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November 30, 2020

Market Spotlight

Crypto VC Plays for the Next Cycle With Arcane Crypto & Blockwall


Host Teana Baker-Taylor mentioned how one of the dynamics that has enabled early blockchain-focused companies and networks to grow was the ability for early BTC and ETH holders to divest and seed a swath of projects within the ecosystem. With venture capital (VC) firms dedicated to the industry rapidly flowing in, and the next wave of adoption and innovation upon us, she spoke with Eva Lawrence, COO of Arcane Crypto, and Laurenz Apiarius, managing partner at Blockwall, to discuss how both firms are looking to position themselves.

Eva explained how her career began as a lawyer specializing in fund financial services. She also worked in-house at Morgan Stanley for 8.5 years in legal roles and trading where she ended up heading up their securities lending team out of London. She had been consulting for a couple of Arcane Crypto portfolio companies since the beginning of the year and moved into the COO role at Arcane in August. Eva explained,

(1:32) “Arcane Crypto was set up by two serial ambassadors and entrepreneurs in Norway who saw this opportunity to access the crypto market from the Nordics and set up their own crypto-focused investment company. So they brought in Torbjørn Bull Jenssen, who is one of the best known, if not the best known Bitcoin blockchain expert, to help them. And we’re most recently about to be listed on the Swedish Stock exchange.”

Blockwall’s Laurenz explained how he is the son of an entrepreneur, and after business studies he went into the businesses his father had founded, where there was a steep learning curve. So he migrated to Zurich, where he was doing PE investments and at which time he got to know bitcoin, which was in 2014. In 2016, he and two university friends started Blockwall because they saw that in German-speaking markets, there was not really a place for investors to participate, saying it was too complex and infrastructure that was there seemed dodgy.

(3:11) “So we set up a regulated fund structure out of Germany and raised a first fund that exclusively invested in protocol tokens. And at the moment, we’re setting up a second fund complimentary to the first one that’s solely investing in early stage startups that are using blockchain as a general edge in order to provide better biz models,” said Laurenz.

He went on to explain that they have funds dedicated to each strategy. The first one is a closed fund that is running for another 3.5 more years and is exclusively focused on token investments. The thesis behind the fund was that decentralized infrastructures have merit and they have certain use cases. Within that, they’ve done several allocations in liquid already tokens but they’ve mostly allocated into early stage not-yet-liquid token protocols across the smart contract space, data marketplaces and also Bitcoin.

With the long term goal, this is something that is of value and that needs to be monetized. The learning curve over the past years has been not to play the liquid part but to really have that long-term view, which they mitigated toward our LPs with a closed-fund structure, he explained.

Blockwall does invest in equity as well with the second fund. The LPs they have been speaking to have different aspects as to why they would invest in this space. So it’s a tradeoff on many levels, Laurenz said, adding that at the end of the day, they’ve separated the two and they can see equal opportunities in both.

Eva explained that Arcane Crypto is pretty much primarily focused on equity investments via two main channels: one side is crypto adoption and the other side is global payments. They have a portfolio of complimentary companies that enables them to “think bigger” in terms of the cryptocurrency ecosystem. They’re focused on scalable solutions, mostly around Bitcoin, which they feel has the best infrastructure and liquidity at the moment.

Below is a glimpse into Arcane Crypto’s portfolio

arcane cryptos portfolio

Arcane has an asset management arm operating a crypto fund for accredited investors and recently entered into a share-purchase agreement for the purchase of a local regulated crypto broker in Norway.

Teana asked how both companies are looking at the decentralized financed (DeFi) space and whether they are participating in looking at DeFi technology protocols that are looking to disrupt the payments  space.

(8:30) “We’ve definitely been taking an interest in DeFi. I think everybody has. And it is a very exciting area of development. But we haven’t specifically invested in DeFi projects as of now. We’ve been looking more at second layer solutions on Lighting networks,” said Arcane Crypto’s Eva.

She pointed to one portfolio company that announced a clearing platform to enable participants to have direct ownership and access to their funds via the Lightning Network. So she thinks that there are some synergies for the DeFi space there as it’s looking to solve some of the same problems that DeFi is trying to address, with areas such as transparency and greater self-custody in focus.

Eva added that this portfolio company is acting as an escrow partner, not a custodian, and they are the party enabling the peer-to-peer transactions to occur.

(9:54) “That’s probably the nearest we have in our portfolio for now. But obviously we’re always looking and exploring new projects and it’s definitely an area of interest,” said Eva.

For his part, Laurenz described how Blockwall has not yet invested in the most prominent DeFi projects, though he says that conceptually it is “absolutely interesting.” As a fund with a certain duration, however, they need to look at investments that are creating “plannable value” over the fund’s remaining duration.

(10:35) “DeFi seems still to be a bit like a speedboat that’s being built while it’s operating at 300KM an hour. And the holy grail to proper defi protocol solution adoption is to have mainstream non-crypto natives using it. And if you look around, how difficult it still is for regular retail buyers to get their hands on bitcoin, the stretch for DeFi solutions is still a bit wider,” said Laurenz.He goes on to say that some of their investments are data marketplaces, and if you put the definition wide enough, it’s DeFi because you’re monetizing data that hasn’t been monetized before.Teana asked about other verticals that the companies might be looking at today that they might not have looked at earlier, in response to which Laurenz explained what has been the most surprising to him. He said that this is in particular to their second fund, which again is focused on early-stage equity startups. The rate and magnitude at which solutions are being built using blockchain is extraordinary, he said, adding:

(10:47) “So what we’re seeing is the rate of adoption that began almost 18 months ago has looked incredible. And the area that we see with respect to that is almost exclusively on a B2B level. So we’re seeing B2B processes being reengienered, being made more efficient, and that’s something that I could have only imagined when we raised the first fund that was supposed to invest in tokens that facilitate a certain use case. And now we’re seeing these use cases being established. So the rate of adoption again is what has surprised me on a positive note the most.

Eva explained how Arcane started out with trading and exchange infrastructure and then moved over into payments, looking for complimentary companies that work well together and that shared many synergies.

(13:27) “I think that we’ve seen more interest or more focus around payments in the last year or so then we had at the start. But I think also our focus has shifted geographically rather than just on the particular projects. So obviously we started out as you would expect with a Nordics focus as we were a Nordics investment company. But that has shifted now, and we now have investments in the UK, in Sweden, in France. And we’re currently looking at potential partnerships or investments in the US, Southeast Asia and the rest of Europe.  So I think that it kind of shows that the exciting projects these days are not limited to one particular area, that it really is global in terms of companies building, working on interesting projects,” said Eva.

Teana asked about the sentiment around what’s been shaping venture capital over the last 12-18 months and how the profile of LPs has changed.

Arcane Crypto’s Eva said that one of the biggest changes was going from a family office to almost being listed. In general, they’ve seen more interest from the more traditional investors, such as asset managers and insurance companies, who are starting to ask how they can get involved and gain more exposure.  Previously it was something that they had an interest in but it was more “from the benches,” she explained, saying that they were on the sidelines because while they found this area interesting, it was just not possible then.

Blockwall’s Laurenz explained how they’ve observed a “huge difference” between the first and second funds. For the first fund, investors were exclusively single-family offices and high net worth individuals who wanted to participate but “didn’t really get their hands around it to be into it themselves.” With that backdrop, he said they raised quite a significant amount of money.

They also had to learn that a lot of what would be classified as proper institutional investors didn’t have a mandate to hold anything directly or indirectly that relates to tokens. So that’s also what they see with respect to their second fund, the equity fund. He said there’s a lot of interest compared to the first fund and people wanting to have access to this still niche-area, blockchain, when it comes to venture capital.

(19:50) “This is what COVID-19 has tremendously helped with. They want to be invested in one of those exponential technologies that they’ve researched about and they want to have an allocation in. They don’t see deal flow for that. They have a mandate to invest in venture funds so that helps. So this is definitely what has changed,” said Laurenz.

He added that even though they’re an equity fund, the rising token prices do support that to some extent because it’s an underlying confirmation of the overall technology, though it’s not a major driver. When it comes to volatility, the fact that Blockwall has a closed-fund structure is something that LPs finally understand because “I wouldn’t have survived this roller coaster ever since,” said Laurenz.

Teana also asked about the next big play the market has its eye on, in response to which Laurenz said in addition to the price predictions for BTC and ETH, it’s the overall adoption of the technology, which he says is the more important aspect of the industry. They’re seeing how corporates have an active interest in this technology and are looking for solutions to adopt them. Meanwhile, startups are building those technologies. He pointed to IOT sensors, an area that has grown tremendously and that is looking for certain solutions that the blockchain can facilitate. He is also hoping for some exits, which helps the overall venture part around blockchain mature even more.

Eva says that something Arcane crypto is focusing on unlike everybody else is lightning transforming payments for areas such as trading and gaming, for instance. They are also focused on Bitcoin for cross-border payments, which she says is “completely disrupting the global payments market.” And they are watching for banks coming into crypto, saying that it’s not just institutional but tier-one banks that are coming, which is something completely different. They will require infrastructure to fit the way they operate.

She adds that the way a tier-1 bank operates vs. a hedge fund or asset manager is very different, saying that the banks are very specific around what they need and want to be able to trade crypto. So service providers can deliver everything around trading, AML and data specifically for big banks and their very specific requirements. (31:26) “I think that’s also going to be very big,” said Eva.10

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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