Hutt Capital’s Blockchain VC Fund Landscape (2020 Edition)
Based on the positive feedback regarding our post, Analysis of the Blockchain VC Fund Landscape, in April 2019, we decided to write an updated analysis to reflect how the landscape of blockchain VC funds has changed over the past year. Hopefully we will make this an annual report going forward.
At Hutt Capital, a blockchain VC fund of funds and direct investment firm, we invest in both blockchain VC funds (as a Limited Partner) and directly in the equity of growth stage blockchain-related startups. A key part of our job is to build relationships with the most prominent and promising blockchain venture funds around the world. We are glad to share the aggregated data from our tracking system publicly to provide a glimpse into the robust landscape that is developing in blockchain.
Before reviewing the data, here is a quick reminder of what we consider a blockchain venture fund (more detail on this can be found in last year’s post). This criteria is consistent with Hutt Capital’s focus with the fund of funds portion of our strategy.
· Dedicated blockchain focus (the fund, not necessarily the whole firm)
· Closed-end, illiquid VC fund structure (no “hybrid” or hedge funds)
· No strategic funds (corporate VCs, ecosystem funds, etc.)
· Fund series is an ongoing concern
Summary
Over the past year, the number of blockchain VC funds tracked globally by Hutt Capital grew from 49 to 65, an increase of 33% year-over-year.
Hutt Capital has added more than 16 new funds to our tracking system over the past year, but we also stopped tracking several funds over the same period — primarily instances where new firms were not able to raise their inaugural fund or it became clear that existing firms would not be raising future funds.
Manager quality has increased as lower quality managers exit the market, replaced by higher quality new entrants. Especially as we move further away from the ICO-fueled bubble in 2017/2018, managers who arose in a more opportunistic fashion have increasingly been driven out of the market and replaced by new fund managers who are deeply passionate and dedicated to the long-term vision for blockchain and digital assets.
Fund Sizes & Availability of Capital
The 65 fund managers either have or are raising a total pool of capital representing $4.1 billion. This data represents either the target fund size (if the manager is actively fundraising), or the actual size of their most recent fund (if not actively fundraising).
This is up just slightly from April 2019, when 49 managers represented $3.8 billion. However, a handful of firms with aggressive fundraising targets in last year’s data have ceased efforts or raised significantly less than planned, which in retrospect inflated last year’s figure relative to this year’s data. The growth year-over-year of aggregate capital in reality is higher than it would appear.
The aggregate actual/target fund size data described above is best thought of the amount of capital that might be deployed over a 2–3 year cycle if all funds are successful in raising their targeted fund size.
Thinking about annual pacing for equity in blockchain startups, lets assume these funds have $4.1 billion to invest over a 2–3 year cycle and invest 80% in equity (other 20% in tokens). Further, if they invest 50% at initial investment, 20% in early stage follow-on rounds, and 30% in later-stage follow-on rounds, in the aggregate blockchain VC funds would invest $0.8-$1.1 billion annually in the equity of early stage companies over a 2–3 year cycle.
There was $2.1 billion of early stage investment into blockchain startups in 2019 (more data on 2019 blockchain startup funding data can be found here), so this seems to us an appropriate level of capital for blockchain VC funds to invest in a prudent manner. This is illustrated in the chart below.
We don’t have precise data on dry powder for each fund, but a cursory review of the underlying data indicates the dry powder currently available to these firms is in the range of $1.0–1.5 billion. For comparison, it was recently estimated that there is $150 billion of dry powder held just by U.S.-based venture funds (which in 2019 were 61% of global VC fundraising).
We estimate blockchain VC funds hold ~0.5% of global dry powder for all VC funds, an undersized figure given blockchain startups raised 1.1% of all VC capital and represented 2.8% of all deals in 2019.
Reviewing the data by fund size, we can see below that about half of the $4.1 billion total capital pool is concentrated across the nine largest funds which have or are targeting $100M+, while the other half is spread across 57 smaller funds who have or are targeting less than $100M. Further, 40 of the 65 funds (62%) raised or are targeting less than $50M, and in the aggregate represent just 26% of the total capital base.
Blockchain VC funds are much smaller compared to VC overall. For example, just 14% of blockchain VC funds are targeting or raised $100M or more, whereas ~50% of global VC funds that closed in 2018 and 2019 had fund sizes of at least $100M (per Pitchbook).
Further highlighting the gap in fund size between blockchain VC funds and their non-blockchain peers, funds of less than $100M control 50% of all blockchain VC capital. For all VC, funds of less than $100M only raised ~10% of total dollars raised in 2018–2019 (per Pitchbook).
Number of Funds by Manager
Hutt Capital is tracking 65 funds, including 50 first time funds (77% of total).
For comparison, in 2019, according to data from Pitchbook, only 15% of all VC funds raised globally were first time funds (by number of funds).
While blockchain VC remains a market of emerging managers, the number of funds which are on Fund II or later has grown to 15 from 7 one year ago.
Further, many of the first-time funds have meaningful blockchain VC investment experience at prior firms or through other vehicles, indicating the manager set is more experienced than it may otherwise appear.
Not surprisingly, the more mature funds control more capital. The 15 blockchain VCs on Fund II or later represent 23% of the manager set but control 47% of capital based on actual/target fund size data.
While some may see the breadth of smaller emerging managers as a negative, past research also shows that emerging VC managers outperform their more established peers.
Using data from Pitchbook for all VC funds, we looked at first-time funds from vintages 2006–2015 vs. Fund IIs and beyond. This data, while not specific to blockchain VC funds, shows that first-time funds outperform their established peers meaningfully and have smaller fund sizes.
Based on net IRR, first-time funds have outperformed on average 15.4% to 14.0%, and 16.6% to 11.2% using median data.
Based on TVPI, first-time funds have outperformed on average 2.03x to 1.65x, and 1.57x to 1.42x using median data.
First-time funds, as expected, are also much smaller than their established peers. Average and median first-time fund sizes are $106 and $60 million, compared to $252 million and $150 million, respectively, for their more established peers.
Based on the above data, one could argue that with an abundance of young and hungry emerging funds in the blockchain VC space, this dynamic alone should lead to outperformance of the blockchain VC manager set vs the broader venture capital ecosystem.
One note worth mentioning in the data, is that the average first time fund vintage is 2009.3, compared to 2010.6 for established funds. They have called about the same % of their funds from LPs, but the more established funds are on average 1.3 years younger than the first-time funds within this data set.
Geography
North America continues to be the dominant force in blockchain VC, representing 63% of blockchain VC funds representing 74% of total capital. Many of these funds invest globally though typically are strongly weighted to their home geography.
Europe and Asia come in #2 and #3, respectively, with 12 and 8 funds, respectively. European funds in particular tend to be smaller, such that they represent 18.5% of the number of funds but only 9.4% of capital.
Of the four “global” funds, three are distributed such that they have no primary continent of focus or HQ, whereas we consider one to be based in San Francisco but without a single primary region of investment.
NYC and San Francisco continue to be the primary locations for blockchain VC funds, accounting for 27 funds (42% of total) and $2.5 billion of capital (60% of total). The share of the number of funds in these locations is actually down year-over-year, however, from 53% in April 2019. More growth has come from Europe and other U.S. locations.
NYC has surpassed San Francisco as top location for blockchain VC funds, growing from 11 to 14 funds over the past year. However, funds in the Bay Area are more established, significantly larger and represent 41% of the capital base vs. only 19% for NYC. Specifically, six of the nine largest funds are based in the Bay Area, whereas NYC only has two.
Outside the U.S., London is the largest single home for blockchain VC funds, with Germany and Singapore close behind.
Hutt Capital is not currently tracking any funds in India, but it will be interesting to see if any blockchain VC funds emerge there now that the two-year old ban on crypto was recently lifted and demand for crypto-related services has since surged.
Comparing location of blockchain VC funds vs. blockchain startups is quite interesting.
Relative to location of the underlying deals, North America has a larger share of capital while Europe and Asia have lower shares. This tells us two things: 1) deals outside of North America are likely to be less trafficked by blockchain VC funds, and 2) North American funds should be looking at deals outside of their region if they have the infrastructure to do so prudently.
Firm Structure
Independent blockchain VC firms represent 46 of the 65 blockchain VC funds, or 71% of total. The other 29% are part of a broader platform, including generalist VC firms with a dedicated crypto fund, dedicated blockchain/crypto firms which offer both VC and HF products, and others.
Not surprisingly, those blockchain VC funds which are part of a broader platform are larger than their independent peers. Funds which are part of a broader platform represent just 29% of funds but 46% of capital, as they often have broader market awareness given their other business lines and/or existing investor bases from which to procure capital for their VC funds.
GP Makeup
Women make up 11% of key decision makers at blockchain VC funds, up slightly from 10% in April 2019.
20% of blockchain VC funds have at least one female partner but, unlike for their male counterparts, we are not currently tracking any funds that have multiple female key decision makers.
Not included in the above are some notable female blockchain VCs who either are not formally in the “key decision maker” category but play key roles for their firms, or work at generalist VCs but personally are focused on blockchain and crypto.
About Hutt Capital
Hutt Capital, a blockchain venture capital fund of funds and direct investment firm, partners with blockchain venture capital firms pioneering the next wave of disruptive financial, social and technological innovation to offer a long-term, diversified approach to blockchain investment. Our goal is to provide investors with global exposure to blockchain innovation with a lower level of risk and volatility vs. other strategies within this emerging category. To learn more, please reach out to Brooke Pollack at brooke@huttcapital.com.
