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“Show them green”
I’m financial journalist Leo Schwartz, filling in for Allie while she’s on her honeymoon.
I’m still recovering from Fortune’s Future of Finance conference held last Thursday in Midtown Manhattan, a revival of a series that’s been dormant since the pandemic, with the last confab hosted in Montauk in 2019.
A frequent topic of discussion at Thursday’s event was whether cryptocurrencies have an important role in the future of finance, particularly given the ignominious last couple of years in the blockchain world. Many of the speakers agreed that it is January approval of Bitcoin ETFs – and the dominance of these new investment products by giants like BlackRock and Fidelity – have meant that cryptocurrencies have completed its transformation from a disruptive sector run by iconoclasts to an established sector run by seeds.
Yet much of the money that greases the wheels of cryptocurrency megafunds – the limited partners representing relatively conservative institutions like sovereign wealth funds and endowments – appears hesitant to return after the scandals of 2022. idiosyncrasies of token trading and the pain of seeing their holdings drastically reduced in real time, many of these LPs now want assurance that they will actually get returns and not just lose their precious money to scamming vaporware. In addition to the SEC, there are three letters that I keep hearing over and over again from venture capital sources: DPI.
Distributed to paid-in capital, which in venture capital terms means the amount of cash distributions LPs receive compared to what they have invested, has become the new gold standard for top companies, and it’s something that crypto VCs are the only ones able to provide. Unlike traditional venture capital firms, whose equity positions in startups can be difficult to exit, cryptocurrencies tend to hold liquid investments. It’s easy to cash in on Bitcoin, Ethereum and Solana, which have all seen increases in value in recent months, if a company wants to deploy capital to its LPs.
An LP at cryptocurrency firm Blockchange recently shared with me an email from late March, in which the VC announced that his first fund had just completed two distributions totaling over $530 million and over $860 million dollars since inception, which according to the email made Blockchange the second-highest performing venture capital fund since 1999: it started with just $30 million. And earlier this month, Bloomberg reported that Polychain, one of the best companies run by Coinbase alum Olaf Carlson-Weebegan distributing 44% of one of its funds, as well as half the value of its first fund, to investors earlier this year.
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I met the president of another major cryptocurrency fund on the sidelines of Future of Finance, who told me that DPI is the hottest topic of discussion among cryptocurrency companies. As they begin to raise new funds, they must demonstrate to LPs that cryptocurrencies continue to be a profitable opportunity, even if the volatile sector causes endless headaches.
Distributions have their drawbacks. For one thing, LPs invest their money in venture funds because they want them to make venture-style investments and receive venture-style returns, and not just invest their capital in Solana and Bitcoin. Anyone can do it. As one LP told me, they back crypto funds because they are long-term bullish, not for short-term gains. “Withdrawing based on where you are in the cycle is stupid,” they told me. “If you’re going to redeem these funds, you’re basically saying you don’t believe space will exist in 10 years.”
The managing partner of another major cryptocurrency fund had a different view. DPI, the partner told me, was a way to keep the sector attractive despite excess reputation, especially for more institutional and less crypto-native investors, such as university endowments. “Many of these investment teams probably think that if they don’t publish the DPI soon, it will become increasingly difficult to justify it.”
And a late managing partner of a cryptocurrency fund had, perhaps, the most succinct opinion: With cryptocurrency prices rising, everyone wants to feel like they’re making money, even if exiting token positions isn’t the best way. rational to do so. manage a venture capital fund. As they told me: “Let them see the green.”
Leo Schwartz
Twitter: @leomschwartz
E-mail: leo.schwartz@fortune.com
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Joe Abrams edited the offers section of today’s newsletter.
This story was originally featured on Fortune.com