VeradiVerdict - Issue #277
Sat down with Inside.com to chat about the future of blockchain and crypto investing
Karan Chafekar: Hey insiders, thank you for tuning in for this new interview series of Inside VC, where we chat with VCs, angel investors, and founders. Joining us today is Paul Veradittakit, the managing partner of Pantera Capital, a blockchain hedge fund and a VC firm that has invested in over 100 blockchain companies, 110 early-stage tokens, and manages nearly $3.3B in blockchain-related assets. Hey, Paul, thanks for joining us today.
Paul Veradittakit: Thank you for having me, Karan.
Karan: So let's start with the first question, which is- the crypto industry has faced I mean, really big slump over the last year, you know, the VC funding has declined, and that has got into crypto as well, that has impacted that as well. And plus, there was the fallout of FTX, and then Three Arrows Capital, and so many things going on in the crypto industry. So how has that impacted Pantera Capital and your portfolio companies?
Paul: That's a great question. This is the first time that the crypto market has been bear [market], in the same time, as there has been a global recession. So that makes it pretty tough on the macro side for a lot of companies to think about going public and also companies from a fundraising perspective. The other thing that has happened on top of a global recession has been a few blow-ups- FTX, Terra Luna, DCG, Genesis and a few others. And that makes it tough for the industry, because not only are you sort of facing headwinds around a recession, but the reputation around crypto has gotten a bit tougher. But nevertheless, I mean, even though we are seeing a lot of growth stage investors and traditional VCs, probably backing away a little bit from crypto, and not quite sort of seeing the opportunity or focusing on other areas like artificial intelligence. For us, I mean, we're more excited than ever, in investing in this space. Us and our peers have quite a bit of capital, there were quite a few seed funds that were able to raise during the last bull market and now are deploying capital in this bear market, it is the best time to be investing. When you look for entrepreneurs to back, you always try to figure out whether they are mission-driven, whether they can sort of survive and push through a bear market. So, it is very self-selecting right now, where all the entrepreneurs that are coming in are very mission-driven about pushing decentralization to the forefront, and they're willing to go through whatever sort of things that they have to go through in terms of regulations, they're accumulating a bunch of talent –right now, we're actually seeing quite a bit of talent coming in, still from some of the best crypto companies or large tech companies wanting to build during this time. And so there is alignment in terms of vision. And I think there's also a bit more alignment in terms of valuation.
Karan: Well, thanks for your answer. I think you dived into so many of these topics, which definitely we'll dive into more. But to begin with, you said, definitely, I mean, crypto startups are being invested in. So which are the startups that are getting funded? And which are the ones that are not getting funded in recent times?
Paul: Yeah, I would say that there has been a shift towards companies that are probably going after, larger chunks or larger average customer values for a business model. So while there's still interest and opportunities in bringing consumers to crypto, whether it's in a centralized financial onramp way, or maybe even if it's in a more decentralized financial onramp way, those companies are going to be a little bit tougher and thus need a certain type of entrepreneur. But companies that are taking more of a B2B business model, whether they're servicing developers, enterprises, or institutions are probably more likely to, number one get fundraising but also more likely where entrepreneurs are going to sort of tackle because, at the end of the day, when you're in a bear market, you can sort of see the line of sight to the next round when you're able to get closer to profitability. And thus, I'd say a lot of the companies that are being funded right now are in that camp, either developer tooling, companies that are helping, let's just say enterprises figure out NFTs for sort of brand loyalty or maybe even on the institutional side, like companies like for instance, like Ondo that are trying to tokenize real-world assets, and then of course, be able to get institutions to get access to these products, whether it's domestically or internationally. Things around data security, insurance, and businesses providing services to the cryptocurrency industry. So we've seen zero-knowledge proofs be used for scalability, now we're starting to see some of them being used for, you know, providing privacy, transactions, and maybe privacy to identity, etc. And so that category has been sort of interesting. And then of course, the intersection of AI, and anything AI related is probably going to grab some attention.
Karan: So mainly, it's about the infrastructure building, and maybe building it out for the next few generations.
Paul: Yeah, a lot of infrastructure right now, a lot of focus, on infrastructure.
Karan: Cool. So you mentioned about how this is like a good time to be investing, because most likely, you will be able to scoop up companies at lower valuations. Are you seeing that trend? Is Pantera focusing on that? Because we as we are seeing a lot of the big crypto investors, Andreessen Horowitz, and everything, and they have literally paused their investments. So what is your take on and what is Pantera doing this time?
Paul: Yeah, I would say the, the seed side is probably the most active right now in terms of stage, just because, you know, I'd say, a lot of the companies that are a bit more mature, they raised during the last bull market, and probably are, you know, have quite a bit of runway or or holding off on fundraising because they can, but a lot of new companies coming into this space, trying to start again, use cases, new technologies, etc. And so there's a lot of funding on the seed stage side of things. Now, for Pantera. I mean, you know, we are a multi-stage fund, we can go into the seed stage, I think, during this time, with valuations being, you know, a bit sort of lower than what we saw in the bull market, I'd say, you know, series A valuations are probably kind of moved to where it seed stage valuations were during the bull market. And so I think for us, like, we are probably looking at a bit more series A and beyond. You get to put in a bit more capital, and maybe, especially during this time, have a bit more ownership than you would have during the bull market. And then I would say more open to rounds after that. So I think for us, like, you know, there was a talk of Panthera, I wouldn't say moving to mid-stage, but I'd say being more open expanding to sort of like early and mid-stage companies.
Karan: Oh, yeah, I heard about that, where Pandora said, I mean, y'all start focusing on mid-stage companies. And that is a very good thing, because especially those are the companies per startup that require funding [right now]
Paul: There is a gap right there. There's a gap even potentially, on the Series A. But I think like past Series A, [there is] a much bigger gap, especially with the traditional folks backing away. So I think there's a great opportunity to be that value-added scalability partner on the capital side.
Karan: And we are seeing the venture funding for Crypto startups decline for like five consecutive quarters. So do you think that that's gonna like, that trend is gonna reverse probably by the end of this year, or by early next year?
Paul: Yeah, I think a big part of the decline has been a slow down of growth rounds. Most of the funding is on the seed stage. We saw three companies go public within the last two weeks, the IPO market opens up, global macro opens up, Bitcoin halving can help catalyze the start of a bull market, some clarity around regulations, ETFs, etc. We could be looking at a very positive, positive year next year.
Karan: Yeah, so is the VC funding in crypto sector very closely correlated to the Bitcoin prices and Etherium pipe prices?
Paul: You know, I would say, I would say there's probably a little bit of correlation. You know, I think when prices are a bit higher, then you have more investors, all types of investors, not just like crypto funds, but you see all types of investors trying to get exposure to this space, there's that fear of missing out. And so there will probably be a little bit of correlation there, at least.
Karan: So, circling back to the issue of the slump in crypto funding, and then the implosion of FTX. So, did that impact Pantera Capital’s portfolio startups in any way? Did that have an effect on startups?
Paul: It did in a few different ways. Number one, it definitely was impactful to some of the treasuries out there, some of them saw FTX as a way to get financial services for the international demographic. And so, it hurt from a treasury perspective, I think it also hurt from a counterparty perspective, some of them were actually using FTX for market making or other sorts of services. And then I'd say from a sort of, like, reputation for the industry and fundraising perspective, both for companies and also maybe even for funds. It was something for folks to kind of get over. I think, folks now realize that it wasn't a blockchain problem. It wasn't a crypto security problem. It was fraud. And not only did crypto folks get impacted, but even some of the largest, most renowned traditional VC firms got impacted. So it was just an unfortunate situation that happens early on in the ecosystem. You know, I hope we all learn from it. And therefore, I think there's been a lot of opportunities on the venture side post-FTX. I think there's been companies that are trying to sort of take that place but sort of do so maybe in a more trustless, transparent way. So think about noncustodial peer-to-peer trading, instead of again, using sort of centralized counterparties, maybe even things like decentralized market making. I think there's people trying to sort of fill that gap, which is great.
Karan: Yeah, I can see that there's an opportunity there, I mean, despite the failure of FTX. And like you rightly said, it was not the failure of the technology, but a failure of the company. And that's, you can say, that's a single failure, and not as a cryptocurrency as a whole. Having said that, have VC investors like yourself, starting to make more thorough due diligence of learning, having learned from FTX failures?
Paul: Well, you know, that coincided with us being in a slower market. And thus, in general, we are having a bit more time to diligence companies. And I think at the end of the day, it all comes down to the team, you know, folks that went into FTX, thought that they saw something in the team, and they, you know, we weren't able to sort of catch something there. And so, I think there is more and more thorough diligence around teams these days, and really trying to figure out, you know, like, what you can sort of get comfortable around the team. And then of course, you know, there's probably just a lot more diligence around just looking at the financials than the data and trying to sort of verify whatever folks are saying are accurate or not. And, and so with more time, and with sort of what happened in the past, the industry is learning.
Karan: And let's just move the topic to the regulatory headwinds, because there is a lot of uncertainty about crypto and blockchain in the US. So, I mean, what's going on with that regulatory-wise? Do you think we'll get some clarity in 2024? And having said that, startups are also considering moving out of us to maybe Asia So have you seen that kind of a trend in the industry?
Paul: Yes, so I do think regulations are extremely important. And there are geographies that look to the US for some sort of guidance. I think so far, we haven't gotten too much clarity, you know, just a lot of enforcement. And I think for us, I mean, we're sort of glad to sort of see some of the more, you know, well-funded actors like Coinbase, and Ripple, trying to sort of educate the market on what they think is right, and how we can move forward, but it's going to take a bit of time, and it's going to bit take a bit of sort of just work in the administration. I do think that there is an opportunity outside the United States, you know, we're starting to see licenses being issued in the Middle East, I was just there not too long ago. Same thing with Singapore, they were early leaders in licensing and now they're opening a bit more on the licensing front. Hong Kong and Japan both, you know, you know, I'd say fairly positive news around stablecoins in those regions. Plus, also Hong Kong starting to issue licenses around crypto. And so, you know, to us, I mean, you know, there's an opportunity, for both early-stage startups that are starting off, but also more mature startups within our portfolio that are thinking about, especially as they think about tokenization, of setting up their jurisdiction in those areas, and then being able to feel more comfortable going after retail in those areas. And, of course, then institutions open up in those areas, too, because institutions, the bottleneck has usually been around regulatory, you know, progress and even clarity. And so as those jurisdictions move forward a bit more, I do think that the B2B and business-to-enterprise side of things for crypto will, be partly part of the catalyst for the next bull market.
Karan: So going back to Pantera is just investing in the crypto space, which is like one specific domain. So how does your firm de-risk against investments considering that sometimes a sector just drops suddenly after a bear market. So how do you de-risk such investments?
Paul: Yeah, I mean, on the hedge fund side, one hedge is cash. The other hedge is basically, we are diversified, both in terms of the types of sectors that we can bet invest into crypto. So everything from more centralized companies, ones that are getting licenses, fiat on-ramps; to maybe even layer 1’s, which are sort of a little bit more sort of stable; and then you start getting into earlier stage companies. Some firms just focus on token, some firms just focus on defi. We do equity, we do tokens, we do every single category within crypto. And then I think the other thing too, is we do not only do early stage, but we also do mid stage and sometimes even late stage. So just diversification all around within the sector. And also we do liquids, which is different from a lot of funds out there. We do active management on liquids long and short. So I'd say like from even the largest funds, we have the most diversity in terms of strategies.
Karan: And coming to my last question, I know Pantera is looking to raise its fifth fund in 2024. Currently, the market has been tough for established fund managers as well as emerging ones. Do you think that will change? And what are the challenges you expect going into next year?
Paul: Yeah, look, I mean, for us, like we are, we are in a great position. We have a lot of capital, most of our capital, actually from our last one, which was $1.2B. And we are actually, you know versus other firms, we're actually trying to expand and grow the team right now, both on the investing team and the platform side. In terms of fundraising, you know, I think for us, like we just want to go out there, you know, really sort of prove out our investment strategies and our investment model, and just drive winners that come out of this bear market. And I think once you're able to sort of do that, you know, maybe couples with, you know, a healthier market overall, then I think that'll prove very, very well, for fundraising, I do think that it'll be very interesting to sort of see, as folks kind of go out for fundraising during the next sort of period, what the size funds are going to sort of be. I think it really sort of depends on macro but also depends on really where some of the leaders in our industry-leading companies in our industry end up that are probably dictate, you know, how much of a sort of mid-stage and growth stage sort of environment there is to sort of deploy capital and this kind of backs into sort of fund size. But I think it's a great time to be investing and we're super active.
Karan: Alright, so that brings us to the end of our interview. Thank you all for joining us today. It was a pleasure speaking with you and learning about Pantera Capital.
Paul: Thank you. Yeah,
Karan: Well folks, that's it for today. Watch this space for more such interviews with VCs, startup founders, angel investors, and more. Thanks for watching and have a good day. Bye.
- Paul Veradittakit
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Hi, I’m Paul Veradittakit, a Managing Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.\
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