Privileged Access and Asymmetrical Information
PRIVILEGED ACCESS AND ASYMMETRICAL INFORMATION
As we kickoff a new year full of excitement for innovation and early stage venture investing including in the blockchain and crypto spaces, we thought it would be useful to recap the best practices of early stage venture investing, including the importance of diversification, privileged access, and asymmetrical information that are integral to our investment strategies at Blockchain Coinvestors.
The first exhibit in this newsletter shown above illustrates both how we deliver global diversification in early stage blockchain investing, and also how our unique sustainable advantage rests on the privileged access and asymmetrical information that we have worked for a decade to build. We leverage this investment edge into our targeted decision-making for our indirect and direct investments. We believe the results have been impressive.
This newsletter will go over this in greater detail and finish with the results driven by our investment edge to date.
Academic Research into Venture Investing Returns
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 (see Exhibit 2).
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.
Exhibit 2 - Returns by Asset Class & Vintage
Unlike public asset classes which have normally distributed return profiles, private investing asset classes tend to have power curve distributions with important implications for investors.
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. The power curve returns of venture investing require broad diversification if an investor is to raise the probability that they will achieve the high expected return of the asset class.
Moreover, if an investor can achieve diversification within a stratified population of investments made by the best performing investors in the asset class, of course the returns are likely to be even higher. This is what we strive for at Blockchain Coinvestors.
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 privileged access and deal flow
Conduct exhaustive due diligence in which relevant expertise is engaged in leveraging asymmetrical information
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
The essentials of our investment strategy are therefore:
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 privileged access and asymmetrical information as a result of our place in the blockchain ecosystem.
Inform our direct and follow on investing with these two investment advantages.
All of these best practices are consistently applied and are reflected in the coverage models that we have developed.
Privileged Access
Privileged access is hard to build, and even harder to secure long term.
Our approach for the last ten years has been to carve out a role as a value added business partner to the best venture investors in the blockchain and crypto ecosystem globally. Our current list of blockchain investment partners is shown in Exhibit 3. These partners have been selected based upon our proprietary coverage model and many years of relationship building. In most cases we have secured ongoing access with investment side letters.
Exhibit 3. Privileged Access
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. These relationships provide both global diversified early stage access through our combined portfolio of more than 1,250 indirect investments, and also provides access to targeted direct investment rounds as they arise (see below).
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 co-founder 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.
Asymmetrical Information
The second investment edge derives from the asymmetrical information we have built over time. Here we maintain databases of blockchain unicorns, and our combined portfolio of investments, and watch for signals that will inform targeted follow on investments.
Exhibit 4. Combined Portfolio and Asymmetrical Information
Exhibit 4 provides the names of the more than 110 blockchain unicorns that we currently have within our investment portfolio, however, there is equally important information to be derived from the many hundreds of emerging unicorns which in some cases may provide compelling investment opportunities in the mid stage. The Blockchain Coinvestors investment team leverages this body of information to derive investment insights and specific follow on investment signals.
Investment Results
One measure of how our investment strategies are performing, is to assess the degree to which we are deploying capital into the companies and projects that end up being the most valuable in the asset class, before they raise to become the unicorns and public players of the space.
We do just this assessment twice each year in our biannual Meet the Blockchain Unicorns report. Exhibit 5 is the summary page from that report.
Exhibit 5. Meet the Blockchain Unicorns
At the end of 2024 there were a total of 111 blockchain enterprises, and 126 crypto projects valued at more than $1 billion.
Our investment strategies had deployed capital into 62 of the former, and 52 of the latter mostly in the early stages.
Direct Investment Opportunities
As noted above, our investment team then watches for signals that will inform targeted follow on investments. Where we are able to secure allocations beyond our available capital need, we selectively offer direct investment to our investors. In 2024 examples of these include:
Bitwise where we participated in the recent investment round alongside a long list of leading blockchain investment firms.
Securitize where we are able to secure an investment at a better valuation than BlackRock secured (although on slightly different terms).
Wintermute where we deployed capital with members of our investment circle.
Token rounds including at Delysium, Gravity/Galxe, and RiscZero where we were able to use access to secure hard-to-get token allocations at attractive prices.
These are just examples that make the point that privileged access and asymmetrical information are not just academic matters - they can drive investment activity in follow-on investment rounds.
Why Now?
As we enter 2025 it seems like blockchain, and specifically Bitcoin, are on every investor's minds (as well as AI which we have discussed in prior newsletters). In our conversations with investors, it seems that many think they have missed the opportunity in blockchain. After years of deciding not to invest for whatever reason, now the investors are talking themselves out of investing because they think the opportunity has already come and gone.
Here we will reiterate the simple facts of the matter: Blockchain is at the beginning, not the end, of its innovation arc.
As just one example, while the Bitcoin ETFs have been the most successful launch of an ETF family ever, capital continues to flow rapidly into them, and yet today, perhaps more than 90% of sovereign wealth funds, pension funds, insurance companies, retirement systems, wealth advisors, and so on have yet to take any exposure into these crypto assets.
Is it too late to invest in Bitcoin?
If you own Bitcoin today you are one of the first 10% or less of the world's investors to have this exposure. Meanwhile, most of the world's largest asset managers have none including perhaps 90% of sovereign funds, pension funds, insurance companies, endowments, wealth advisors, and so on. You are a pioneer, while the majority of the world's investors are still on the sidelines about to deploy their first capital to our space.
As a result, we think the answer must be no, if you move fast, then it is not too late - in fact it is still early. (Not investment advice however - if you want to deep dive on this topic, please reread December 17th's newsletter).
Finally, please contact ir@blockchaincoinvestors.com if you would like to learn more about our investment strategies.
Thank you for reading.
Blockchain Coinvestors Partners
About Blockchain Coinvestors
Blockchain Coinvestors is the best way to invest in blockchain businesses. 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 early stage blockchain investments and access to emerging blockchain unicorns. Blockchain Coinvestors’ investment strategies are now in their 10th year and are backed by 400+ investors globally. To date we have invested in 40+ pure play blockchain venture capital funds in the Americas, Asia, and Europe and in a combined portfolio of 1,250+ blockchain companies and projects including 95 blockchain unicorns. Blockchain Coinvestors’ first fund of funds ranks in the top decile amongst all funds in its category on both Pitchbook and Preqin. Headquartered in San Francisco with a presence in London, New York, Grand Cayman, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle.
“The best way to invest in blockchain businesses”