populated by young, nimble people who hustle and are well networked but don’t scale very well. In fact, many of these managers do investments for business development purposes.
Lastly, you have All Purpose Value Add Funds, usually started as an Incubator or an Accelerator. Consensys’ Ethereal Ventures is the most obvious example. Thesis is another. Delphi Digital too. Advanced Blockchain AG comes into play as well. (JUMP identifies this way but is more known as a market maker/trading desk.)
Yunt Capital is another DAO that has been successful at establishing itself as specialists in all “hot spots” of crypto. “When we invest in projects we look beyond just providing capital. We like to be involved with projects that want to work with us and look to offer our guidance and advice in: tokenomics, governance, and content, but we also have niche specialties across the board as well.” one of their founding members stated recently. With eighteen members, they are decentralized enough – and well connected enough – to have gained a great reputation as value add investors without the traditional fund structure in place. 0xVentures DAO is similar - with 80 members who double as the investments’ power users (“quants, NFTs maxis, traders, gaming wizards, VCs, and developers” as just a sampling, their founder told me over Telegram earlier this week) who help them build the optimal product. Examples of work that they’ve done for founders are: creating content, consulting for major platforms, incubation, machine learning provision, node operation, code reviews, and more. Neither DAOs have a token yet, but another group – New Order DAO – has the same value adds and is structured as a DAO. Founded by former Outliers Ventures Partner Eden Dhaliwal, their decentralized accelerator model is working perfectly, with their first product launched – Opytfi – a crowd favorite. You can also buy their token on the open market.
The future of funds in the space will have to involve the most robust, value additive structures possible.