LEVERAGING ECONOMIC DOWNTURNS FOR SUPERIOR RETURNS
Leveraging Economic Downturns for Superior Returns
Image Source: a16z: 20023 State of Crypto Report
Blockchain Coinvestors invests in early stage blockchain projects and companies with the goal of having them have successful exits in better markets than todays. However, it is important to monitor the current state of the US economy for possible implications for our investment approach. Recent indicators, including an acknowledgement by Federal Reserve Chairman Jerome Powell, suggest a looming recession. For many asset classes a recession may raise concerns, however, economic downturns often present unique opportunities for early-stage venture investors like ourselves.
At first glance, a recession, typically associated with reduced spending and heightened risk aversion, may seem harmful to growth. However, history tells us that challenging economic conditions often become fertile ground for innovation, entrepreneurship, and transformative breakthroughs. These periods inspire entrepreneurs to discover novel solutions, identify inefficiencies, and create disruptive technologies capable of shaping industries and delivering substantial returns.
Our investment strategy involves capitalizing on these opportunities by investing in early-stage venture funds and start-ups, enabling us to support exceptional talent and groundbreaking ideas.
To elaborate, our strategy for early stage investing during an economic downturn includes:
Capitalizing on scarcity
‘Cross-over’ investors, such as hedge funds, pensions, sovereign wealth, or large family offices that were actively investing during the boom, tend to sit on the sidelines, leaving venture firms as the primary investors at the early stage.
Leveraging scarcity to negotiate better terms
Reduced competition for a smaller capital pool can drive down valuations, enabling venture investors to negotiate more favorable valuations as well as pro investor terms and conditions.
Harnessing abundant talent
Major companies often downsize during a recession, providing an excellent talent pool for startups – leading public technology companies including Amazon, Coinbase, Google, Meta, Microsoft, Twitter, and many others have recently let go of excellent, experienced engineers some of whom wish to launch their own ventures.
Driving start-up efficiency
Early-stage companies are compelled to trim costs and focus on delivering their business plan. In both 2001/2002 and 2009/2010 we saw this phenomenon with an emphasis on bootstrapping and revenue generation over negative cash flowing growth strategies that are typical of the venture model in better times.
Encouraging innovation
Limited resources inspire established companies to innovate and find compelling ways to attract users and generate revenue.
In summary, economic downturns not only present attractive entry points for investors but also catalyze the creation of innovative companies. For example, Uber and Airbnb, two pioneering companies in the sharing economy, were established during the 2008 recession. Both companies capitalized on a diminished labor market which left millions looking for new avenues to generate income. Hence, it’s no coincidence that two of the most important companies in the sharing economy emerged during a recession.
Given the current economic climate, we believe now is prime time for early-stage venture investing. Historical trends show that venture capital can yield superior asset returns for long-term oriented investors who are prepared to hold illiquid assets and, crucially, can identify and engage high-quality fund managers.
Liquidity Dynamics in Private vs Public Markets
A fundamental difference between private and public markets is the degree to which attractive investments are accessible. The open and liquid markets, stringent regulatory oversight and reporting requirements in public markets enable retail investors to participate actively. As per a recent Gallup poll, approximately 58% of Americans hold equity in public companies. Further, the world's largest institutional investors, including pension and sovereign wealth funds, also heavily infuse capital into public markets, bolstering their liquidity and increasing their efficiency. Efficient market theory postulates that superior returns should not be attainable in efficient markets, and perhaps this is why we see public equity returns rarely deviating from the expected risk adjusted return.
Contrastingly, private markets are characterized by inaccessibility, lower liquidity and, consequently, inefficiency. Private markets, particularly private equity including venture capital, have historically shown a tendency to bounce back stronger post-recessions, characterized by shorter recession periods and more substantial returns, as demonstrated in the data following the dotcom crash and financial crises.
Dotcom Crash: S&P 500 vs US Buyout
Source: Neuberger Berman
2008 Financial Crisis: S&P 500 vs US Buyout
Source: Neuberger Berman
Venture Capital Outperformance Post 2008
In the spectrum of private market investing, venture capital sits the furthest out on the risk curve, aligning investors with nascent companies offering the largest potential returns. This position amplifies the inherent advantage of private investing, but, as we noted in Letter from London Vol. 2, No 3., it is critical to build a diversified portfolio to achieve an attractive risk-adjusted return profile in your portfolio. In alignment with this concept, venture capital significantly outperformed other private market investment classes following the 2008 financial crisis, as shown in the data below.
The Advantage of Early-Stage Investing
In the aftermath of a recession, early-stage venture investing often proves superior even with respect to other stages within the venture asset class. This is due to specific key attributes:
Early-stage valuations tend to remain more stable and reasonable than those of later stages (see below graphic).
With the fewest "crossover investors" (e.g., the sovereign wealth funds and hedge funds), early-stage start-ups are shielded from the valuation hyperinflation often seen in more mature ventures. This scenario provides an advantageous entry point for early-stage investors, enabling them to secure investments at more favorable price points and potentially reap greater returns as these companies flourish when the recession ends.
In addition, those startups that do receive funding have lesser competition during recessions since capital becomes concentrated in the hands of the higher performing investors who tend to focus it on the best portfolios companies.
Finally, those well-funded startups that are active in downturns also see a concentration of go to market opportunities including with larger established companies.
Source: JP Morgan Asset Management
The View from London
In the words of Warren Buffett, "be fearful when others are greedy, and greedy when others are fearful." In our words, the superior returns of venture investing during downtowns should make the best investment strategy to heavy up, not reduce, your allocation if you see a recession beginning.
Moreover, given early-stage venture follows the power law (see Letter from London Vol. 2, No. 3), it is advantageous to invest with the top tier of fund managers, as they tend to continue to outperform given their high persistency. At Blockchain Coinvestors, we have assembled a portfolio of high-quality fund managers providing us with diversified exposure to the blockchain industry at an early stage. Given the current economic forecast, we remain confident in this approach.
If you would like to discuss our view on the current market and impact on our investing strategy, please reach out to us at ir@blockchaincoinvestors.com.
Thank you for reading,
Mitch Mechigian
Partner, London
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 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 more than 750 blockchain companies and projects including 70+ 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
The Blockchain Coinvestors Fund of Funds strategy 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. Almost all of our fund investments are performing as top quartile against the Cambridge Associates Venture Benchmark. Fund I Net TVPI is 4.55x with an IRR of 59.8% and is one of the highest performing fund of funds in the world according to Pitchbook and Preqin. Fund II shows equally impressive early results with Net TVPI of 1.39x and an IRR of 30.9%. Fund III closed at the end of 2022 and will begin reporting this year. Our newest fund of funds - Fund VII - is now in formation. Email us at ir@blockchaincoinvestors.com to learn more.
BLOCKCHAIN COINVESTORS CURRENT OPPORTUNITIES
Our funds provide investors with global, diversified exposure to early stage investing into the blockchain space. Our Fund of Funds allows an investor to make a single investment to access global, diversified exposure to leading early stage blockchain venture investments on an institutional platform, while our direct funds provide concentrated early stage exposure. We also provide regular coinvestment opportunities to our investors.
Funds are available to accredited investors, with minimums of $250,000 or more at the discretion of our managers.
Explore our funds below or contact our Capital Formation team directly at IR@blockchaincoinvestors.com if you are ready to start investing.
Blockchain Coinvestors Fund VII (Fund of Funds) Our fund of funds strategy provides diversified coverage of the best blockchain pure play venture funds in the Americas, Asia, and Europe. Almost all of our fund investments are performing as top quartile against the Cambridge Associates Venture Benchmark. Our newest fund of funds - Fund VII - is now in formation and currently taking indications of interest.
Blockchain Coinvestors Fund IV (Early Stage Token) accesses early stage tokenized projects in their formation and seed stages through our relationships with other leading blockchain investors. We leverage asymmetrical information from our 40+ VC Funds to pick the most attractive opportunities.
Blockchain Coinvestors Fund VI (Mid Stage Growth) provides direct exposure to the emerging category leaders in the blockchain and crypto ecosystem. The Fund assesses the more than 400 blockchain and crypto projects in which we are already investors and employs a robust investment framework to select investment opportunities in their mid stage rounds - typically Series A, B, C.
Coinvestments. Our coinvestment program offers our investor community the opportunity to increase their exposure to emerging category leaders in the blockchain space. Please let us know if you want to learn which coinvestments are currently open for funding.
Contact ir@blockchaincoinvestors.com to learn more about any of these opportunities.
INTERESTED IN MORE? REGISTER NOW FOR UPCOMING WEBINARS AND CALLS
Our investment team hosts regular webinars and calls to help educate our community about our investment thesis focused on the inevitability of digital monies, commodities and assets and the role that blockchain technology plays in enabling them. We discuss what we have learned and how we are using our knowledge to inform our own investment thesis and actions. Below is a list of our upcoming webinars for which you can register.
The Regulatory Landscape for Digital Monies, Commodities, and Assets
Global regulation of digital monies, commodities, and assets is accelerating quickly with pro innovation legislation in process in almost all leading financial centers worldwide. Our UK Partner, Mitch Mechigian, will share how we see regulation impacting the development of blockchain in the years to come.
Meet the Blockchain Unicorns - Mid-Year
Our bi-annual report which includes the most comprehensive list of blockchain unicorns globally - including private blockchain enterprises and projects whose valuations exceed $1 billion. Blockchain Coinvestors uses proprietary data sources and its own database of its combined portfolio resulting from its blockchain venture fund of funds to track emerging unicorns.
Recordings of past webinars and calls can be found at www.blockchaincoinvestors.com/webinars.
UPCOMING APPEARANCES
Our team speaks regularly at conferences and seminars around the world. Please join us at any of our upcoming appearances to take deep dives into the most innovative technologies of our time.
We are pleased to once again join Prestel & Partner at their London Family Office Forum on June 20th & 21st. Our Managing Partner, Matthew Le Merle, will speak on the importance of investing in the future through venture opportunities.
RECENT PRESS
CNBC Crypto World: Matthew Le Merle discusses this year’s performance in the space and provides an outlook for 2023
Business Insider: A profile of the firm's investment strategy and why now is the right time to invest in blockchain technology
The Holy Grail of Finance: A podcast with Altvia regarding the inevitability of blockchain technology in conducting digital commerce
Boardroom Governance: Alison Davis gives her unique view on 20+ years of experience in management, investing, and board membership
CoinDesk TV: Interview on unicorns and predictions for 2022
Nasdaq Trade Talks: Discussion on the blockchain unicorn universe research and how to gain exposure
Ashurst: On the ESG Podcast, a discussion of the internet, fintech, blockchain, and individual revolution
Business Insider: Discussing how right now in blockchain is similar to the internet boom of the '90s in terms of growth and innovation
NBC San Francisco: An interview on what are NFTs
Crypto Unstacked: Podcast on the Fifth Era and the evolution of digital assets
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.