WHAT BLOCKCHAIN VC's ARE SAYING ABOUT 2023
Blockchain Coinvestors Newsletter
Vol. 5, No. 2, February 2023
WHAT BLOCKCHAIN VC's ARE SAYING ABOUT 2023
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:
Why Digital is Inevitable
- February 13th, 7:00am PT
- February 13th, 12:00pm PT
Investing in Early Stage Tokens
- March 6th, 7:00am PT
- March 6th, 12:00pm PT
What is Tokenization?
- March 20th, 7:00am PT
- March 20th, 11:00am PT
Recordings of past webinars and calls can be found at www.blockchaincoinvestors.com/webinars.
WHAT BLOCKCHAIN VC's ARE SAYING ABOUT 2023
As we enter 2023, Blockchain Coinvestors has a unique advantage that we don't believe anyone else shares. As investors in over 45 blockchain venture capital funds (Go to www.blockchaincoinvestors.com/portfolio to see them), and partnered with some 30 blockchain focused investment firms, we benefit from a veritable fire hydrant of incoming data, information, and perspective. Every quarter these fund managers provide us valuable information with regard to their portfolio performance, new investments, uprounds, downrounds, upcoming follow on rounds, and so on. In aggregate this provides us with our asymmetric information advantage, and enables our direct investment strategies through:
Fund IV (Early Stage Token)
Fund VI (Mid Stage Growth)
Fund VII (Fund of Funds now in formation)
All of our investment strategies are open to capital commitments. Please reach out to ir@blockchaincoinvestors.com to learn more.
Each quarter we reach out to speak to as many of our fund GP's as possible (and some we speak to much more frequently than quarterly) and this time we asked them three questions:
Given what just happened in 2022, are you changing your investment thesis and/or strategy?
Since most venture funds receive most of their returns from 10% of their investments, which of yours do you have the highest conviction in today?
What compelling investment opportunities can we collaborate on now?
This newsletter focuses on the answers we received to the first of these questions.
What Happened in 2022?
First, as context, almost all of them feel that 2022 was a troubling year, not only because of the broader macroeconomic environment with its negative consequences for almost all investment classes, but also because a number of players in the public liquid crypto markets shot themselves in the head. We won't say again what we have said many times before, other to reiterate that traders from places like Credit Suisse (3 Arrows) and Jane Street (FTX) pivoted into a new asset class (Public Crypto) bringing their highly leveraged, highly risky trading strategies with them without understanding counterparty risk or the reality that all cryptoassets are innovation based with significant enterprise risk ahead of them.
Add to this a hefty dose of apparent fraud, and the result may have been inevitable.
For our VCs, this is troubling particularly because of the likely implications for both regulation and oversight of the blockchain space, and because it makes fund raising harder given the fear, uncertainty, and doubt that has resulted. For most, the former is a good thing, but the risk is that in their haste lawmakers may enact bad regulation not fit for purpose for an important emerging body of very beneficial innovation. In the 1990's lawmakers, especially in the US, kept their heads and enacted legislation that accelerated the Internet and helped make US companies the global leaders. If FTX, 3Arrows, Celsius, and others lead to that sort of regulation, most of our VCs think that would be beneficial. But on the other hand....
Conversely, making it harder to raise capital is mostly a bad thing for our VCs, although it does reduce capital and competition in the space, which in turn will reduce valuations, which is clearly a silver lining for blockchain specialists.
Changes to Investment Thesis
In light of this context, we asked the first question to gauge their sentiment for the long term opportunity for blockchain investors.
Given what just happened in 2022, are you changing your investment thesis and/or strategy?
Our VCs were unanimous in sharing their conviction that the central thesis of blockchain and specifically the emergence of an Internet of Value bringing digital monies, commodities, and assets into existence is unchanged. They still believe in their investment thesis and none of them plan to pivot out of blockchain investing into proximate opportunities like broader Fintech, AI, and so on.
So no change at the level of the investment thesis.
Impact on Funding Levels
However, a number of them told us that they believe that 'generalist' venture investors, and those attracted to blockchain by the fear of missing out that became palpable in 2021 and 2022, are likely to leave the space. For the blockchain specialists, this is a good - not a bad - thing.
To give you a sense of the magnitude of this change, take a look at the following chart from Cointelegraph. There has been a dramatic decrease in investment activity into blockchain enterprises and crypto projects in just the last 12 months.
However, averages lie. The enormous numbers of the first half of 2022 were driven by later stage private equity investors giving vast amounts of capital to late stage blockchain companies. Just as one example, consider the $1.8 billion plus equity investment into FTX over several rounds. Most of that came in late stage rounds at multi billion valuations led by firms that were new, or relatively inexperienced in blockchain investing. That capital most probably was more than the formation and seed rounds of most other blockchain opportunities in that same timeframe. One late stage deal can equal ALL formation and seed rounds. We have seen this consistently in other tech boom and bust cycles. The late stage investors get ahead of their skis and inevitably tumble down. Some of them are so bruised when they fall, that they never try skiing again.
The easy capital is fleeing the space, but the serious specialist blockchain capital remains and our VCs plan to continue investing it.
Back to Normal
The second chart from Cointelegraph shows you what we should expect for the next two or three years. We are almost certainly going back to 2018, 2019 and 2020 when blockchain specialists invested modest amounts of capital into promising teams and projects, and it will be a year or two before massive capital flows at very high valuations into a broad swath of late stage multi billion valuation blockchain unicorns.
Although of course there will be exceptions.
Changes to Investment Strategy
Which brings us back to the second half of our first question.
Given what just happened in 2022, are you changing your investment thesis and/or strategy?
In terms of investment strategy our VCs differ in their responses, but the center of gravity is the following:
We will continue to invest, but at a slightly slower rate as we watch for valuations to come down.
We are already seeing this happen in equity based projects, but we need to see more flexibility in token valuations, particularly in the post seeding private rounds.
We will, as we always do, conduct comprehensive due diligence and hope everyone else does as well.
We are negotiating much more aggressively on valuation, but also on terms and conditions. In the last few years SAFEs and SAFTs have been too entrepreneur friendly, and investors have lost certain rights (like follow on rights, or anti-dilution rights) which we are now expecting to get back.
We are also being even more careful to ensure that we own rights in 'derivative' and 'spin off' companies and projects under the terms of our initial investment.
Some, but not all, VCs are looking closely at milestone driven investing to make sure the entrepreneurs have to deliver real code, networks really launch, and value propositions are delivered before more capital is provided.
The VCs also think that the large number of layoffs at places like Amazon, Facebook/Meta, Google, Microsoft, Twitter, as well as in blockchain at places like Coinbase and Kraken to name but two, means that talented engineers, current in the technologies, and with understanding of what user needs are, now are free to pursue their own projects and startups which require backing.
In terms of the technology stack, the general sentiment (but not unanimously held) is as follows:
At the foundation layer, VCs are seeing a new powerful wave of innovation coming as the next group of projects build upon the learnings of those that have gone before. Since much of the code is open source, this may be very important to invest into.
Also at the foundation layer, new needs such as interoperability, portable secure identity, more robust onboarding including KYC/AML, better cybersecurity and so on, are also leading to new startups in the space.
At the transactional layer, which is about the Internet of Value and hence mostly about blockchain fintechs and DeFi, there is a general sentiment that the costs to play just got much higher. Startups in this layer will need more experienced teams, who can operate in a world of more complex, and often fragmented regulation, which will be time consuming and costly in every regard. Hence, our VCs will have higher expectations of teams before they will back them.
At the application layer, there is a lot of excitement for new emerging Web 3 versions of browsers, social platforms, blockchain based entertainment, and new platforms for digitalized assets including NFTs. However, since in many cases the cost of entry is low, there is a sense that this will be a hit driven space with high failure rates. So our VCs are being very selective with regards to who to back, but they are still investing into blockchain applications.
There are a lot of other specific points that our VCs shared with us, but this captures the common themes.
In summary, our VCs are cautiously optimistic, are actively investing in 2023, and expect that they will have less competition, with less capital, and less irrational exuberance, giving them the opportunity to back great teams, with great ideas, at lower valuations.
Implication for Blockchain Coinvestors
Given this, what are the implications for us, and what changes at Blockchain Coinvestors:
We also are not changing our investment thesis.
We are not changing our investment strategy. We believe in diversified, early stage investing into the best investors in the space:
We will launch Fund VII (Fund of Funds) in the second quarter and are already accepting expressions of interest and requests for the materials when they are ready.
We also believe in taking advantage of asymmetric information and privileged access and have spent almost a decade now securing those advantages:
Fund IV (Early Stage Token) is accepting quarterly commitments
Fund VI (Mid Stage Growth) is also open to new investors and subscriptions
Please contact us at ir@blockchaincoinvestors.com for information about any of our funds.
In conclusion, we share our VC partner sentiment, that the chaos of 2022 is setting up a very attractive 2023 and 2024 for early stage blockchain investors like ourselves.
Thank you for reading.
Alison Davis
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
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. 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%. 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.
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.
Los Angeles, CA
Matthew Le Merle discusses the future of FinTech after the crash of FTX.
Digital Asset Week brings together some of the brightest minds in the space. Join our team as we provide our experienced insights of what is happening now and in the years to come.
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 55% 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.
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.
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