On Monday (22 October 2018), Ari Paul, Chief Investment Officer and Managing Partner at crypto investment firm BlockTower Capital, presented some personal observations on the current state of early stage crypto fundraising on Twitter.
BlockTower, a leading crypto hedge fund based in Stamford, Connecticut, was founded in August 2017 by Matthew Goetz, a former vice president at Goldman Sachs (where he spent eleven years), and Ari Paul, a former risk specialist and portfolio manager at the University of Chicago’s endowment investment office and a derivatives trader at Susquehanna International Group.
On 4 January 2018, Bloomberg reported that BlockTower had raised $140 million from “family offices and other institutions such as venture capital firms.” The report also mentioned that two of these VC firms were Union Square Ventures and Andressen Horowitz.
Earlier today, Ari, whose motto is “Stay hungry. Stay humble. Stay ambitious. Stay curious. Be a student, always”, used Twitter (@AriDavidPaul) to share his personal observations on the current state of early stage crypto fundraising.
Ari started with this opening tweet:
Some observations on the state early stage crypto fundraising: money is still flowing but from different sources and to different structures and types of projects.
— Ari Paul (@AriDavidPaul) October 22, 2018
He then proceeded to express his remaining observations via ten more tweets:
- “2/ Retail support for ICOs has fallen very dramatically, not just since Q4, but even since Q2 of this year. For good projects, the amount raised from this crowd has fallen from $20m+ to <$4m typically.”
- “3/ Syndicates and small crypto funds similarly have dramatically reduced their funding. Part of this is because these syndicates and small funds haven’t raised much new money, and there haven’t been many ‘exits’ to allow for recycling of capital.”
- “4/ So who’s funding new projects? A. A handful of the largest crypto funds both old and new. B. Ecosystem funds and companies behind projects (like block one and ripple). C. Exchange and miner funds (coinbase, binance, bitmain).”
- “5/ For BlockTower, it’s been mostly business as usual. The longer path to liquidity means we can’t recycle capital as quickly so we’re allocating a bit more slowly and writing slightly smaller checks, but not much different in that regard. Biggest difference has been valuation.”
- “6/ We generally look to invest at something closer to traditional VC valuations. For a project in its earliest stages without a working product or traction, that typically means <$5m valuation. (there are exceptions.)”
- “7/ when projects ask me for fundraising advice, my answer depends heavily on the project, but increasingly I suggest reaching out to companies or ecosystem funds behind the platform on which a project intends to build. For trading related start-ups, exchanges are good partners.”
- “8/ For new base protocol projects, the biggest funds remain the primary fundraising source. One big question for projects is whether they should take what they can get now, or wait for market to improve.”
- “9/ No easy answer to this. A compromise is to do a very small round now to get some working capital without giving up too much of the equity/token cap table, and retain optionality to raise more at a hopefully higher valuation in the future.”
- “10/ there’s a general “wait and see” approach among investors. As an entrepreneur, anything you can do to show some hint of traction will help you with the round. That might be a rudimentary testnet, a demo, or some very limited product release with even a few real users.”
- “11/ Lastly, the market generally dislikes tokens when there’s associated equity today. If you have a for-profit company behind a token distribution, expect many sophisticated investors to demand to invest in the equity or equity+tokens, not just tokens.”
On 22 June 2018, Ari made a post on his personal blog (“The Cryptocurrency Investor”) that explained how and why “crazy valuations of early stage projects are falling to earth”; this post also offered some advice to blockchain projects that are wondering “what this market dynamic means for them.”
Featured Image Courtesy of BlockTower Capital