The Rational Blockchain Ecosystem Fund: A Model For Melding Profit and Non-Profit Objectives to Maximize EVERYTHING
Yes, we invest in projects that build on the AION platform. Yes, we promote the AION ecosystem vigorously. Do we consider ourselves an “ecosystem fund” in the same vein of the myriad that have sprung up around the blockchain industry in the last 6 months? Ennnnhhh it’s complicated. We love complicated, because if it was easy someone else would have done it already and it would be no fun!
We believe that ecosystem funds are challenging because you are maximizing something that is not profit (ecosystem) and that becomes, for lack of a better word, squishy. Note that squishy isn’t bad, but it is, again complicated. Profit maximization is simple to evaluate. 2 dollars is objectively bigger than 1 dollar. However 2 ecosystem units is only subjectively bigger than 1 ecosystem units, and that’s where the squishiness comes in.
Let’s start with what we know. Corporate venture capital funds have long been a controversial topic (in the lightest sense of the word “controversial). Traditional fund incentive structures are well understood and battle tested. The investors invest money with the expectation of the maximum profit return within the given constraints of the Investment Policy Statement. They agree to have a certain amount of their investment used to set up the fund, a certain amount to run ongoing fund operations (fund administration, audit etc), and a certain amount paid to someone to manage the operations of the fund (manager salaries, rent, etc). Then the manager says “ok Mr. or Ms. investor man / woman, if I can invest these funds so well that I earn back what the fund spends on costs, plus my own costs, and out earn what you would have done anyways with that capital (opportunity cost[1]) you will be better off than you were without investing in me and so you will pay me a portion of that “better offness” to acknowledge how legendary I am”.
There are quibbles with the infamous 2/20 model where you pay a 2% management fee plus 20% of any “better offness”, but it generally holds together in keeping with the above framework. Now all of this assumes that everyone is a profit maximizing entity. The investor wants to maximize their own profit so they will only pay incentive fees if they are made economically better off, the manager wants to maximize their own profit as well so they will do all they can to make the investor economically better off to maximize their own return. So what happens when you introduce a stakeholder in the fund who is maximizing for something other than profit? The old world equivalent of ecosystem maximization, “strategic” maximization.
Assuming the corporation itself is profit maximizing (and they all are under our current shareholder value maximization dogma) and the corporation is the sole investor in the fund, the strategic venture fund may make investments that are sub-optimal on a standalone basis in order to maximize the value of the corporation as a whole. The value transfer from sub-optimal investment to optimal corporation is this “strategic” maximization. Does it exist? Maybe. Has anyone nailed how it works on a nuts and bolts basis? Not exactly, although some valiant efforts have been made.
The cynical way to interpret these funds is that the corporation has no better projects to invest in that are core to their business model and they don’t want to admit that by returning capital to their shareholders, so uhhhh… let’s have a corporate venture fund!! It’ll be cool!! In addition to this, the signaling impact of a project receiving an investment from “sub-optimal” capital may indicate that either the project is “sub-optimal” themselves and can’t attract optimal investors, or that the business can’t generate customers naturally so needs to buy customers by investing in them. We’re not that cynical and think there can be value in these strategic / ecosystem maximization models, but it needs to be extremely carefully considered.
Please consider the below our extremely careful consideration.
When layering this concept into the magical world of blockchain, it is often not for profit foundations that are the “corporations”. This is where we break from profit maximizing to ecosystem maximizing. Our thesis on the current ecosystem fund landscape is that there has been A LOT of capital raised, not enough development to deploy it on and no willingness (or ability) to return capital to contributors. This has led to the perception that this excess capital has low hurdle rates to deployment and therefore could be being deployed in very sub-optimal ways (how’s that for diplomacy!).
Enter Bicameral Ventures, our model is a bicameral investment fund (heyoo) that both attracts external capital by adhering to the traditional profit maximizing incentive model outlined above, while also maximizing the AION ecosystem. An absolutely critical line of questioning that we ask our projects is who are the stakeholders of the project, what do you want them to do on the platform, what are they maximizing for, how do you incent that behavior given their construct, and how are you wiring that into your model? We would be remiss if we didn’t do so ourselves!!
There are three actors here; investors, ourselves as fund managers and the AION Foundation. Investors and ourselves as independent management are profit maximizing, while the Foundation is ecosystem maximizing. A key thing to note (for all projects and ourselves) is that time is a critical dimension in this analysis. Our investors will all have different attributes that make an investment rational for them (early AION investors, current AION investors, crypto enthusiasts, family offices, institutional investors etc) and our fund, it’s opportunity set and the AION ecosystem will evolve over time. Shameless Plug™: I recently did a panel at CoinAgenda on the specific attributes of Family offices check it out here (I’m at 2:09). So we’ve tailored certain aspects to certain investor groups and all aspects will continue to be optimized as this crazy landscape evolves!
For sake of simplicity, let’s focus on the universe of investors already with a position in AION tokens (and we’d encourage any reader to join that universe!). Effectively our strategy has been to make Bicameral objectively rational wherever possible, and provide overwhelming evidence where rationality is more subjective.
Why This Fund is Rational for Private Investors
Why This Fund is Rational for the AION Foundation
Why This Fund is Rational For Us As Bicameral Management
Thanks for thinking about us guys!
We’ve clearly spent a lot of time thinking this through, but essentially the Foundation deploys a minimum amount of capital, keeps its mandate intact, get’s a multiplier on it’s capital and we get to go off and run an independent, amazing venture fund building on a super cool platform and attract the best investors and projects in the world. You’d do it too!
PREPARE YOURSELVES: THE DISCLAIMER COMETH
Forward-Looking Information: This post may contain forward-looking statements. Forward-looking statements address future events and conditions which involve inherent risks and uncertainties. Actual results could differ materially from those expressed or implied by them. Examples of forward looking information and assumptions include statements regarding the future performance of various investments, including AION token investments. Forward looking statements involve known and unknown risks and uncertainties which may not prove to be accurate. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations.
[1] The opportunity cost varies with the type of fund, but should be tailored to the specifics of the Fund.
