Sep 15, 2023

Recent PitchBook data shows crypto companies worldwide raised $5 billion dollars in the first half of the year, down almost 75% from a year ago.

Video transcript

Although Bitcoin has risen roughly 60% in 2023 VC funding remains sluggish. Recent pitchbook data shows crypto companies worldwide raised $5 billion in the first half of the year down almost 75% from a year ago. Joining us now to discuss is the managing partner for VC firm Coin fund. David Packman. Welcome to the show, David. Hi, Jen. Thank you for having me. Good to see you. Hey, Lawrence. Hi, let's talk about the recent fund. You raised 100 and $58 million back a few months ago. Was it tough to raise this fund? Given what we're seeing in the broader market and given this data that's come out of pitchbook coin fund is one of the oldest crypto native investing firms around. We've been at it since 2015 and the fund you're talking about is our fourth seed fund. So, um we've been blessed with a, a strong group of LP S who have supported us for a long time and we've been able to add some more. We have a seed strategy. We have a uh early stage strategy and we have a liquid strategy. So three different three different products. Uh The, it's not a surprise to see sort of boom and bust cycles in crypto. It's very similar to the ones we see in tech. We're in our maybe third, uh, but bust cycle in crypto bear market. And, uh, we've been through all three of those as a firm. I've been through two in the traditional venture world as well. And VC funding tends to be a lagging indicator about what's happening. Um venture investing sort of moves in packs. Um But the constant we've seen among a small group of crypto native investors is that we tend to invest through both boom and bust cycles where long term investors, seed and venture investing is a very long term discipline. The average uh holding period for an investment in funds like that is eight years. So uh companies will move through multiple cycles, multiple bowl and bear markets. And what we're looking for are companies that you build a long amount of enterprise value over a longer period of time. So, uh when, when the bear markets come, uh the tourist money tends to leave, the late stage money tends to leave. That's usually the largest check sizes, hedge funds and growth funds. And what you're left with is a small group of core crypto focussed investors of which were one and uh I think the numbers reflect that. So you guys are the crypto investors but who are, who are the LP s putting money into this fund. I mean, how, how many are doctors and dentists versus institutional? Because we've been at it for a while. We have a pretty broad mix of institutional investors like um fund of funds, foundations, endowments, uh and pensions. Uh And we also have high net worth and crypto founders uh and friends of ours. Um So it's a good mix. We've uh increased the amount of institutional investment capital since raising the first funds back in 2015. Uh And uh you know, count some of the world's most experienced venture allocators in a in an R LP base. What what are they looking for with this with giving you this money here? I mean, obviously it's diversification. All everyone will say, well, we want to diversify, its only say 2% of our total net worth we put into this fund, et cetera. But what, what are they looking for specifically when they invest with, with coin fund for, for this particular round? They're hoping that we will continue to back some of the largest and most important companies that will be built in crypto and web three over this cycle. Uh You know, venture investing tends to be a model where the largest successes drive the majority of the upside. And so the the mission is to back the most vicious entrepreneurs who will build long term sustainable, almost iconic companies or protocols. We've seen a few of those built so far and, and the goal is to, that's what the R LP S are looking for us to do but, but are they looking, are they saying, look, we want to put money into a lay, you know, layer one NFT? Like is there anything specific that they're, they're trying to do and why? Now I understand. Thanks for clarifying. Um LP S tend not to make subsector allocation uh decisions. They, they pay us to do that. They're the reason they're investing in experienced managers are because we tend to have more experience picking the sub sectors of, of crypto or, or or web three that are likely to produce these sort of outsized winners. Now, our view is that crypto is broad in its innovation set and that we will see giant outcomes in many different layers of the stack, certainly in the base layers like layer ones and layer twos uh and a bunch of infrastructure tech that goes on top of that. Um like one company where investors is Block Damon, you know, basically an outsourced uh infrastructure and, and not as a service operator. Um We also expect to see winners in the NFT space uh in D five protocols. Um Certainly at, at the application level, maybe even in wallets and and other financial infrastructure uh stable coins today represent probably the most demonstrated killer use case for crypto with even in this market, 100 and $25 billion of stable coin adoption as I think they'll be big winners there. Uh But, but really our ps are waiting for us to make, you're not just buying stable coins to be sure you're not just putting all their money in stable coins because I got an issue, the, the returns on that, you know, the capital, the capital appreciation is not going. Yeah. OK. I, so are, are you saying funds are flowing out of like the NFT, the more web three focused projects and into the more infrastructure play? I would say that a good way to judge sort of where we are in the cycle is looking at um where new investments and new entrepreneurial activity is happening. And the majority of that you, you get this at developer conferences and you see it in the seed and, and early venture stage funding is happening in infrastructure and that's the base and, and uh layer two and um and ZK roll ups uh happening at the core infrastructure layers of, of crypto. We're seeing a significant amount of activity at the intersection of A I and web three. Um We see as I, as I mentioned, a bunch of activity around new stable coins and stable coin infrastructure. Um And, and, and now even some activity around moving real world assets onto, onto chain. Uh So that, that would tell me that since we're seeing that a heavily in sort of the seed and series a stage that those are likely to be the companies that move along into the later stage as as they as they make progress. Uh There's also been at the total top the stack, lots of activity around gaming. There are more than 1000 venture backed web three games in the pipeline coming to market of which, you know, at least 400 of them look super promising and exciting. We'll see games are a tough market but um mainly web 2.5 approaches to bringing gaming on chain. Uh And obviously, the NFTS can benefit from that. Um So I, I think we, this is a tell tale of where we think things are going. All right, in this pitchbook data we're talking about says that VC investments and crypto companies have correlated with the markets but like roughly 3 to 6 months. So if this trend continues, they are saying that VC investment should rise during the second half of the year. Is this also what you're expecting? Yes. Um So I think one of the things that you're pointing out is that um all VC tech investing tends to move with the markets as this lagging indicator. We've been in a, you know, a general uh risk off environment for more than a year and a half now. And so you look back at the last couple quarters of VC funding broadly, not just from crypto. And we see that uh decrease in total capital going. And then as we enter more of a risk on environment as interest rates come down. You'll see VC as a as a full asset class, increasing crypto is no different from that. With the exception that there are some in the US challenges around regulatory overhang and still, you know, concerns around coming off the FDX debacle and some of the other companies that we've moved past. But the flip side of that is in Europe where we have much more regulatory clarity frameworks for launching crypto companies. Uh We see way more entrepreneurial activity in the UK in Europe and in a bunch of places in the far east, Singapore, Hong Kong. Um So I think you'll see VC uh investments increase in those regions more quickly than you will in the US in crypto. All right, David, we are going to have to leave it there. Thanks so much for joining us and we hope you have a great weekend. Thanks for having me. You guys too. Thanks, Jen. Thanks, Lawrence. Thank you. That was Coin Fund managing partner, David Packman.

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