Thursday Thoughts #16 (Paul Veradittakit - Pantera Capital)
Thoughts on equity vs. tokens, transparency, M&A, and more
Hello world, and welcome to the sixteenth issue of Thursday Thoughts.
Each week, founders and investors share their thoughts on fundraising trends and strategy.
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Pantera Capital was launched in 2013 by Dan Morehead. It is the first blockchain hedge and venture fund ever created in the US. The firm now manages $4.7B in blockchain assets, and to date, they have made 80 venture investments, 65 early-stage token investments for an IRR of 104% on average over 8 funds.
Paul Veradittakit joined in 2014 as a Partner and has executed over 100 investments. He also sits on the board of Alchemy, Blockfolio, and Staked, is a mentor at The House Fund, Boost VC, and Creative Destruction Labs, and is an advisor to Audius, Ampleforth, and Set Labs.
Paul sat down with us and shared his thoughts on investing.
In August, you participated in Ondo's $4M equity round - what is the current state of equity rounds in the DeFi space? What are the main advantages compared to token investments?
Most DeFi startups that we’re seeing today are choosing to launch a token. This is an interesting shift in the industry—something we certainly didn’t see even a couple of years ago—but makes sense for two main reasons.
First, most projects in DeFi have embraced some version of progressive decentralization. This is typically a gradual transition, but we’ve certainly backed projects that have been fully decentralized from the start, like Liquity. Regardless of where a project falls on this spectrum, if the plan is to decentralize and incorporate as a DAO, you absolutely need a well-thought-out token strategy.
Second, tokens can really help early-stage startups scale. They can make it easier to raise capital to scale your startup since you can also “go public to the community” through an IDO. in addition, tokens can be a useful incentive to stimulate user behavior, such as attracting liquidity providers.
This is a lot of the reason why we’ve seen protocols pursue the well-established token model.
However, when a company is at an early stage, sometimes you’re not sure whether they will end up pursuing a token business model vs a revenue model. As you know, a token business model involves quite a bit of risk with regulations and quite a bit of work to build/maintain a community. Thus, investors will prefer to invest and get equity in a project but also a warrant for tokens if that becomes part or the dominant business model. This aligns both investors and entrepreneurs.
Pantera Capital recently published the deck used to raise funds - why is such transparency so important but uncommon on the investors’ side?
One of the core tenets of this industry is transparency! From a blockchain’s on-chain consensus mechanism to the community’s embrace of open-source code, we’ve tried to incorporate some of this openness into our own operations.
While there’s obviously information that we can’t divulge, we’ve tried to publish information about how we think about the industry through our newsletters (including my own) and give founders more clarity on how our funds work through the decks you alluded to. We’ve also kept our fund minimums fairly small compared to our peers, $100,000, hoping to build a community that will help us in our mission to provide capital to further the industry.
You created a dedicated liquid token fund in November 2017 and bought some DeFi blue chips like MKR, UNI, COMP, and AAVE - to what extent do you exploit market inefficiencies to trade those tokens?
Our venture fund typically invests in early-stage, low-liquidity tokens that we hold for long periods of time—similar to a traditional venture capital firm, just with both token and equity deals.
We launched the liquid token fund in 2017 to complement our work on the venture side with sophisticated trading strategies of tokens with large market capitalizations. This involves discretionary trading as well as cutting-edge quantitative strategies—using both our knowledge of these companies and teams from their earliest stages in combination with on-chain and financial data. And, with the addition of revenue-generating opportunities from staking and liquidity provision, there are new alpha-generation opportunities that don’t exist in traditional markets.
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You are known for having assisted some teams on M&A deals. Inverse Finance acquiring Tonic Finance for $1.6M is the only on-chain DeFi merger to date - how do you see the space evolves in the coming months or years?
We believe as value-add investors, we have to help our portfolio companies from beginning to end and that involves the exit. We have folks on our team with M&A experience in addition to partners with deep relationships so we actively monitor our portfolio companies and help with acquisitions when it’s appropriate.
On-chain M&A is a trend we’ve been following quite closely, for two main reasons. First, it has important implications for our portfolio companies—some projects may decide to “exit” to another one in the future if the right opportunity arises, similar to traditional equity deals.
Second—and one’s that quite interesting to me—is that we’re closely watching how the “M&A stack” emerges. Some of the largest investment banks make billions of dollars per year facilitating M&A transactions; what is the equivalent of this in the decentralized ecosystem? Will there be M&A DAOs? Or tools that projects use? From an investment standpoint, this is quite compelling to us.
If the recent Polygon-Hermez merger is any indication, these could be a strategic tool for projects to sustain their growth trajectories. I think we’ll continue to see more, and larger, mergers and acquisitions in this ecosystem.
Since 2013, you have led 50% of your investments - any advice for founders when selecting a lead investor?
There’s a lot of things that the typical lead investor does. They provide capital, set the terms for the round, connect the company with potential investors or partners, provide strategic guidance, and align their institutional brand with the project. These are table stakes these days.
In an industry as dynamic and unique as ours, blockchain founders need to look for more in their lead investor. These elements include, but aren’t limited to: staking and early liquidity provision, community-building, content production, auditing and technical reviews, and deep industry experience. At Pantera, with our comprehensive portfolio of companies that span the industry, we believe we have each of these elements, which is why so many entrepreneurs value us on their cap table.
Many thanks to Paul for sharing such valuable insights.
See you on Tuesday for Dove Dispatch #22,
The Dove Team
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