Building FJ Labs Liquid Crypto
Disclaimer: This is not financial advice. Anything stated in this article is for informational purposes only, and should not be relied upon as a basis for investment decisions. Chris Keshian may maintain positions in any of the assets or projects discussed on this website.
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This is a seven-part series on FJ Labs’ investment process for liquid crypto:
As technology reshapes the finance sector, the emergence of Liquid Venture Capital (LVC) stands out as a novel paradigm shift. Situated at the intersection of conventional venture capital practices and public market dynamics, the emerging cryptocurrency asset class necessitates a nuanced approach. Cryptoassets offer a unique investment profile that combines venture-style returns with lower risk and shorter commitment. In this new asset class, LVC is primed to redefine investment methods, addressing many limitations of the traditional VC model and providing outsized returns with the benefit of full liquidity.
The Limitations of Traditional Venture Capital
Traditional VC operates on the principle of illiquidity. Investors pledge their capital to startups for prolonged periods, frequently years, before a liquidity event, such as an IPO or an acquisition, offers returns. The VC model, while valuable in its capacity to foster innovation, is fraught with inherent constraints:
The long-term illiquid nature of VC investments poses significant challenges. It restricts the agility of investors, locking up their capital and limiting their ability to react dynamically to real-time market developments.
The traditional VC model exhibits a "power law" nature, wherein a small percentage of investments yield the majority of returns. Out of every ten investments, only a few will succeed, while others may fail or achieve moderate success. This demands diversification to spread the risk and necessitates a sizable fund to absorb potential losses.
VCs generally require sizable capital commitments, which effectively limit this investment opportunity to wealthy individuals and institutional investors. This restricts broader participation and democratization of venture capital.
FJ Labs Traditional VC
Fabrice Grinda and Jose Marin recognized some of the shortcomings listed above when they founded FJ Labs and devised a novel investment approach. As Fabrice discusses here, FJ Labs takes a unique, high-velocity angel investment approach to early-stage VC:
We evaluate 40-50 deals per week,
We invest based on two 60-minute calls,
We do not lead, and
We do not take board seats.
As a result, the FJ Labs portfolio consists of over 1,000 companies that span multiple investment stages, geographies, and industries in marketplaces and network effect businesses. Because of this approach, FJ is a small enough investor to exit at certain rounds, which helps solve for the illiquid shortcoming listed above.
FJ Labs Liquid Crypto
Given the unique strategy FJ applies to traditional venture, it was the perfect place to apply a nuanced LVC model to the cryptocurrency arena. FJ Labs was already very active in the crypto space, with 47 crypto investments before I joined. After working tangentially with Fabrice Grinda on a novel approach to liquid crypto, I joined FJ Labs formally in 2022 to incubate a LVC crypto strategy for the fund. Over the next few posts, I will outline some of the methods we use to invest in and actively manage a diversified portfolio of liquid crypto assets.
As Fabrice describes in his latest post, we believe now is the best time to pursue a liquid crypto strategy for a few reasons:
Crypto has never gone through a macro risk-off moment. Since these assets are still viewed as the riskiest portion of an investor’s portfolio, and because they are liquid, they are the first to get sold in an environment like this.
The implosion of multiple funds, centralized lenders, and high-profile exchanges have further exacerbated the downside move across this space.
The regulatory headwinds in the United States are the icing on the cake and have been the final shoe to drop in a year of negative news and sentiment surrounding this asset class.
Since this is still a highly correlated asset class, the great projects with real revenue and sticky users sell off just as hard as the projects that have no real merit.
We believe that the above factors, combined with our proprietary evaluation process, have provided a unique opportunity to realize venture returns in this emerging asset class.
We recently closed FJ Labs III and are early in our deployment period. We have made 12 liquid crypto investments so far and will continue to opportunistically invest in the strategy mimicking our diversified FJ Labs’ core investment strategy. We are optimistic that the asset class can boost FJ Labs’ core returns with limited downside.
