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Overview: Clearblock has released a Web3 venture capital ranking database. This article is an interpretation of the data of 9 venture capital funds. It also recommends that entrepreneurs should also conduct due diligence on them before accepting VC investment. Mr.
, am I adding value?
Hello everyone, the origin of this article is as a place to record my ideas, and hope to provide value to others. On September 28, Clearblock's @codygarrison_ released a Web3 VC ranking database for founders to better understand the crypto venture capital sector. I have always loved reverse accountability. Audit on auditors, supervise regulators, and conduct due diligence on venture capital. Clearblock has done a great job of providing scores for these ventures, so I will focus on the finances.
Research on cryptographic venture capital
Investors often carefully check the founder's "burning money". They shout "Break everything quickly" when the situation is good, and when the situation is difficult, they talk a lot about how to manage "burning money". Although this may be annoying and “obvious in retrospect,” the above attitude makes sense because the ultimate responsibility of venture capital firms is to create returns for their limited partners. Although we really like the “value added” of the companies they invest in, reality is often difficult to deal with. For venture capital, there is no perfect value-added formula. It depends on many factors, such as the stage of the company they invest in, and how the founder’s experience is. Young founders may need operational help, while experienced founders may wish you shut up.
In this post, I am trying to understand the economics of crypto venture capital funds. For founders or professionals looking to work in the crypto investment field, it is crucial to understand the mathematical principles behind these funds in order to prepare for a variety of situations.
Sometimes the question is simple: Can funds still be eaten without performance fees?
This is especially important if we are about to enter a bear market that lasts for many years. I worked for a cryptocurrency fund in 2019 and didn’t expect the downturn in the cryptocurrency market could be so severe. Of course, we may never see such a serious situation again. Since then, the crypto ecosystem has matured significantly, with a lot of capital waiting off the market – but; this does not mean we should not scrutinize funds like we do when we scrutinize startups.
private markets are often opaque. Due to the lack of regulatory regulations, it is difficult to find information about best practices and audit standards for venture capital firms. This problem is more obvious in the crypto field because of two reasons: (1) tokens and (2) global nature. Tokens create liquidity reflexivity, allowing private market investors to be more proficient in their exit strategies, while the global nature of cryptocurrencies means that funds can comply with different standards around the world based on their jurisdiction.
PS: Before you comment, I wasn't advocating for more regulation, in fact, I think the rules for certified investors are already very outdated.
In addition, the job titles of venture funds may also be quite vague. What is a research partner? Are you profitable, or are you just a senior investment assistant? @Darrenlautf does a great job of sorting out the results of Web3 analyst compensation surveys, which you can visit here. Anyway, let's get started.
Here are the quick points:
● Private equity markets are often opaque, which makes it difficult for us to clearly understand the compensation structure and financial status of a fund.
● Investing in DAO (Investment DAO) can improve the transparency of funds by storing all content on the chain.
● As a founder or young investment professional, it is crucial to carefully review the venture capital company itself as a business.
● The bull market has spawned many new venture capital companies, which can also be regarded as "startups" themselves, so it deserves more attention.
● Venture capital is a "top-heavy" industry - most of the value goes to founders and general partners. To find the best funding for your startup, it is crucial to understand this dynamic in the financing process.
background
I'm using Clearblock's Web3 VC database. Clearblock has already summarized a lot of good data, but I will only focus on the top 50 companies, whose funding amounts are easy to determine, excluding the company's spin-offs from venture capital departments (Coinbase Ventures, Binance Labs) and older funds. Because they have not usually raised much money in the past few years, and it is difficult to distinguish between their returns on spot ETH since 2016 and their recent return on investment. Therefore, I will focus on evaluating the following 9 venture capital companies.
Comments and Assumptions:
● The management fee is 2%
In reality, the situation will be different. This depends on the net asset value of the fund years after the issuance (based on future financing of the portfolio company). This also depends on the specific protocol with different types of LPs. In some jurisdictions, especially emerging markets, fees tend to be slightly lower (within the 1% range) due to industry dynamics and the maturity of the U.S. financial markets.
● Fund investment cycle is 3 years
In fact, most such companies are likely to raise another fund before fully distributing the gains of existing funds. It usually takes 3 years to deploy funds, and another 2 years to recover and distribute income. Most reputable funds will be able to raise new funds before the end of the 5-year cycle, bringing more management fees to continue operations.
● Employees: The information comes from the fund website.
GP, MP, Founder and President column track the top leadership of the fund. The column on the far right of
records the number of employees in senior management positions, including "partners" outside of GP/MP (such as research partners), as well as heads, directors and any C-level executives.
● I believe some of these numbers can be improved, but the point here is to have a starting point for how to evaluate these venture capital investments. Since each fund has different salary structures, its accuracy will inevitably vary.
● These are top crypto funds, and thanks to the bull market in the past two years, they have funded unicorns, so I believe none of them will really get into trouble. What I want to show is how venture capital funds perform during a downturn in the market.
Discovery
1. Electric Capital's management fee per employee is up to
venture capital companies can also be considered "startups", which are reflected in these numbers. For example, a16z may have the highest per employee management fee, but we have not considered how much of these fees flows to a wider range of company executives and founders (Marc, Ben, Margit, etc.) who may not be directly involved in the operations of a16z crypto fund. These details are unknown to the public and may affect our understanding of these numbers.
Except for a16z, the other funds here are crypto-native funds, so it is easier to digest numbers in an accurate way. Electric Capital has the highest management fee per employee, while Fabric Ventures has the lowest.
2. Pantera Capital's leadership and employee percentage is the highest
This number just shows which companies have more leadership positions compared to the total number of employees. It can be seen as positive or negative, depending on how you view it. Pantera Capital, for example, leads by 58%. On the one hand, this can be seen as hiring enough people to do the job and actually supporting your portfolio company. On the other hand, this also means that these leadership roles will receive a smaller fee share (management or carry). A few months ago, a group of executives left Pantera. Be reserved about this.
On the other hand, I'm pretty sure a16z is a non-crypto native company with more employees in handling the operations of the fund, and these employees may not be in the a16z crypto team. That's why they have the lowest number, only 10%.
3. A16z and Paradigm's core leader's management fee is up to
. The same situation applies to non-cryptographic native funds a16z.
Putting this aside, Paradigm is ahead of the management fees for each core leadership position based on public information and subjective judgments on the individual leadership titles. We don't know the specifics of the agreement between these companies and senior executives who are not the founders of the company (and therefore not in the "core leadership" category), but this is the beginning. Transparency on the
chain
Ideally, we will get a more detailed compensation structure report from VC funds so that founders can also investigate the health of the VCs investing in their VCs. While the top VC firms assessed above may never have any liquidity issues, small companies that may go bankrupt due to market downturns will affect the founders. Founders will not be able to obtain future support and networks; they may even need to waste time dealing with secondary sales of liquidated funds.
With the rise of many small crypto venture capital firms – if you are the founder who needs to raise funds from these new entities, or you are the young professional who wants to work for these funds; make sure to execute the basic model mentioned above and carefully review the financial situation of the company. Perhaps investing in DAOs can pave the way by putting all of their economy on the chain so that any party who wants to do business with DAOs can verify it, allowing others to conduct due diligence on entities that do due diligence.
Young people in the field of encryption
Yesterday, @knowerofmarkets, a great writer and interesting person, posted the following tweet on crypto twitter. I really like Knower's work. In fact, his work rekindled my motivation to write. So, when I saw these tweets, I felt the need to respond to what he said (or at least think about it in my mind). Knower is young – I know that because he often says he is still in college. Entering the crypto field at a very young age will expose a person to a lot of interesting knowledge, both good and bad, and your growth depends on how you use this knowledge. Some become “too online”, forming a edgy liberal personality, while others are more thoughtful about the complexity of the world.
Picture: I feel that the world is becoming more and more stupid and absurd day by day. It's hard to understand all the markets, it feels like everything is a scam, and the house of cards will soon collapse - but it will never be. All that remains to be done is to ride the wind and waves and live to the end
encryption is at the intersection of technology, finance, game theory, government regulation, privacy, personal freedom and other fields. When you are young, it is difficult to get bombarded with all these ideas. Most people can’t be masters in one of these fields, let alone the intersection of all of them. Cryptotech also often brings glory to young entrepreneurs; the 18-year-old earns 8 figures by capturing MEVs, and a PFP. While some of these have achieved surprisingly well, we need to look at work in the crypto space in a normalized way. After all, the greatness of an industry depends on its next generation of builders.
In other words, when I was in my early 20s, I drank three nights a week, but I was fooled by Wanlian ICO.
Picture: Speaking people is: Yes, I have been losing money when I make a transaction
until the next time,
Marco M.
Editor in charge: Felix
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