Coinbase Co-Founder Launches Largest Crypto Venture Fund

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Cryptocurrencies are booming, and a three-year-old investment firm has raised the largest new venture capital fund in history to keep the party going.

Coinbase co-founder Fred Ehrsam and former Sequoia Capital partner Matt Huang finished raising $ 2.5 billion this month for Paradigm One, their first venture capital fund. Investors mobilized to commit money to the fund, allowing them to raise double the amount initially targeted.

“It’s probably small compared to where we’re going 10 years from now,” Ehrsam told the Financial Times at Paradigm’s light-colored headquarters in downtown San Francisco, where plastic wrap covered the new office equipment. .

Paradigm’s mind-blowing fundraiser could fuel fears of a cryptocurrency bubble, especially in decentralized finance niches where the company has made a name for itself. Earlier this year, venture capital firm Andreessen Horowitz also raised twice as much as it had hoped for a new cryptocurrency fund, bringing in $ 2.2 billion, which it said was the “largest crypto fund ever raised”.

More than any other investor, the two companies have staked their fortunes on an expanding ecosystem of applications based on ethereum, a digital ledger that allows programmers to write contracts that automatically perform functions like money transfers.

Crypto can look like a speculative casino from the outside.

But that distracts many people from the deeper truth: the casino is a Trojan horse with a new financial system hidden inside.

– Matt Huang (@matthuang) May 25, 2021

Paradigm One Co-Founder Matt Huang Optimistic About New Crypto-Unlocked Financial System

The programs run on so-called tokens, digital assets that are granted to users over time, often giving them a say in governance. Paradigm has amassed some of the biggest token portfolios in the industry by placing early bets on development teams, which gives it rights to future distributions.

Paradigm’s first fund, which raised an initial $ 400 million in 2018, achieved an annual internal rate of return of more than 200% in the first half of this year, according to figures seen by the Financial Times .

The fund’s assets have reached $ 10 billion, although they can fluctuate greatly with the price of cryptocurrencies, people familiar with its holdings said. Paradigm structured it like a hedge fund, which means it doesn’t need to return capital to investors by a certain date, a requirement of venture capital funds. Paradigm declined to comment on the performance.

The founders of Paradigm said the world of token-based apps, sometimes referred to as Web3, has even more room to grow. Several so-called decentralized financial protocols backed by Paradigm, such as the Uniswap token exchange, have gained in value over the past year as more people withdraw money from the old financial system. In areas such as games and music, developers are also experimenting with new ways to deliver value to consumers using tokens.

“The biggest companies in the world are big Internet technology companies powered by network effects,” Ehrsam said. “We believe that decades into the future it is very clear that the largest entities in the world will be powered by tokens.”

Ethereum still faces skeptics. The network has faced high transaction costs during peak periods, and some cryptocurrency entrepreneurs have challenged its dominant status as an infrastructure for decentralized applications.

“The story has yet to be decided,” Ehrsam said. Paradigm doesn’t just bet on Ethereum either, investing in a lending app called Jet Protocol that runs on rival Solana network, which claims faster transaction speeds.

Paradigm’s founders said they viewed their token investments as long-term holdings that could take at least 10 years to pay off. Like bitcoin, assets can be very volatile depending on the whims of cryptocurrency speculators.

“If liquidity were to dry up in space, they are going to end up with a lot of assets,” said Graham Duncan, one of Paradigm’s early investors. But he is still confident about their chances. “I think their time horizon will guide them through this,” he said.

The start-up’s founders said Paradigm quickly became a desirable investor, in part by hiring a research team of five to work with the portfolio companies. The company’s financial services groups and investors, which include endowments from Harvard and Yale universities, have also turned to Paradigm for advice on how digital assets work.

Sometimes Paradigm has negotiated privileged deals with cryptocurrency groups seeking its approval. In a recent $ 73 million token sale for Lido, a yield-earning app on Ethereum and other blockchains, Paradigm led a group of investors who received a rebate of around the two-thirds of the open market price of the token at the time of the first offer.

Optimism, a public interest company developing a program to make Ethereum transactions more efficient, approached Paradigm for an investment after the company brought in programmers it had previously hoped to hire.

“If we wanted to access their time, it made sense to go and try to get a check from Paradigm,” said Jinglang Wang, co-founder of Optimism.

Opyn, a cryptocurrency options program, this year chose an investment offering from Paradigm that valued the company below what Andreessen was willing to pay, a person briefed on the agreement that asked to remain anonymous. Andreessen declined to comment.

Paradigm bought about 20% of the company for a valuation of $ 28 million, as well as the rights to a proportional share of all tokens created by Opyn.

After investing, Paradigm worked with Opyn CEO Zubin Koticha and other employees to design a new type of cryptocurrency derivative during a week-long retreat in rural Carolina. North. Dave White and Dan Robinson, two Paradigm researchers, have become the lead authors of a paper presenting the concept.

Investors tend to be skeptical of large venture capital funds, which can be difficult to invest profitably. Huang said he had few doubts about Paradigm’s strategy. “If Fred and I ever found ourselves working in some kind of low growth, low yield situation, I think we would prefer death,” Huang said.

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