1confirmation Fund II
A $45M fund for founders building products for the cryptocurrency community
We recently closed 1confirmation fund II, a $45M fund to invest in new projects in the cryptocurrency ecosystem. We now manage over $75M in aggregate and we are excited as ever about the future of the industry.
Since fund I launched two years ago, we’ve been lucky to work with great founders and partners (80+ LPs from 9 different countries) who have put trust in us to be good stewards for the industry as the adoption of open blockchains grows. That is a privilege that we don’t take lightly.
What we’ve learned so far
Because cryptocurrencies are publicly traded globally and the world is more interconnected than ever, the booms and busts in our industry have been unlike anything ever seen in financial markets. We launched fund I in August 2017 in the midst of the last major crypto bubble — the total market value of crypto assets was approaching $1 trillion, $100M ICOs were the norm and a new “crypto hedge fund” popped up weekly.
We believed in a disciplined investment approach and launched a $26M venture fund with a focus on early-stage projects that could meaningfully push cryptocurrency adoption forward in the long-run (with a mandate to invest in both companies and cryptocurrencies). We’re still learning every day, but here are a few of our biggest lessons learned since we started 1confirmation two years ago:
The most important characteristic of both companies and cryptocurrencies is the people behind them: teams for companies and communities for cryptocurrencies
It’s easy to get lost in the tech when there’s a major technology revolution like the one we’ve experienced since 2009 when Satoshi unleashed Bitcoin to the world. At the end of the day though, the people behind the technology are what ultimately determine success: teams of people bringing impactful products to the world in the case of companies and communities of people bringing impactful products to the world in the case of cryptocurrencies.
The skill sets required to build a company and a cryptocurrency-powered decentralized organization are different. In a company, the product is all that matters — as a founding team you can focus internally on product, build in private and launch when ready and users will come if the product is great. A decentralized organization is different in that the cryptocurrency business model relies on a passionate community of believers and trust must be obtained from the community over time. Our view is that an inclusive, transparent and community-focused founding team is essential for a decentralized organization to capture a passionate community of believers (see more on this here: On Cryptocurrency Communities).
There are only a few business models (cryptocurrency appreciation and fees) working in the space to date and a lot of experimentation yet to be done
Since August 2017, we’ve slowly built out a portfolio of cryptocurrency-powered decentralized organizations that have strong communities: Bitcoin, Ethereum, MakerDAO, Augur, Cosmos, Polkadot, Nervos, and Brave. We’ve also backed great founders building traditional companies like bloXroute, Coinbase, Commonwealth, dYdX, Forte, Harbor, OpenSea, Tendermint and Veil.
The major paradigm shift here is the new business model that cryptocurrencies enable (see The Slow Death of the Firm). But a cryptocurrency doesn’t make sense for most teams and products, and we think that a lot of value will continue to accrue to companies building traditional businesses without cryptocurrencies. There have been several billion-dollar businesses built with a fee-based marketplace business model and we think that business model will continue to flourish and others will emerge.
Focus is essential
When things are going well, it’s easy to spread yourself too thin and lose focus. We saw that happen to countless teams in our industry in the last bull market of 2016–2018. If you were an entrepreneur or fund manager in the space in 2016, you suddenly looked like a genius in 2017 and saw people throwing money at you to pursue new businesses or raise new funds. While new opportunities and piles of cash can be alluring, the best decision for early-stage founders is often to stay disciplined in terms of funding and focused in terms of product direction. We’ve seen founders with deep conviction who stay disciplined and laser-focused have the most success in our industry, and we hope to continue to work with focused, disciplined, mission-driven founders.
Where the industry is going
Today, the current total market value of crypto assets is ~$223B and investment/speculation is the only mainstream use case. We think in the next five years, that total market value will surpass $1T as the investment/speculation use case continues to grow and other mainstream use cases emerge.
Bitcoin is the leader
Bitcoin will continue to lead the industry forward. It was the first mover in bringing open, inclusive financial products to the world. It has the best story and is the most decentralized (in terms of ownership and decision making) of all cryptocurrencies. As more people and institutions believe the story of BTC as a store of value and adopt it, the price of BTC is likely to increase, which has a reflexive property and helps catalyze further interest in the industry. We don’t think this pattern will slow down anytime soon and it could in fact accelerate if instability in the traditional institutional world continues.
Ethereum is right behind
We believe Ethereum is right behind Bitcoin in bringing open, inclusive financial products to the world. When I first got into the industry in 2012, I was most excited about Bitcoin as a platform for innovation in financial services, and in the early days of Coinbase, we placed a big emphasis on our API platform to enable developers to build Bitcoin-based applications. For various reasons, the Bitcoin community ultimately decided to focus on Bitcoin as a store of value and Ethereum emerged as the leading platform for innovation in the industry.
Today many interesting open, global financial applications beyond store of value are emerging on top of Ethereum (e.g. MakerDAO, Augur, Opensea, dYdX and many more). While the story for ETH as a store of value is not as strong as the story for BTC as a store of value and a lot of Ethereum infrastructure challenges remain unsolved, we think that Ethereum as a platform for innovation is here to stay and ETH’s future as Internet money for open, inclusive financial products (aka DeFi) is bright. If you’re a new developer or user in the industry and interested in behaviors beyond speculation (like saving), Ethereum is the best place to start.
From infrastructure and middleware to applications
Just like Ethereum came along to enable new use cases that Bitcoin wasn’t optimizing for, we think that new platforms will emerge to enable use cases that Ethereum isn’t optimizing for.
Today if you’re a developer who wants to build an application that requires high dollar value transactions and low throughput, Ethereum works well. But if you’re a developer who wants to build a low dollar value, high throughput application, Ethereum leaves much to be desired. This is an opportunity that next-gen dApp platforms like Cosmos and Polkadot could serve.
Some people in the Ethereum community see these as competitive and state that Ethereum will eventually be able to serve these use cases, just like Bitcoiners saw Ethereum as competitive and said Bitcoin could ultimately do what Ethereum is doing. It’s possible that ETH maximalists are right and it is certainly true that most “next-gen” dApp platforms were cash grabs, but we think the Cosmos and Polkadot communities are here to stay, enabling new use cases and pushing the industry forward.
Our approach moving forward
Most investment firms have an institutional aura that feels disconnected from people. We want to stay away from that as we grow. Particularly in this industry, where being a crypto-native user who understands products and community is a big competitive advantage. There’s a reason why every traditional investment firm on the planet missed the Ethereum crowdsale in 2014, which ended up being one of the best private investments in history.
Transparency is a core value for us and we spend a lot of time providing lots of information to our LPs and will continue to do so. There are certain limitations to providing full transparency to the public on things like investment performance and portfolio construction, but we try to be as open as possible with our product updates and newsletter and plan to do more in the future.
In addition to closing the new fund, Richard Chen has recently joined full-time as a partner on the investment team. Richard is a crypto native who just graduated from Stanford and brings a lot of expertise in cryptography and cryptoeconomics to the team.
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About 1confirmation: 1confirmation is a San Francisco based cryptocurrency investment firm with over $75M in AUM. Founded by Nick Tomaino and backed by individuals such as Peter Thiel, Mark Cuban and Marc Andreessen and institutions like Horsley Bridge, the firm focuses on supporting founders who are decentralizing the web and society.
