DIVERSIFICATION IN PRACTICE IN BLOCKCHAIN VENTURE CAPITAL

Blockchain Coinvestors Newsletter

Vol. 4, No. 19, October 2022 

DIVERSIFICATION IN PRACTICE IN BLOCKCHAIN VENTURE CAPITAL

As we prepare for the final closing of our third fund of funds which will be held before the end of November, we thought it would be useful to recap the best practices of early stage venture investing, including the importance of diversification, that are integral to the investment strategy of the fund (please contact ir@blockchaincoinvestors.com if you would like to participate or increase your current commitment).

 

Academic Research into Venture Investing Returns

 

At Blockchain Coinvestors our focus is on early and mid stage investing in blockchain startups - both equity and tokens. As a result we think it behooves us to be familiar with the academic research into the historical returns of venture capital funds, and the best practices of the top quartile investors including the importance of diversification. 

 

A quick synthesis of the academic research into venture returns shows:

  • Early stage technology investing is perhaps the highest returning asset class over the last 25 years

  • However, even for top quartile venture funds, there is a significant skew of portfolio outcomes:

    • For venture funds, about two thirds of investments have no return

    • Meanwhile, 7% of exits are 10x or better

    • The 10x and better exits provide 75% or more of the total return

  • Over the long term, most other investment opportunities have demonstrated much lower returns, which is particular concern in a potential high inflation future.

The Importance of Diversification

 

Given these statistics, diversification is a key best practice for any early stage investor. The probability of achieving the expected population return increases as the portfolio diversification increases:

  • 12 Investments = 75%

  • 24 investments = 90%

  • 48 investments = 95%.

Conversely, diversification does not increase the return. It mitigates the risk of achieving the population return only.

 

Other Best Practices of Early Stage Venture Investing

 

Beyond diversification, other best practices of the top quartile venture investors include:

  • Work to achieve high quality proprietary deal flow

  • Conduct exhaustive due diligence in which relevant expertise is engaged

  • Syndicate deals with other best in class investors, to both improve selection, and ensure ongoing support

  • Selectively follow-on invest into emerging category leaders, while recognizing that mid stage rounds show lower returns on average than early stage rounds

These findings have been shown to be robust and were integral to the formation of our Blockchain Coinvestors investment strategy over the last decade.

 

Blockchain Coinvestors Investment Strategy

 

Without repeating our Fund III materials verbatim, the essentials of our investment strategy are:

  • Focus on early stage rounds in blockchain companies that are enabling the transition to digital monies, commodities and assets and which are providing the infrastructure required to upgrade global commerce

  • Invest with the best specialist investors in the space (today we are investors in, and we have developed relationships with, more of the best blockchain funds than anyone else - as far as we know)

  • Build proprietary access and asymmetric information as a result of our place in the blockchain ecosystem

  • Inform our direct and follow on investing with this asymmetric information advantage.

All of these best practices are consistently applied and are reflected in the coverage model that sits underneath Fund III which is holding its final closing before the end of November.

 

Diversification in Fund III

 

We consider our coverage model to be a proprietary advantage that our investors benefit from but which we don't explicitly share. It considers global blockchain startup activity and ensures we gain exposure to the investments of many of the best investors in the space along the following dimensions:

  • Geography

  • Stage

  • Position in the technology stack

  • Investment theme

  • Equities and tokens

  • Other

However, while the specifics of our coverage model are confidential, we are transparent with regard to the output in terms of manager selection. The currently open fund of funds is an investor in all of the following managers, and a total of 29 funds (in some cases two funds at one manager).

Based on our experiences from our first two fund of funds, we expect that the average fund we invest into will make approximately 30 investments, and adjusting for overlap (there are many syndicated investments), we fully expect that investors in Fund III will end up with a total combined portfolio of more than 500 blockchain equities and tokens.

 

Practical Considerations

It is not easy to build this type of broadly diversified investment portfolio. In public markets, indexes are a common approach to ensuring diversification, and BGI (now Blackrock) where Alison was CFO was pre-eminent in this regard. In early stage venture investing there are no indexes. However, we feel we have gone one step further by creating essentially a 'stratified index' of the investments of the leading blockchain investors.

 

Furthermore, many of the best blockchain funds are raising their minimums out of the reach of many investors, as well as frequently having to limit access due to capital over subscriptions - their alternative is to shift emphasis from early and mid stage to late stage, which is a practical way to increase capital under management, but tends to reduce the delivered return.

 

We prefer funds that are sticking to early and mid stage blockchain investing and are avoiding the late stage.

 

Why Now?

 

While understanding that the economic and financial outlook is uncertain, the good news is that Fund III is more than 70% in dry powder and the analytical evidence says that venture capitalists outperform following a downturn and the best strategy is to heavy up by investing into the downturn.

Fund III Value Proposition

 

So to conclude, we believe that Fund III provides our investors with a unique value proposition. Make a single investment and be exposed to the most diversified portfolio of early stage equity and token investments in blockchain being built by the best investors in the space.


We believe the timing for investing into early stage blockchain companies and projects is ideal.

 

Please contact ir@blockchaincoinvestors.com if you would like to participate or increase your current commitment.

Thank you for reading.

Alison Davis

Matthew Le Merle

ABOUT BLOCKCHAIN COINVESTORS

 

Launched in 2014, our vision is that digital monies, commodities and assets are inevitable and all of the world’s financial infrastructure must be upgraded. Our mission is to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and crypto projects. Our investment strategy is now in its 9th year and has to date invested in more than 40 pure play blockchain venture funds in the Americas, Asia and Europe; and in a combined portfolio of 400+ blockchain and crypto projects including approximately 60% of all blockchain unicorns. Our funds rank in the top decile amongst all funds in their respective categories on both Pitchbook and Preqin. Headquartered in San Francisco with a presence in Grand Cayman, London, New York, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle.

FUND PERFORMANCE

 

Blockchain Coinvestors Fund III (Fund of Funds) was created to provide diverse coverage of the best blockchain pure play venture funds in the Americas, Asia, and Europe. Blockchain Coinvestors Funds I and II have already experienced significant appreciation. Fund I Net TVPI is 4.82x with an IRR of 67%. Fund II shows equally impressive early results with Net TVPI of 1.42x and an IRR of 42%. Almost all of our fund investments are performing as top quartile against the Cambridge Associates Venture Benchmark.

BLOCKCHAIN COINVESTORS FUNDS

Blockchain Coinvestors’ goals are to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and to capture superior returns from investing in the leading blockchain venture partnerships. Our funds are open to investors that meet the Qualified Client definition with a minimum subscription level of $250,000 at the discretion of the Manager. 

 

  • Blockchain Coinvestors Fund III (Fund of Funds) was created to provide diverse coverage of the best blockchain pure play venture funds in the Americas, Asia, and Europe. Blockchain Coinvestors Funds I and II have already experienced significant appreciation. Fund I Net TVPI is 4.82x with an IRR of 67%. Fund II shows equally impressive early results with Net TVPI of 1.42x and an IRR of 42%. Almost all of our fund investments are performing as top quartile against the Cambridge Associates Venture Benchmark.

  • Blockchain Coinvestors Fund IV (Early Stage Token) provides direct access to promising private stage token projects accessing our relationships with many of the world’s leading blockchain investors. We leverage asymmetrical information from our 40+ VC Funds to pick the most attractive opportunities. This is a continuation of the direct token investing strategy of the Fund Manager that has included private stage investments in Acala, Filecoin, NEAR, Polkadot, Structure, and others.

  • Blockchain Coinvestors VI (Mid Stage Growth) provides direct exposure to the emerging category leaders in the blockchain and crypto ecosystem. The fund leverages our unique sustainable competitive advantage (USCA) in blockchain, web3, and fintech to create a concentrated portfolio of between 20 and 30 investments with attractive return profiles and visible paths to liquidity. The fund assesses the more than 400 blockchain and crypto projects in which we are direct and indirect investors and employs a robust investment framework to select investment opportunities into the leading mid stage growth rounds - typically Series B, C and D. This is a continuation of the mid stage investing strategy of the Fund Manager that has included investments in Bitwise, Brex, InfiniteWorld, Securitize, Uphold, Wyre, and others.

Please visit the Blockchain Coinvestors website to learn more about our offerings. You can also reach our Investor Relations team directly at ir@blockchaincoinvestors.com.

BLOCKCHAIN COINVESTORS SWISS

We are excited to announce that Blockchain Coinvestors Funds are now available through Swiss certificates for those of our non-US investors who prefer this approach. The underlying fund is the same, however, our Zurich based team at Blockchain Coinvestors Swiss, who will introduce in future weeks, can provide detailed information regarding this investment option. Email us at mlemerle@blockchaincoinvestors.com to learn more.

BLOCKCHAIN COINVESTORS ANGELLIST SYNDICATE

Continuing the theme of the democratization of investing, we have a rapidly growing Blockchain Coinvestors syndicate on AngelList providing access to selected coinvestments. Please join us and our partner Lou Kerner on AngelList.

Click here to receive the insightful weekly crypto newsletter and webinar invitations from our Blockchain Coinvestors partner Lou Kerner.

REGISTER NOW FOR UPCOMING WEBINARS AND CALLS

 

Our investment team hosts regular webinars and calls to help educate our community about the Fifth Era, fintech, blockchain and crypto. We discuss important trends, tailwinds and investment themes including what we have learned and how we are using our knowledge to inform our own investment thesis and actions. Below is a list of upcoming webinars for which you can register by clicking the links:

 

2023 Blockchain Predictions
- November 7th, 7:00am PT
- November 7th, 12:00pm PT

 

Options for Investing in Blockchain & Crypto

- November 14th, 7:00am PT
- November 14th, 12:00pm PT

 

Meet the Blockchain Unicorns - Year-End 2022

- December 5th, 7:00am PT
- December 5th, 12:00pm PT

 

Recordings of past webinars and calls can be found at www.blockchaincoinvestors.com/webinars.

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