What institutional capital looks for before it allocates to a crypto VC | EBC12

Thank you to everyone who came here for the last financial, let's say institutional panel of the day. We have a very exciting conversation ahead of us. But perhaps it's worth starting with a very simple question. We hear a lot about institutions: they want to invest, but the interest and the ability to invest are two different things. Because what do I mean?

What do institutions really want to see in a crypto in a crypto venture fund before they are ready to invest? This is the question we are considering today considering today . To do this, I invited two true giants of the industry. Jida is the general partner for capital formation in this era. This is a specialized venture capital firm that invests at the intersection of AI, blockchain, and internet technologies.

He focuses on late- stage companies as well as secondary transactions as part of the investment team. Tom Nash is a team. Tom Nash is a leading growth and crypto investment fund, a venture capital firm focused on investments from pre-seed to pre-IPO. Tom is on the board of directors of such interesting companies as Bitpanda, The Block, Speiko, or Flowdesk. So Block, Speiko, or Flowdesk.

So , I'll start with the first very interesting question to move on. What does a crypto venture fund have to demonstrate before institutional investors are willing to allocate capital? Please, you can begin. Thank you. Yes, I'm happy to start Yes, I'm happy to start , and thank you for this introduction, Danny.

I think for us as limited partners (LPs) at many of these venture firms, we have had the experience of learning about the infrastructure and the basic audit capabilities of these funds. And we know that crypto, blockchain, and digital assets in general are high- risk investments. And venture capital as an asset class is also high-risk. So if you combine these two things, you essentially get a requirement for deep due diligence. For us as an LP, what we've looked at in the past are things like the quality of manager selection.

I think this becomes quite important, especially when you look at sustainability metrics in venture capital. The resilience, essentially, that I'm talking about means that managers in the top quartile tend to stay in that top quartile. And this essentially boils down to information asymmetry. So when you as an institution are considering the choice of a manager, I think, given the fiduciary requirements for your clients, it becomes very important to make the right decisions. And creating a portfolio takes time and some diligence.

And I think those are the two most important things. Yes. I definitely agree. Thank you very much for your thoughts. What about you, Tom?

What do you think about this? Perhaps it's worth clarifying first that I'm not a crypto venture capitalist, I'm a broad- based investor who also invests in blockchain invests in blockchain companies because it's a great way to make a profit. And, um…I also don't invest in crypto invest in crypto venture funds like you do. I invest directly in companies. So my perspective is a little different.

In addition, I only invest in stocks only invest in stocks , not tokens. This is a conscious decision, as I currently believe that 90% of believe that 90% of attractive crypto companies are also companies with equity capital. We are seeing a real second wave of crypto founders who previously worked at traditional fintech at traditional fintech companies like Revolut or similar and are now building something new. And they create companies with shareholder participation. On the other hand, our LPs, i.

e. the funds that provide us with funds, would not invest in any token funds so far. We would essentially token funds so far. We would essentially be unattractive to invest in for most of our LPs. That's why, just to clarify, as a broad- based investor, we invest in stocks, and I think we've discussed this before.

Yes. And there are fewer interesting opportunities for investing in tokens , right? So, you—would I consider you a true crypto venture capitalist or not? We are definitely a crypto venture capital fund, and you raised an interesting question. I think considering a token fund is a completely different asset class.

It does not behave like any other venture capital investment or venture capital fund. This is completely different, because the underlying value is not the shares, MGM. is n't that right? This is not the company's performance, it is the price of the tokens. And if markets dictate valuation, how can you guarantee a profit as a result?

So, this becomes a very interesting philosophical question: is this still a venture investment at this point? You're not buying a share in the company, you 're at the mercy of what other people think about it. Mhm. And this does not depend on the company's performance. There is no revenue generation.

You can't build a financial model and estimate cash flows. Yes. So, I just want you to add for me No, no, no. I'm disrupting your agenda . I just thought it would be Of course, this is a discussion.

You know, these are not questions and answers. Yes, it was important to understand what crypto venture capital is, what it really means, right? So, I think we've made that distinction. No, very good. Very good.

Thank you very much. Because I had one more question in reserve, but it's almost answered, although you can add more thoughts. What needs to happen for a crypto fund to move from the “interesting” category to the “actually investable” category by institutions? What do you think, because there are two different, let's say, elements here. Yes, Tom, I think you just touched on that.

I believe there are two ways for an institution to look at this. Do you invest in venture capital or specifically in crypto specifically in crypto venture capital? Are you looking at this as a single stock investment, or do you want the diversification that a fund offers? I think that in today's world, institutions definitely look at the first. So, they want to have access to specific names.

They know what they want. They need a stake in the capital of companies that are building infrastructure for the world of the future. These are companies like Securitize, for example, which just went public, tokenizing real assets. Or Kraken, a very famous crypto exchange. So I think the industry is mature enough at this point for institutions to know what they want.

I think 10 years ago things were different. Although, having said that, we still get questions from partners: “ can you explain why Bitcoin is not a scam?” So there is still a lot of work to be done in terms of education in the crypto world to convince them. You said a very apt thing, because I was just about to ask, at what sign or " what sign or " red flag" would you immediately stop the due diligence process? Because, just following the flow of the conversation, it's worth mentioning.

So, regarding verification, what is essentially a " what is essentially a " red flag"? This is a tough question because every verification process is different, right? But there are obvious things; if this is the manager's first fund, for example, it's not really a " it's not really a " red flag." I mean, novice founders can be successful, and novice fund managers can be successful too. But generally, we want to see a track record, and I think institutions generally want to have numbers that they can rely on, something that they can show their clients and say, " clients and say, " Hey, this is why we trust these guys."

So I think that would be number one on my list. Perhaps, returning to your questions about your questions about what an institutional investor is actually looking for and when a project is investment- attractive. I mean, in venture capital, it's not just about performance, because our LPs, I think most of them, are looking for financial results, but results, but secondly, they are also looking for co- investment opportunities, meaning they want to invest a lot more capital directly in portfolio companies with the fund, so sometimes performance doesn't really matter. Or if strategic investors, such as banks or insurance companies, want to gain strategic insights that are useful for their core business. So I just wanted to step back a little bit.

In this asset class, it's not always all about performance. No, fantastic. No, thank you very much. Now you have two directions open: on the one hand, let's say, due diligence, and on the other hand, the investment part. What I will say now is this: can each of you answer for me or the public how LPs can distinguish real performance from that which exists mostly on paper?

Because you just mentioned that they're looking for more than just performance, but I'd like to dig deeper into that concept. If you could also enlighten us a little, I think the audience would really appreciate it. Thank you. Yes, I think this is an ongoing problem. You know, a lot of value on paper is presented as real-world performance, and it just doesn't match reality.

And I think institutions are starting to understand the fact that without investment exits or real liquidity, when DPI is zero, it doesn't really matter how well you think your portfolio is doing. So to get that liquidity, value creation in private markets, I mean, it's almost a buzzword now, but I think institutions are now looking, as I said, for the ability to allocate into specific names. And in fact, we are seeing a significant increase in allocations to technology companies before IPO. Again, an example, but, you know, your time frames and liquidity horizons are much shorter. You don't count on, you know, a 10-year fund that returns capital in 12-15 years.

There is no real guarantee of getting your money back after these 15 years. So that was a constant problem. But when you look at these companies before IPO, it's probably a holding period of 3-5 years max. And in general, it can be argued that you can always make some profit from it. Thank you very much.

I can give a more technical answer very quickly: how LPs, that is, investors who invest in our funds, look at this. So cash-to-cash profitability cash-to-cash profitability is the best; it would be best if that were not available, then any capital raising rounds, and if those rounds don't happen anytime soon , then they look further at the portfolio companies' KPIs portfolio companies' KPIs , be it revenue growth, gross margin, EBITDA margin, etc. So, that's the technical answer to the question. Okay, no. Thank you very much, one question from me one question from me .

The liquidity element was mentioned, what do you think is usually the biggest obstacle: regulation, track record , governance, liquidity, or even reputation? I know, that's a difficult question, sorry, because, you know, we're more focused on regulation and on sentiment right now. Yes, I mean, I can start. I think that's a pretty open question, honestly, Danny. Um but I think you have to consider all these things together.

And I know this is a bit of a boring answer and sounds like an excuse, but management is important, liquidity is important, due diligence is important, track record is important, and you can't have what you consider a successful investment without any of investment without any of those pillars. So I think it's really worth looking at this not as an attempt at ranking by importance, but almost as a checklist exercise as a checklist exercise : do these things exist? If the answer is yes, then great, you can study the investment further and conduct due diligence, but if one of these pillars is missing, what pillars is missing, what you are trying to build is on a shaky foundation. So it is difficult to assess what this will lead to. No, I mean, I completely agree.

I think, let's say, you can take one of these elements , depending on the situation or context. Of course, there are many factors, so it cannot be said that this one argument should be decisive. And I think it's some combination of two or three of them. Yes. I can't choose one of them, but it's essentially a combination.

This is an extremely challenging market for venture capital and crypto funds to raise capital. And the main barrier is proven experience and performance. If you are not in the top quartile of funds, they will usually not continue to work with you. That's why I choose this, because everything else comes after that. Okay, I understand.

Rightly. We talked about verification, risk, liquidity, and efficiency. I think we've basically summed it up conceptually. I would like to end this session with one question for you. Please finish the sentence in 30 seconds.

Of course, you can tell us more. This, of course, is not a problem. Institutional capital will start investing heavily in crypto investing heavily in crypto venture funds when, Excuse me, I'm going to be a little more sloppy and take a little longer , but I don't know if you saw the Cambridge Associates report that came out late last year, which essentially said that everyone's portfolio should have a certain percentage allocated to blockchain as an investment. And if we go further, the models offered by companies like BlackRock, Invesco, or Pictet will essentially say that you should own a share of blockchain because of the performance of this asset class. And I think that once this becomes part of pension funds and asset managers, the issue of institutional allocation will disappear by itself.

This will almost become the foundation on which everything rests. Perhaps also a detailed answer detailed answer . I mean, we need more capital flowing back into the system. Essentially, we need exits. Yes.

Because now all the institutional investors who invested at the peak of 2021 have been burned as their investments have depreciated. Moreover, most of the capital was not returned. So they have very little free capital for new spending. And what new capital there is is now being channeled into AI and deep technologies, leaving almost nothing for the crypto or blockchain sector. Therefore, we need exits through IPOs or business sales.

Hopefully, this will happen next year. No, thank you very much. I think we discussed that ultimately institutions are not just looking for good returns. We mentioned that they look beyond performance metrics. I think, for example, they want to understand how to invest, what risks they are taking risks they are taking , and whether they have the right team to manage all of those risks.

And this is important, because in the cryptosphere it matters even more because of things like volatility, liquidity, as well as regulatory issues. I think, let's put it this way, that's enough. I hope this is enough. I hope everyone enjoyed our conversation. Thank you and I wish you a good continuation of the event.