A brief history of Fulgur Ventures

An interview with Oleg Mikhalsky by Nawaz Ahmed originally published in The Inquisitive VC

Oleg Mikhalsky is a Partner of Fulgur Ventures, a venture capital fund which invests in early-stage startups focused on Bitcoin and the Lightning Network. Prior to crypto, Oleg worked in the Cloud and Cybersecurity industry while these were still nascent technologies.

We talk about the formation of Fulgur Ventures, gaming, and the future of the lightning network!

NA: Could you talk about your background a little bit, how you got into the crypto space and then into venture capital specifically?

OM: Yes, so my background is in software and product management. I spent, almost a couple of decades in different roles in software companies mostly around product management. It was always in technology domains that represented an emerging, growing industry. From a nascent industry where people clarify what is the value proposition of the technology and to a point where the industry goes to mass adoption.

So as an example, the most recent industry I worked in was cloud and I was a product manager for a cloud storage line of products based on a distributed file system. That was in 2010 when people were still learning: what is a public cloud, what is private cloud and what is hybrid cloud. They were trying to figure out what the applications of cloud technology are and also at that time the user experience was really rough.

When I left the industry in 2017, cloud was almost mainstream, and now it’s completely mainstream with companies like Microsoft, Google, and Amazon making a significant portion of revenues from their cloud business.

My experience before cloud was in cybersecurity when that was a very nascent industry which took about a decade to develop products for regular users, not only professionals. So, I have this natural curiosity to find what’s the next technology. It so happened that, when I was done with the cloud industry, I was looking for the next technology to possibly spend the next decade on and I met some people from whom I learned about Bitcoin.

I learned about it quite late. It was already deep in 2017 when there was information overload with different blockchains, different offerings and different ideas. I was really lucky because I had met the right people who advised me to focus on Bitcoin.

I did that, and since I am an application product guy, I thought to focus on the lightning network as the productization layer, where you can build applications. I was introduced to the lightning network through Andrey Samokhvalov, who was then working remotely from Moscow for Lightning Labs, and I am very grateful to him for this.

Later when he decided to do his own startup, we became his angel investors, even before we formed the fund.

NA: It’s great to hear that you were previously working with nascent technologies. In regards to your fund, could you give a background on Fulgur Ventures? Why did you guys start it?

OM: I was also an angel investor before I got into this space, typically in startups where I could add value as someone who could advise on product strategy, go-to-market, fundraising and growing from a small company.

We started the fund as our curiosity and our engagement with the industry increased sometime after we made the angel investment in Andrey’s startup that was building an exchange using lightning network technology, which was a pretty novel concept at the beginning of 2018.

We thought we could develop a value-added fund for entrepreneurs who are working on Bitcoin specifically. There’s a lot of first-time founders who are either engineers or product designers, but less often they are marketing or business people. So we thought we could add the business development and go to market expertise to Bitcoin and lightning network startups, that were primarily founded by engineers and first-time entrepreneurs.

In late 2018, while the blockchain space was pretty quiet we thought that it may be a good time to start a VC fund and help to build things. We already had some connections and understanding. I was continuing to learn more about the lightning network as a technology and getting a better handle of what can be done with the lightning network and why it was important.

We wanted to focus on Bitcoin and the lightning network because we believe that Bitcoin is a powerful candidate for building a neutral, decentralized monetary system. Bitcoin being a store of value and an asset with which you can transact large amounts securely and without the intermediary risk, we understood it needed the lightning network as a scalability layer to increase adoption into the domain of smaller and faster transactions.

We were also really fascinated with the opportunities that Bitcoin and the lightning network could open up. Also, the beginning of 2019 was a very good time to start things because the people around were real believers in the lightning network like we were.

NA: It’s quite interesting how you chose a particular niche within the blockchain industry so early on. How did you source deals and what was the process of your fund?

OM: When we started there were not many investors who were interested specifically in the lightning network. The typical investors would invest in blockchain startups that would have a business model because they were based on some kind of common use case and were trying to improve it with blockchain technology or they would go into growing industries like mining and crypto trading where business models were already established.

That was not the case with the early lightning network startups. They were basically a little experimental and were trying to find the right product-market fit for the lightning network while still discovering and solving its technical limitations. In the beginning, it was mostly angels who were investing in the lightning network and similar Bitcoin startups and a few investors like those backing Lightning Labs, Casa, OpenNode and other pioneers in the space.

We were also behaving like angels, writing small checks to follow founders who share the Bitcoin lightning network values and were committed to the long term development of the lightning network ecosystem.

They knew ahead of time that it would be difficult to find a business model around it, that it will take a long time to get traction and they were prepared to weather the storms. This is not like the founders in which typical VCs invest because typically VCs invest in founders who generally know how to iterate quickly to prove product-market fit, then to get traction and scalability.

That was not what the lightning network would provide to traditional investors and maybe till the middle of 2019, it was still the case that only a few investors were really interested in understanding and learning about the lightning network.

We have seen that really changing in the latter half of 2019, when we were already participating in the deals with other investors, including some, well known and established VCs in Europe, the US and Asia, which gave us an assurance that things were evolving in the right direction.

This year, despite the COVID-19 lockdown and the general distress in the economy we are seeing the creation of more Bitcoin focused venture capital funds. I’ve also seen a few other crypto and non-crypto funds recently shifting more of their focus towards Bitcoin and the Bitcoin ecosystem.

We were planning to invest in maybe a dozen startups each year, but by the beginning of this year, we had almost 20 startups in our portfolio. So the COVID slowdown also gave us some room to dive deeper and learn from this experience while closing the deals that were starting last year.

Since May 2020 it seems like the deal flow is picking up again. It might also be the case that the slowdown helped the ecosystem to advance in development because everyone had more time to focus on research and coding rather than conferences.

Speaking of the ecosystem, оne of our goals is to do both for-profit venture capital investing and also to support nonprofit activities. We are sponsoring conferences and different communities, funding some open source development. These kinds of nonprofit initiatives may give us some additional visibility in the ecosystem and I would certainly recommend other interested VC funds to do the same. Remarkably, the amount of non-profit financing is quite low in this space compared to how much important stuff is being done.

NA: That’s an interesting way to go about it. When we spoke earlier, you mentioned, you guys are also focused on gaming. Can you talk about that a little bit and how you think lightning network and Bitcoin can really add value to the gaming world?

OM: It’s a very good question. As a venture capital fund, we were trying to map out the ecosystem and make our own educated guesses about where initial traction could actually happen. The gaming industry seemed both very attractive because gamers are typically early adopters of technology and are used to deal with new gaming gadgets being released.

Gamers are also already used to the notion of digital assets inside the games, so we thought that gaming would eventually become one of the key areas for the adoption of digital assets, including Bitcoin. Payments over the lightning network could also become very useful in games because of the ability to pay for microtransactions. That could come, with a possibility to stream payments or instant payments to change the gameplay for example.

We like people who are looking for very disruptive, state of the art innovation. One project I am following since New York Lightning Hack Day in 2018 has recently released BitcoinBountyHunt — a PC game that comes with a non-custodial lightning wallet preinstalled. This project is run by a team of just three people from Germany who not only experiment with technology, but also game design, user adoption and monetization. It is amazing how much a focused team can achieve.

Another area is the potential to issue and use assets on the Bitcoin blockchain using the lightning network, through RGB technology. When I’ve been talking to other companies in the blockchain gaming space, I’ve been hearing from them that the demand from users to be able to store assets independently of the game, and also to create a secondary market for game assets is an upcoming trend where RGB, Bitcoin and the lightning network could become useful.

Views on this may be different across game developer companies of different sizes and culture, but there are early signs that game developers, in general, may find benefits in Bitcoin technology. So yeah, there’s just a lot of cool things happening in the gaming space.

NA: The gaming spaces is definitely very exciting. Finally, what other areas are you focused on for your investments?

OM: Aside from the gaming space, we are closely following bitcoin security applications and what is called “stacking sats” or bitcoin rewards. The problem of securely keeping your own bitcoin keys has not been perfectly solved yet as well as the problem of giving users easy access to their first bitcoin, or sats, rather.

A startup called Foundation Devices is putting a secure open-source bitcoin wallet in a Steve Jobs style user-friendly design form factor. It is a very challenging but exciting idea to work on.

Another tiny startup SatsBack is working on a solution to allow other companies and startups to build bitcoin rewards applications in their domestic markets or industry sectors. If it works out well, it can be a huge driver of adoption of bitcoin-based universal rewards systems that can improve on closed-loop incompatible and non-transferable loyalty points programs we use today.

As lightning network technology matures, there are many new ideas becoming possible, so we are yet to see the most exciting things in this space. If bitcoin is to be the internet of money, should not the browser become a wallet and payment app, possibly supporting frictionless “streaming” payments? Or could lightning network become useful for machine to machine micropayments in IoT? Or if bitcoin is further recognized as an asset class, in how many ways can it be also used as collateral? So much to do in this space in the coming years and decades.

NA: That is very true Oleg there is still a lot of innovation to happen. Once again thanks so much for chatting with me.

OM: No problem, I had a great time!

Originally published at https://medium.com on July 29, 2020.