As we head into our ninth year of investing in web3, it’s a great time to reflect on how we’re doing and where we want to go. CoinFund has raised the bar to become an institutional-grade leader — and I truly believe our firm will be held as the model of what a professional cryptonative firm can and should be. As a team, we strive to evolve alongside the opportunity, continuously refining and refreshing our thinking and challenging ourselves with each emerging datapoint. As a company, we’ve matured in all of the good ways and hopefully less of the bad ways. We work hard to evaluate scores of companies and get to the bottom of complex topics, risks and dependencies. Our leadership and team maintain the same curiosity which led us all to crypto in the first place, and we prioritize data- driven decision making and a founder friendly approach.
We raised over $550M in the last 18 months and today announced that Seed Fund IV has exceeded its fundraising target, closing on $158M — demonstrating continued faith and demand during this bear market which will propel a generation of founders we believe in. We will continue to push the bar ever higher as we vie for exceptional and repeatable returns for our LPs. Buckle up.
One question we commonly hear is “Who are you and how are you different?” I’ve thought about this often in the last year as we stared down market uncertainty while continuing to gain trust from founders, LPs and the talent we hire. In the crypto microcosm we’re often characterized as the OGs and cryptonatives. The former is objective: founded in 2015, we are among the first cryptonative investment managers in the world. The latter is somewhat more subjective. I think we’re cryptonative because we are peers to the founders in our industry. We’re in the sandbox dogfooding protocols as often as we are educating large legacy tech and financial players, acting as a conduit to the mainstream world. We are also ambitiously trying to build a very successful web3 company ourselves and appreciate all the details and nuance that make it so hard. We believe in open source technology and like everyone in web3 who’s grinding, we’ve experienced challenges around asset volatility, technology limitations, immature tooling, anxiety about security and safety, regulatory uncertainty and token custody that present idiosyncratic differences to traditional software design and company building. The 30 person CoinFund team not only understands the guts of what founders are building on a technical level, but we also bring a level of real connectivity to the right set of end users and developers. And with our collective authentic experiences, we feel uniquely qualified to announce our formalized mission: to champion the leaders of the new internet.
Who are we? We love what we do and are inspired by the founders we partner with — pairing an obsession with an open internet with the dedication to serve these partners excellently. The ambition to solve hard problems in order to deliver a decentralized application developer stack is a big commitment. In recent years we’ve applied this same focus to our own organization. In 2020 we invested heavily in operational expertise and risk management before the last bull market kicked off. Today, we find ourselves investing heavily to hone more advantages to serve our founders; so far this year we’ve hired new heads of venture legal, marketing and platform.
We’re also the team that’s early. Considering how we’ve contextualized in advance the opportunity in web3 for each new vintage of venture capital funds over the years, there have been three distinct epochs that required foresight to anticipate and create value for our LPs.
- 2015–2019: Focus on cryptocurrency, infrastructure and protocols– if we cannot prove $100s of billions of tokenized value, there is nothing for the picks and shovels to service provide
- 2020–2022: Early indications of consumer adoption and positioning for product and demand growth in DeFi and NFTs as well as more developer-focused infrastructure and middleware
- 2023–2025: Renewed focus on infrastructure in the post-FTX era to complete the end-to-end decentralization roadmap for scalability, interoperability and developer tooling with an emphasis on trust, safety and user experience
- Estimated 2026+: Finally, demand scaling and more real world use cases. Apps, apps, apps
Timing is an incredibly important component to successful venture investing. Anticipating how demand will come online for crypto sub-sectors has been notoriously difficult — either limited, slow or volatile. As I reflect over the past 8 years, we have some major wins — both making investments and consciously avoiding others. There have also been some that we missed.
We positioned ourselves early and well in the most important now established verticals — the ones that have evidence of $5–10B companies such as web3 infrastructure, NFTs and DeFi. In the wake of the 2018 ICO wave we recognized that focusing on mission-driven founders within an emerging area (before it became popular) drew durable credibility and key advantages. While we don’t have every category leader in our portfolio, and it’s still too early to judge, we can draw some intentional solid lines to areas we avoided in the early years. We chose to avoid many CeFi services due to lack of moats and limited prerequisite expertise among company founders. Coinbase got started before we began seed investing and is already a huge win for early investors, but Blockfi, FTX, 3AC, Celsius, Voyager, Genesis and many others failed due to overly competitive business practices or other self-inflicted issues. We misjudged key nuances by overly generalizing certain sub-sectors like data and analytics due to small customer bases and limited proprietary advantages in open source, only to miss massive demand from non-crypto players for basic security and compliance services. And we expressed a technical view that optimistic rollups may be inferior to zero-knowledge roll ups, yet it’s early and both approaches seem to have found early developer interest. While not perfect, I use this framework to critically review our prior theses and to adjust or measure outputs. In the past month our refined theses in these areas have led to exciting new investments in Superstate for CeFi, Cloudburst for compliance and threat intelligence and Neutron for modular blockchain scalability. Additionally we’re continuing to push forward our AI x web3 thesis as an exciting emerging area with follow-on capital for Gensyn (which we seeded in early 2022 before the AI boom kicked off) as well as a new investment in Giza for smart contract AI model inference.
We face perennial doubt from swaths of the technology world, but with each passing year there is more raw material that points to the conclusion that this is both an inevitability and the biggest long term value creation opportunity looking forward. Decentralized systems are trust machines built for the largest and most vibrant networks imaginable (even Meta’s new Threads product has signaled a move to adopt W3C’s independent server coordinator ActivityPub). However, we are still lacking the demand data and plethora of use cases to feel totally grounded in this view. The market has reminded us countless times during our journey that despite looking out over the horizon, sentiment can wax and wane quickly and the journey will likely remain a volatile one. The Bitcoin market cycles of 2011, 2015, 2018 and 2022 recorded peak to trough drawdowns of 93%, 87%, 84% and 77%, respectively. On average, each unwind took 333 days, or nearly a year, but each market cycle, antifragile moment and recovery brings us closer to the tipping point. Traditional capital doesn’t have to be all in like we do, but they are voting with their dollars on how to align with our view and I couldn’t be more thankful to have such an amazing group of sophisticated institutional allocators to work for. If correct, these are the types of structural transitions that generate massive payoffs.
In the field, we’ve seen valuations come down considerably on the private side, especially for mid to late stage crypto companies, and it took a while for the reset to unfold. As a result, I believe valuations will be stickier and remain lower for some time even if this broad market recovery helps to put in a floor and begin the march higher. Fundraising in the venture space is clearly much more difficult in a high interest rate environment and existing funds are deploying more slowly. Our Q1 2023 internal analysis shows a 35% decline in deal activity Y-o-Y from Q1 2022 to 286 total financings, but a much larger drop in dollars invested of 79% to $2.4B for the quarter. In the seed and Series A investing cohorts where we focus, we saw declines of 37% and 13% in the number of investments and 47% and 20% in dollars invested, respectively. In March, our data observations led us to conclude that a slight deal premium exists in infrastructure, with observed data for the prior 3 months of early stage financings averaging to $33.5M valuations vs. $24.3M for non-infrastructure. We consistently seek attractive entry points throughout cycles and rarely refine our strategy based on market dynamics. Three adjustments we’ve made during the past year are 1) increasing our focus on lead or co lead roles (we’ve led or co-lead 77% of the last 13 deals), 2) increasing fund reserves to help our entrepreneurs continue growth until later stage capital markets improve and 3) renewing an emphasis on in-person due diligence as post-Covid life returns.
In the liquid token markets we are optimistic that the broad based macro-economic and crypto specific headwinds have abated but with forthcoming regulatory discussions and lower market liquidity there may be large price swings. Today, there is also virtually no external credit available, only internal leverage within exchanges or products and open interest on Ethereum is roughly one half of the 2021 peak. In 4Q 2021 and 1Q 2022 Genesis was lending $50B a quarter. I have no doubt in my mind there will be more dispersion in the rebound this time around. Fundamental activity within each protocol or application will matter and we’ve still yet to see some languishing networks wash away. At the start of 2020 before the last bull market there were 5,100 unique tokens and in just two years that has roughly quintupled to 26,324 (CoinMarketCap, July 17, 2023.) Nevertheless our key bull-bear market regime indicator sits positively above the 150-day moving average, which helps support the view that we’re in the early innings of the next bull market regime.
We extend our heartfelt gratitude to all the investors, employees, and companies who have been instrumental in our journey over the past eight years. Your unwavering support, trust, and collaboration have fueled our growth and success. We are grateful for the relationships we’ve built, the lessons learned, and the milestones achieved together. Looking ahead, we remain committed to our cryptonative roots and to supporting innovation, excellence, and creating value in the ever-evolving web3 industry.
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