Paul Veradittakit — Pantera Capital
We talk about the change in crypto, Pantera Capital, competitiveness and more!
Paul Veradittakit is a partner at Pantera Capital, one of the first blockchain and crypto-specific investment funds. Since joining the firm in 2014, Paul has helped launch Pantera Venture Fund II and the firm’s token funds, executing over sixty investments. Paul’s prior experience includes working as an associate at Strive Capital, where he focused on investments in the mobile space, including an early-stage investment in App Annie. He also performed partnerships and growth for Urban Spoils, a daily-deal aggregation startup, and worked with LECG and Hatch Consulting.
NA: Hi Paul, thanks for taking the time to join me today for this chat.
PV: Hi Nawaz, no problem. Looking forward to the conversation.
NA: I wanted to start the conversation with how you got into the world of venture investing and blockchain?
PV: My journey to venture capital is a bit different from some of the other folk out there. Some folks have gone in from being a founder or an investment banker or other sorts of operational roles. I actually started from the lowest ranking of VC.
I grew up in LA and went to UC Berkeley for school. I graduated from there, did a bit of economic consulting, then I did some business development and growth for some early-stage startups. I got into venture capital in late 2010, I joined a corporate VC fund called Strive Capital. Strive Capital was focussed just on mobile. I thought that was great, if you are going to build up some differentiation, you might as well start early in an exciting, budding space like mobile. At the time there were barely mobile apps that had over a million downloads, so it was very early in terms of the app store. I was able to dive deep into one sector, know it very well and build up expertise around it. It really set up a great foundation for getting into another space and being focused on blockchain.
In terms of getting into blockchain specifically. I started off as an analyst at my last fund, rose up the ranks a bit and then I started hearing about Bitcoin from some of my investor friends. It wasn’t until I started looking at potentially joining Coinbase early on, that I realised that this is potentially super disruptive and I wanted to be able to do something in the space. Being an operator, joining a company like Coinbase early was enticing but I really wanted to continue being an investor. I had only done it for a couple of years and I really liked what I was doing, being able to look at things from a high level and being able to help not just one company but many companies. I got connected to Pantera and thought it was a great fit.
Pantera was started by Dan Morehead who used to be at Tiger Management and that was one of the premier hedge funds and I wanted to learn from his background. I felt like my venture experience would be quite complementary with his hedge fund experience and we hit the ground running so far. That is how I got interested in Bitcoin, I got interested in certain use cases that Marc Andreessen wrote in his New York Times post around the store of value, around payments, and decentralised finance, those continue today but have expanded even further.
NA: That is quite an interesting journey. Pantera was one of the first specialist crypto VC funds and you have been with them from their early days, can you talk about how things have changed since you joined to now in regards to venture capital in crypto?
PV: A few things have changed. One thing that has changed has been the make-up of the entrepreneur, the makeup of the teams, that’s one thing wherein 2014 when I joined we saw a lot of great ideas, a lot of great technologies and a lot of great technologists, but we didn’t really see a lot of great teams. A combination of someone that could execute on the commercial side with someone that can execute on the technology side. If it’s a consumer product, maybe someone that can execute on the user experience/design side, but even for SaaS that is also very important. In 2015 we started seeing some more folk that were coming in from the business side. In 2016 we started seeing enterprise and institutions at least doing sandboxes and trying out different things within their organisations, pilots, consortiums, etc. And then in 2017, was a monumental moment both in terms of liquid crypto investing and it also brought an even higher quality of entrepreneurs. Guys that have been serial entrepreneurs, larger companies that have been pivoting over and incorporating blockchain. I think that was a great moment in terms of bringing on more and more talent. So the talent has changed quite a bit from 2014 till now.
What is also different is the sheer number of firms and the amount of capital that is willing to understand, get excited, and deploy capital into this space. Back then it was just Pantera, Digital Currency Group, Blockchain Capital and now we have partners from the likes of Sequoia, Lightspeed and Benchmark starting funds. Family office and endowments have invested directly into token projects so the competition, the number of firms and capital has really transformed quite a bit. I would say that’s been a huge shift.
Lastly would be the type of companies. Back in 2014, it was just how do you get cryptocurrencies? How do you store it? How do you do so in a secure way? Now, its everything from scalability to tooling to consumer applications, games and asset management. Even DAOs, which is a newer sort of thing where people are creating decentralized protocols and on top of that having decentralized governance. It has definitely gotten much more complex both in terms of the technology but also in terms of the use cases.
NA: Definitely, I have also noticed the change in team and types of entrepreneurs forming new businesses more recently. You kind of referred to this earlier, there are many “specialist” funds now and big-name generalist funds like a16z and Union Square Ventures are also actively making investments, do you feel like there is a challenge now to get into the good deals?
PV: It has been a bit more challenging from two aspects. One aspect is that our fund is larger now and because of that we are leading deals. When you are not leading deals and you are a strategic investor you can fit in anywhere. “I mean a $250K cheque from Pantera and you get the team and resources behind it, why not?”. When you are choosing to be a lead investor and competing against the a16zs and some of the newer funds and some of the traditional VC funds, it does get more competitive because some of those entrepreneurs do have an existing relationship with those VC funds. We feel pretty confident in our standing, what continues to differentiate for us is, like you mentioned, we have been doing it for the last six years. So, we have built up a lot of expertise, a lot of connections and a lot of great portfolio companies that they can plug in to. We do a great job similar to a16z and First Round of trying to build up a community and our community is just crypto companies. I think that is very different, there are a lot of different problems that crypto companies have and a lot of business development that they want to do with each other. We can invest in companies that are very complimentary. Joining our community can more significantly increase shareholder value in a shorter amount of time, than potentially getting a lead cheque from some of the other VCs. We feel pretty confident that people like working with us, what we are able to provide on the resource side and our track record really helps.
NA: Pantera is definitely a recognized brand in the space.Can you talk through the process that Pantera takes from sourcing a deal to making an investment and usually how long that would take?
PV: We want to be able to do due diligence and feel confident about the investment, but also balance that with making sure that we can fit into the timeline of the entrepreneur. It can be as short as a few days and sometimes it can take a month or two depending on what stage they are at and what type of relationship we have with the entrepreneurs already. You always go out there trying to get answers to all the questions and risks you see, sometimes things just can’t get answered or they won’t be answered in the most complete way. At the end of the day, we are looking at all the different factors going into a deal, everything from the team, product, the problem they are trying to solve, any initial traction, any competitive edge, technology, reference etc. We try to see how it fits in with our thesis and fits in with our portfolio.
It usually starts with one, or a few people having a call, to an all partners meeting and then deciding whether we want to invest, how much and what the structure of the deal should look like.
NA: Okay, that sounds quite efficient. What has been the quickest deal that you have made?
PV: We made a deal right after a meeting.
NA: What are your thoughts on the resurgence of capital raising via tokens?
PV: I mean right now everything is slowing down, but I think tokens are here to stay. I think that early stage token deals will be a combination of equity and tokens because when it’s so early you never know what a startup is going to do. So you just want to make sure that you are aligned with whatever value gets created and at that stage, it could be tokens, it could be equity. Once you do get to a time period where you are about to do a token generation event then you can do pure token deals, pure SAFTs etc. I think it has been difficult as the market has had a shakeout and the entrepreneurs that raised capital much more easily in 2017, a lot of them are not doing as well. A lot of the investors, because of liquidity, have bowed out. It’s shaking out the market in terms of what’s needed for new entrepreneurs to raise capital for tokens, what those models look like, what those investors look like and from there also resetting the market in terms of valuations. We are seeing token deals happen, weather hey are in the earlier stage or late stage, it’s just the players and structure has changed a bit.
NA: Yes, I saw two private token deals that were announced last month as well as public toke sale. How do you think COVID-19 is going to impact crypto and venture capital? I saw the post you guys put out a few weeks ago, it was quite insightful but I wanted to get your thoughts as well.
PV: I would say its a good time to be investing. Deals are happening a bit slower, but I do feel like it’s going to be challenging for entrepreneurs to close deals, and if they need to raise money, they may have to raise at a bit of a discount, depending on who they are, what they are doing and what their traction is. It is a good time to get in at some good valuations. On the entrepreneurial side, I think it’s going to be a good exercise for entrepreneurs to really evaluate their spending and making sure they have enough money to last however long this situation lasts and be able to continue their business. Maybe focussing a bit more on building product right now because deals aren’t really getting closed. Being able to find the pros of the situation and making the best of it and coming out of this strong. Companies that know how to navigate this well can really come out in a much better position.
NA: Also in regards to how you guys are operating in this situation, are you still actively making investments or are just refocusing on your current portfolio?
PV: We are doing both. We already signed a term sheet with one deal right in the middle of this We are looking to make 2–3 more over the next week or two.
NA: Great to hear that deals are still happening. In regards to your investment thesis, where do you see the most opportunity with blockchain technology from here onwards?
PV: I would love for there to be some great consumer use cases of blockchain, and then, of course, I would love to see more blockchain use in emerging markets. Areas that can really benefit from it. Maybe its a company like Xapo that really helps folks in Latin America use their cryptocurrencies to maybe other exchanges in India, to payments in Africa. I love the emerging markets and what they can use crypto for, in terms of both stores of value and payments.
I also get excited about cool use cases around consumer. One of the ones I really like is Audius. Being able to decentralise content and payments and do so in a vertical like music I think is really fascinating. Decentralising SoundCloud for instance, trying to achieve what SoundCloud was trying to achieve, but doing so in a decentralised manner is pretty cool. I think they have gotten some pretty good traction so far. Those two are directions I would love to see the space take and maybe its a Libra that maybe gets the emerging markets of to much larger traction. Outside of that, we are continuing to invest in the infrastructure side of things whether its companies that are providing rails to move money across border to exchanges and wallets and developer tools, fiat on-ramps. All those sorts of things, which we think are needed for those applications to come to fruition.
NA: Being a blockchain and crypto focussed venture firm, how do you look at portfolio construction?
PV: For us, we are going to continue to get in fairly early. We want to be the first institutional investor in these rounds. We are looking for outsized returns, those could come really early, or not as early. For us, having a bit of diversification around different types of business within the blockchain space, maybe even different types of assets. Some of these companies that we are investing in are going to have both token and equity exposure. I think it’s just having a mix of different things across a portfolio, each of them is going to have differentiated risk profiles and differentiated upside but we want to get in early and target at least a 10X, But I’d say the earlier we go in the higher that multiple we are targetting.
NA: Okay, great to get a clearer understand of that. I think it was a week ago we heard the announcement that Binance will be acquiring CoinMarketCap. What are your thoughts on the M&A space? Do you think we will see more M&A activity and do you think we will more legacy companies making moves?
PV: I think acquisitions are a little bit more difficult in general, especially from fintech companies because of the current macro environment. When they really have to figure out ways to survive in this environment, making an acquisition will make is going to be a little tough. I do think that there will be a lot of acquisitions happening in the crypto space from larger crypto companies. They may see this as an opportunity to pick up assets at a discount. I’d say larger acquisitions like CoinMarketCap could happen too, but you would really need to find a strategic fit with your company. There are a few different things that can generate a lot of value during this time for some of the larger companies. If the company is making a lot of revenue, I think that makes a lot of sense. If the company has the ability to funnel users or potentially get and expand the top of the funnel and get users into a larger organisation that has the resources to monetise then it will make a lot of sense.
CoinMarketCap definitely has both revenue and users but on a userbase side, there are not many properties like CoinMarketCap. On the mobile side, it would be Blockfolio and CoinMarketCap on the web. There is not a lot that gets that many eyeballs with that much engagement and so if you were looking to increase the top of the funnel, which I think is a good strategy for some of the larger companies because they do have the ability to monetize, either through an exchange or other things they are doing.
NA: Okay, and my final question is, what is the latest publicly announced investment you have made and why did you invest?
PV: The last one is Amber Group, we led the round with Blockchain.com Ventures and Paradigm. Knowing that getting onboarded onto an exchange is quite a bit of friction, especially if you want to execute across multiple exchanges and get the best pricing. To do it yourself its quite a bit of an undertaking. With most of the liquidity being in Asia, as a US firm accessing that liquidity is very difficult. What Amber provides is trade execution for anybody, whether it be retail or institutional to be able to access liquidity in the ecosystem globally, especially across Asia where it is highly fragmented.
Amber is providing a solution that Pantera has seen as being very valuable and we think it will grow as more and more institutional investors get into the space. Even on the retail side people are using it because they rather just use a one-stop solution than setting up all these different exchange accounts. I think it is solving a big problem, I think it’s still really early, there are a lot more things that they can do both on the product and growth side. We love the team, the team is extremely smart. They come from institutions like Morgan Stanley, they are based in Hong Kong and they have been able to hustle and get things done.
NA: Yes, Sam mentioned he also invested in Amber in our conversation. Thank you for joining me today Paul, it was a great conversation and really appreciate you taking out the time.
PV: No problem, I really appreciate you reaching out!