Invested in a market that has lost 80%? Not a problem for these fund managers

Fund managers explained the rationale for their early-stage investments in blockchain technology companies at the Cayman Alternative Investment Summit. From left, Ran Neu-Ner, Onchain Capital; Scott Kupor, Andreessen Horowitz; Mark Yusko, Morgan Creek Capital Management; Travis Kling, Ikigai Asset Management; and Tom Serres, Animal Ventures.

Some investors might be unsettled by the volatility of a crypto market that is plagued by scandals and the ups and downs of Bitcoin, which has created and destroyed fortunes for the past eight or nine years.

But, for some fund managers, the value of Bitcoin is irrelevant. What is more important is their belief that distributed ledger technology will be the basis for the next wave of technological innovations and, therefore, a massive opportunity for early-stage investors.

They are convinced that startups in the crypto space will be able to build applications on an open protocol, like distributed ledger technology, in much the same way as today’s largest tech companies built their businesses on the protocols of the internet and open source operating systems.

Scott Kupor, managing partner of Andreessen Horowitz, a venture capital firm that has invested in the crypto space since 2012, says his firm is mainly interested in the non-liquid side of the market, consisting of infrastructure and assets that look like traditional venture capital investments.

Typically, the firm is looking for entrepreneurs who have ideas about things that they want to build. “A lot of the times what we invest in is the promise that they will do that,” Kupor said during a panel session at the Cayman Alternative Investment Summit in February. “And that’s how we think about the business more generally. We are buyers, we have not sold any assets, we think of those as traditional venture investments that have seven-, 10-year horizons.”

The price fluctuations are not surprising, he said. “To us, what this is all about is [blockchain technology] will be either the or one of a few next computing platforms going forward.”

Kupor believes that distributed ledger technology and other crypto assets are undergoing the same evolution as the internet. In that sense, we are at a comparable stage to the first incarnation of the internet when the underlying internet protocols were developed.

Simple Mail Transfer Protocol (SMTP), for instance, is the email protocol that was developed by academics and foundations, Kupor said. “And it is the basis on which Google and Microsoft and others built tremendous businesses.”

Another analogy is open source software technology, first conceived in the 1980s at MIT. At the time, the idea of giving software away for free to open up the development process was regarded as radical left-wing fringe.

“Fast forward to today and open source in the form of Linux is the dominant operating system,” Kupor said.

“What we see today [is that] the potential for blockchain technology is very similar to those two instances in history, which is the idea that you can have open development, open protocols that are managed by a community as opposed to managed by a central organization. And with the massive innovation that blockchain brings, which is the use of a token that provides not only a financial incentive to the people who are participants in that market but also provides a mechanism for governance in a way that did not exist in other areas,” he said. “So that, to us, is why we are excited about this.”

Mark Yusko, CEO & CIO of Morgan Creek Capital Management, just raised a new fund that predominantly makes venture capital investments in businesses that build blockchain technology infrastructure.

He says the price of Bitcoin gets a lot of media attention. “But the price is not what matters, it’s the value of the underlying network and the participants. Every single fundamental aspect of blockchain and Bitcoin is better than it was a year ago.”

Yusko likens the new technology to the latest stage in the 14-year cycles that have shaped the computing industry from the mainframe computer in 1954, the developments of the microchip in 1968, and personal computers in around 1982 to the popular emergence of the internet in 1996. In 2010, the evolution became even bigger with the mobile net and the handheld “supercomputers” in the form of smartphones.

The next iteration in 2024 will be the blockchain or trust net era, which, Yusko believes, will be bigger than the mobile net and the internet.

“What’s going to be created on this platform of computing power is beyond our imagination. And imagination is what this business is all about. It is about investing in things and believing in things before other people even understand. The greatest wealth was always created before the masses understand. And that’s where we are today,” he said.

“To me, it is all about acquiring ownership of the network. And the more I can own of it, the better.”

Yusko argued that current investments in the space are either pre-seed or seed-stage projects that have a 90 percent failure rate, just like any other venture capital investment. But the 10 percent that do not go away can grow into big business and become wealth creators.

Until then, there are many obstacles to overcome, such as the legal and regulatory treatment, scalability of decentralized distributed ledger technology or custody issues.

However, the fund managers have faith in the market to find solutions to these problems.

Travis Kling, founder and CIO of Ikigai Asset Management, a hedge fund in Los Angeles, says the roadblocks to distributed ledger technology are all solvable.

To him, complaining about scalability is like complaining in 1993 that the dial-up modem is not fast enough. “It is obvious that there is so much human and financial capital is flowing in to solve these issues.”

Kupor added, “We have invested in third-party players and are expecting the market will solve this.” In fact, the people who solve the initial problems represent major investment opportunities, he said. Many of these projects will be launching this year, provided that regulatory issues are being overcome, and, as a result, the general public might be able to better understand a lot of the vision for the new technology, Kupor said.