Capital | Market Fit

Capital evolves with the changing structural realities of the industry it funds, so what structure should capital take to find and fund the best entrepreneurs of the open source, crypto world?

Over time, Capital more efficiently incorporates the sector’s unique and constantly changing startup costs, time to launch, chances of failure, and potential financial outcome when considering the correct structure for investments and how to price risk.

In crypto, the rate of experimentation and failure is particularly high because the barriers to entry are so low. Not only do web3 startups benefit from the reduced fixed costs web2 software companies enjoy, but they have a trusted structure of complimentary layers to build upon, composable compliments to integrate and even open source code to fork. As a result, innovation is increasingly coming from the edges, from poorly funded nooks and crannies of the internet rather than from the individuals that happen to get on a Sand Hill Road VC’s calendly.

While select “moonshot” high tech risk startups exist, many startups feel less formal and even individually on average less ambitious in the early stages. Once an industry of a few funded by the few, we’ve evolved to a massive connected global experiment in smaller scale stochastic tinkering from a global talent funded by capital (in theory) moving at the speed of light. While most individual ventures may feel on average vaguely less revolutionary, the whole edifice of technological progress largely seems to be moving at a faster clip. As Nassim Taleb has stated, the system is more antifragile at the cost of the individual fragility of each experiment. For industries with long R&D cycles, winner take all dynamics at play, high CACs etc, traditional venture is still likely the right path, but is there a more flexible vehicle that better matches tinkering entrepreneurs with capital networks best suited to add value?

How does capital find great web3 founders and how do they find us?

While the majority of investments will likely no longer be the Ivy League funding the Ivy League, social networks will always have the most specific information to make investment decisions. Though VCs like to signal just how much they support “anon” culture to stay hip, the reduced data on teams makes it harder to judge the softer intangibles of the founders and their relationship that have an outsized impact on the venture’s success. The added velocity and diffusion of experimentation globally makes innovation nearly impossible to track. Their tentacles can’t reach far or fast enough. Without this information at the VCs’ disposal, fellow founders, angels, family and friends will have greater access and information on these founders and their experiments and thus will be better positioned to fund them and price risk. Founders already increasingly prefer these sources of capital, but they have yet to be organized with the right structure, UX and incentives for capital to move as fast as the speed of innovation.

SPVs, The Deal by Deal Venture Fund

When the logic of business creation has changed, the form that capital takes to fund it ought to change as well. As startups move with a directional arrow of progress from top down corporations to bottom up tinkering, capital should mirror that process. This seems to be increasingly the case. Solo Capitalists and Micro GPs, networks of angels, operators, and investment daos with better process, terms and value add are increasingly taking share in venture rounds.

Perhaps SPVs are a natural evolution of the directional arrow of progress of the democratization venture capital — both on the LP and GP side. SPVs are essentially a single-deal venture fund, spun up by a lead investor with access to a private round allocation who can offer it to a group of investors. Essentially, it is similar to an investment club, but the member who sourced the deal can receive carry for their curation and discretion. Swarms of capital can quickly form on a deal-by-deal basis. GPs don’t need to be accredited and given that LP checks are rolled up into a single vehicle, minimum check sizes can be as low as $1k vs typical startup round minimums of $25k / investor.

If entity formation, KYC, doc signing and stablecoin transfers can all be brought on-chain, could capital finally be able to get closer to moving at the speed of information?

If you’re considering raising an SPV for a deal or have additional thoughts on this topic, feel free to reach out to me @patfitzgerald01 of SmartFunds on twitter.