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Developing a Technology Investment Strategy With Aly Madhavji of Blockchain Founders Fund
Episode 427th June 2022 • Fund Flow • McGuireWoods
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The blockchain sector is perhaps one of the riskiest to invest in today. Not only is it a new and constantly evolving space, but it’s also often riddled with scams. Many large investors remain skeptical, but it’s likely that the future lies in blockchain and crypto.

So how can funds do it safer and smarter, especially as emerging managers? We bring in leading tech entrepreneur and blockchain investor Aly Madhavji to tell us how. Recognized as a “Blockchain 100” global leader by LATTICE80, Aly is an internationally recognized author, speaker, and managing partner at Blockchain Founders Fund, which he launched in 2017.

His success is linked to Blockchain Founders Fund’s goal to be “the most transparent fund in the world.” In fact, all of the fund’s LPs have real-time access to every deal the fund makes. That might sound terrifying, but in the blockchain world, transparency is crucial.

“We think that this is incredibly important when you think about how important partnerships and collaborations are in this space, and being able to tap into world-class expertise to work with our companies,” said Aly. 

That type of differentiation — and the associated risks — are necessary for success.

“The way that this industry is evolving and changing, oftentimes, some people don't just don't get it right away — what this shift could mean and how it could actually change the landscape of the way a sector could work,” said Aly. “And so we want to be part of being at the cutting edge of driving that change with companies.”

In this episode of Fund Flow, Aly joins host Jon Finger as he shares his secrets and best tips for emerging managers in the blockchain or crypto world. 

 

💡 Featured Guest 💡

Name: Aly Madhavji

What he does: Aly is a managing partner at Blockchain Founders Fund, a Singapore-based venture capital fund focused on blockchain startups. He is also a senior blockchain fellow at INSEAD and the author of three books. 

Organization: Blockchain Founders Fund

Connect: LinkedIn | Twitter


🗝️ Key Points 🗝️

Top takeaways from this episode

★    Transactions in the blockchain space operate differently. The industry relies and thrives on strong partnerships and collaborations; unlike on Wall Street, blockchain funds are not ultra-competitive. That’s why Aly’s fund aims to be transparent with all of its LPs and notifies them each time a new deal is made. Transparency ultimately leads to greater success.

★     For a constantly evolving market, have an adaptable strategy. For Blockchain Founders Fund, that means doing things differently than most other VCs — responding to cold emails, and focusing on LPs that fill a gap or propose a solution to a problem in the blockchain sector, rather than adopting a narrow strategy.

★     Find what you do best and follow through. There’s a lot of capital available for emerging managers these days, but it’s also crucial to show what makes your fund different from others. Define what that is and prove that you can follow through on those early investments.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

Transcripts

Voiceover (:

You're listening to Fund Flow, a podcast for emerging managers, offering insights into the journey of new and aspiring fund managers seeking to have access in a crowded market. Tune in as McGuire Woods' partner and host, Jon Finger, is joined by guests ranging from first time fund managers to proven emerging managers, experienced LPs, poised to back emerging managers, and other key participants in the emerging manager ecosystem. Hear their real world perspectives and gain actionable tips to help inform your strategy, and position yourself for a successful fund closing.

Jon Finger (:

Welcome to Fun Flow, a McGuire Woods podcast for emerging managers. I'm Jon Finger, and today, I'm very excited to be joined by Aly Madhavji, managing partner at Blockchain Founders Fund. Aly is a senior blockchain fellow in NCID and was recognized as a blockchain 100 global leader. He is an internationally acclaimed author, publishing three books and a monthly columnist for a leading blockchain magazine. Aly, thanks so much for talking with me today.

Aly Madhavji (:

Thanks so much for having me, Jon.

Jon Finger (:

Let's start with, how did your road in investing lead you to launch Blockchain Founders Fund?

Aly Madhavji (:

Yeah, that's a really good question. I mean, I started off very young in actually the stock market. And this was actually a pretty interesting exercise that I think I owe a lot of credit to my parents for when I was quite young, but very young, they actually got me interested in looking at different companies that I just like, so things like McDonald's, Walmart, things that I was exposed to as a really young kid, and gave me a little bit of capital in a broker account to actually invest in a few companies. And so after I did that, I started reading and trying to follow what was going on with these companies at a very young age. And so that got me my first sort of exposure into public markets. Later on, started all sorts of small, different businesses here and there, continue to follow a lot of tech news.

Aly Madhavji (:

But then after university, my undergrad, started investing in some small angel investments. And that led to all sorts of different paths, but over time, had my startup that I exited, and then got very involved in the blockchain space throughout sort of that period and the crypto space, first, more sort of ideologically and passively in some way, and then full time from 2016. And that worked out really well, right? So when at the end of 2017, we started Blockchain Founders Fund and Scale Ventures. We now have 94 companies around the world, across six continents, and it's been quite a journey with the number of companies from pre-seed and seed to now unicorn status as well.

Jon Finger (:

That's fantastic. You mentioned the public markets, and I think that blockchain and crypto, to some extent, we see a bit of a disconnect sometimes in the public markets. And I think recently, when you have someone like Warren Buffet not saying the kindest things of how crypto and... How do you react to those things, and how does that impact how you think about you're investing, if at all?

Aly Madhavji (:

Yeah, no, absolutely. I mean, I have a lot of respect for Warren Buffet and many others. I mean, these are icons and tycoons in sort of their sectors and where they've done really well. And I think part of the challenge or difficulty is you've got this very quick changing world where blockchains just opened up so many opportunities and so many different ways on the way the world could work, or potentially should work, depending on your viewpoints, and the way that the world is even evolving already, which we can start to see over the last few years. And I think this is where some people, I think, just need more time to see more progress, and maybe sometimes are also oblivious to a lot of the data points that are happening. But in a nutshell, I mean, when you look at the transformational impact of blockchain, I think even sometimes people in the blockchain space don't fully see what's really happening on a bigger picture. And I'll give you some examples, right?

Aly Madhavji (:

So NFTs have sort of emerged. I mean, most people have now heard the term NFTs and have sort of seen everything from 69 plus million dollar paintings to all sorts of other things, but what's really happening in the larger movement that oftentimes I think has forgotten is, this is the first way, in human history, to track digital ownership. And imagine living in a country where you didn't have tracking of property rights, you would say that's barbaric, that's archaic, that you wouldn't buy a property there because you wouldn't actually know if you owned it, or you wouldn't know if it would be it taken over because there's not proper... what might be expected in terms of protections for investors. And I think that's the same way that I think we're going to look at NFTs in 10 years or 20 years. We're going to say, "How did we not think that this was necessity to track ownership in a digital world?" Right?

Aly Madhavji (:

And that's going to become the de facto standard. And I think that's the same thing from NFTs to many other parts of this sector, including when you look at defi and the ability for decentralized finance to help create banking, lending, and savings products for over a billion people that their current market just doesn't want to serve. Whether it's because they don't have identities or they're just not rich enough, the system is leaving them behind. And we now have a solution that I think can make a very big dent in helping to solve that problem. And there's many other things, but I think it's a different approach to the way things have been done, and I think we're already starting to see very clear impact of how some of these things are changing the way that these things can be done and are being done.

Jon Finger (:

That makes sense. So, going into fund two for Blockchain Founders Fund, how did your experiences throughout fund one alter, if at all, your approach to fund two?

Aly Madhavji (:

It's a really good question. I mean, with fund one, so we backed 60 companies in our fund one, and that was essentially private capital for myself and my partner, and there was a lot of different challenges. We're talking about going back into the early days of token launches, blockchain companies that started to make progress. And there was obviously a whole slew of scams, and there still is, but continuing to refine our way of looking at companies, different mistakes, obviously, that we made along the way that we now have learned a tremendous amount from all the way to better being able to assess teams and ability to take major products to market early, because we invest in companies at a pre-seed and seed stage. And so we continue to hone in on those aspects. And now we've developed a process. To give you an idea, we now have about 90 different things that we look at internally when we assess a company.

Aly Madhavji (:

We do this very quickly. We're typically making investment decisions in 14 to 21 days, from first point of contact to close, and that's pretty significant. And so I think we've improved a lot of our processes and our ability to analyze a company, but then we've also continued to improve what we can support companies around. I think that's very critical, especially in the blockchain space. And the people that are aware of sort of the inner workings of the blockchain space know that this industry relies on a lot of very strong partnerships and collaborations. And it's a different way of doing business. It's not ultra competitive in the way that you might see Wall Street firms operate on, right? So that's been, I think, a very big aspect. And so now we've culminated 150 corporate partners that support our companies and offer millions of dollars in benefits to our startups. We've got 320 experts that support our companies, and we've made this pretty much automated, in the sense of everything uses double opt in systems or startups can request intros to anyone in our network. Same with vice versa from our experts connecting with our startups.

Aly Madhavji (:

And we've taken this so far as even doing this on the LP side, right? And so you've got a lot traditional funds trying to launch funds in the web three space, but we're looking at this as, "Hey, well, this needs to have a web three ethos even to the fund itself." And so we've gone as far as... One of our goals is to become the most transparent fund in the world. And so our LPs actually have real time access to every single deal that we do. So the same second we do a deal, LPs have access to it, they can see what the deal is, they can see details about it, and they can click one button to connect with any of our founders, right?

Aly Madhavji (:

It's super transparent. And we think that this is incredibly important when you think about how important partnerships and collaborations are in this space and being able to tap into world class expertise to work with our companies, right? And so this, in part, has helped us drive a ton of fortune 500 collaborations to many other things with our companies. And these are some of the things that have sort of developed over time since fund one to now.

Jon Finger (:

Well, that's amazing. I'd love to hone in on that a little bit from the perspective of... As someone who works with a lot of emerging managers and LPs, hearing you describe that, the first thing that comes to my mind is, that's scary, the idea that your LPs have real time access and interaction and seeing all the data. I very much appreciate the analogy to web three, but does that scare you, or is that just a dinosaur mindset to what it means to be a fund manager?

Aly Madhavji (:

I think that there needs to be changes in the way that funds operate, right? We've also invested in other funds. And we think the funds that we've invested are also have a number of aspects that are on the cutting edge of trying to deliver more transparency and more collaborations. But the way that we look at it is, if we're going and investing in incredible early stage companies, we're talking about pre-seed and seed, we want our companies to go partner with the best people in the world, in their sectors, right? So if you're looking at partnering in with sports leagues and sports teams, well, let's go partner you with the guys that own major sports teams and very involved as owners in major sports leagues, right? This, to us, makes a lot of sense, and getting them exposed early.

Aly Madhavji (:

And that's the same thing, not only across sports leagues, but take the same concept across some of the biggest supply chain companies in the world or major titans in the music industry or whatever that is, and have them exposed to our companies very, very early on, because they're already vested in what we do. And I think that transparency... Sure, we're going to... We invest in early companies. There's a lot of risk, right? We're going to have companies that fold, right? I don't think that's a surprise to anyone, but we also think that by connecting them with incredible titans and leaders across their industries, and family offices that have world class businesses in certain sectors, that by tapping into that expertise, we think we're going to open up more opportunities and grow the valuations more of our companies, because we're going to be partnering with bigger and better partners and being able to monetize those, that we see this as sort of a win-win-win across the board.

Aly Madhavji (:

And I think that's the mindset that you need in the blockchain and crypto space, because it's not always a win lose game. When you look at web three, it's actually a win-win-win game. And I think without that mindset, you're actually missing the objective and what's happening fully in this space.

Jon Finger (:

Yep. That makes sense. So looking back to fund one, what were some of the hallmarks that you could raise a committed fund dedicated to the blockchain and emerging technology sectors?

Aly Madhavji (:

Yeah. So in terms of fund one, I mean there was definitely a number of hallmarks that I think helped to raise fund two. I think one, we started investing in play to earn gaming quite early, right? So a lot of people have heard sort of the term play to earn gaming, and might be aware that the two biggest blockchain games in the world are Axie Infinity and Splinterlands. So we're actually the first investors in Splinterland's, pretty significant share holding there. And they're now a multibillion dollar company in the blockchain space, right? And so we came in at a pre-seed stage on Splinterland. So this has been, obviously, a very big catalyst. And I think not only having invested in them, but I think doing it at a time where most investors... Nobody really got it. So we actually, in the early days, we used to do much smaller investments, and we used to also want to have other partners, other investors come in on deals with us to help de-risk a deal for us.

Aly Madhavji (:

And what we realized when we... We probably brought this to about a hundred investors at the time, so quite a lot of people in our network that we brought this to. And everyone was saying, "Why blockchain and gaming? It's weird. It doesn't make sense. Why would you want to own your assets in a game?" All of these things that now might seem funny to hear, but these were all the comments. And so nobody would actually come in with us on that. So we went alone, and we've supported the company very hands on. We continue to do weekly calls with them for the last three plus years. And the business has, obviously, now become sort of a major player. We've got 350 to 400,000 daily actives, but it was the same thing, not only with them and blockchain and gaming, but with other things, right? So when you start looking at analytics, it was a very similar case. And we have a, an investment in a company called LunarCRISH, which is one of the top tools now in the world, in the crypto space for discovering alt coins.

Aly Madhavji (:

So we analyze well over 4 million social media messages a day with natural language processing. We've got well over a hundred million page views a month that peaked at 2 billion, sort of pulled back a little bit. We also tried to sort of cut out a lot of the box and sort of things that were... There's a lot of that sort of thing in the crypto space. We sort of try to pair that down, but we've got very significant user base there now. And another sort of very well known player that anyone that's sort of investing in alt coins is probably using or aware of LunarCRUSH as a tool. And so that's been another really interesting one. But we've seen also, even on things like machine learning, training for NFTs, people thought was sort of a crazy idea when we started doing that. And that was Altered State Machine, which is now a very well known company as well in the blockchain space.

Aly Madhavji (:

And one of the things that we realized, and sort of going back, even to your earlier question, how have things changed, now, for the most part, when we do a deal, we oftentimes just go alone, and we'll do a post money safe, like a YC post money valuation cap safe. And we just go alone, and then we're happy to help explain and help others come in, but we don't really wait for others, because what we've realized is for a lot of these technologies and these pushes that are sort of pushing the boundaries, the way that this industry's evolving and changing, oftentimes, some people don't get it right away and what this shift could mean, and how it could actually change the landscape of the way a sector could work. And so we want to be part of just being at the cutting edge of driving that change with companies. And so that's also changed our philosophy and our approach even on making investments.

Jon Finger (:

Yeah. And that's something I wanted to talk about based on your space and where your focus is. In talking about your fund strategy, I imagine it's constantly evolving, but talk to me a little bit about how you develop your strategy, and how it does evolve over time in such a rapidly evolving space.

Aly Madhavji (:

It's a really good question. We do this in a few different ways, right? So from a strategy perspective... And if you're trying to talk about strategy and thesis, I mean, at the end of the day, we invest in incredible founders that are solving big problems, right? And we want to support their vision to help make this a reality, right? And that might mean that founders come to us with things that they're working on to solve that maybe we weren't aware of, wasn't as big of a problem as it is, and then we look into it, or it might be something that's super far fetched and it's intriguing, and we want to learn more and explore this. It could be that we also develop a bunch of thesis into very direct and targeted sort of sub, sub sectors of this space, right? And so we've got probably about 25 different thesis at any given point that we're looking for companies in. And so we do a lot of outbound by trying to find companies that are building really cool things in this space that we think are gaps.

Aly Madhavji (:

Sort of pairing those two together gives us sort of the best opportunity, I think, to cover all the different areas where this sector can move. And this sector moves extremely fast. I think it's very difficult to keep a handle of even all the different directions and all the different areas of where this industry sort of moving to. And so this helps us to do it. We do this a little different from other VCs. We find that, even from our conversations with founders, that a lot of VCs won't look at cold outreaches or won't respond to them, things like that. One of our things that we sort of pride ourselves on and one of our goals is, we want to respond to every single founder that reaches out to us, right? We look at, actually, every single thing, usually within 24 hours. And that's been a big objective for ours, because there can be great companies and great ideas that come to us that help us learn about what they're doing, even if it wasn't something we were super aware of.

Aly Madhavji (:

And then we can help support them and help them make that vision a reality. And so that's been a big part of also how we defer in terms of our approach. And we do take cold outreach all the time, every single day. And I know, even from my previous experiences on my last startup, that oftentimes, this wasn't the case, right? And a lot of VCs will ghost you or not respond to cold outreaches, and we just don't think that's always the best way. We also get a lot of referrals from just people that are very deep in the space or sort of have very strong backgrounds at either looking at startups, or very successful backgrounds from, from a business standpoint, et cetera.

Jon Finger (:

That must take an incredible amount of time, and clearly, you spend a lot of your time doing that. I'd love to learn more about the funds team and how you've built that, who takes part in replying to those cold outreaches. I think it would be good for the audience to hear more about how you navigate through where to dedicate your time as a founder. But then also, how does that permeate throughout the team, and who's responsible for what?

Aly Madhavji (:

Yeah. So, that's a good question. I mean, we've worked on one, where we can, to streamline our processes internally to make us as effective as possible, right? And we've actually invested quite a lot of companies from cold outreach. So this is not in very obscure cases. This is actually... We do this a fair bit. And so we love, actually, when people reach out to us. So actually, what happens internally, and this... I think you might be the first person we're sharing this with, so for your audience, but what actually happens is, when someone sends us a note, it actually hits most of our team's inbox, including myself. And so I actually see all of the cold outreaches, the other partner on the fund Mansoor does, and our entire investment team. And so what normally happens is, if it looks like something that might be interesting to us... And anyone can submit details on our website. If it looks like it might be interesting to us, we'll invite the startup to share more details with us.

Aly Madhavji (:

So we ask them to answer a few questions that help us understand where are the company's based, what stage is it that, what sorts of challenges are they facing, what are they building, what's their vision, attach a deck for us, that sort of thing. And then we go through that, or our analysts typically go through that within 24 hours. And we'll come back with a few questions, normally. So we'll come back with a few questions, just to make sure we really understand what you're working on and sort of get a better picture. Then if it seems like something that we might be interested to invest in and sort of want to continue through the process, we end up ha getting on a call. So that typically happens with one of our analysts. And they'll get on a call, they'll ask more questions, get to know the team and the founders in more detail.

Aly Madhavji (:

And then internally, what'll happen is, we'll discuss it. And if it's something that the analyst wants to push forward, we'll discuss it as a team, we'll figure out what are some of the key things that we'd want to know, and sort of what are the key risks and how are those sort of being mitigated. And then generally, I'll hop on a call, or Mansoor or Toby will hop on a call. So either one of the partners or the principal will hop on a call. We'll go through it again in even more detail, have more specific questions that came up from our investment committee. We take things that even aren't fully baked to our investment committee.

Aly Madhavji (:

So we do our investment committee meetings three times a week, so this helps us be pretty agile. And so our investment committee also helps us to iterate and look at what are some of the risks? What are some of the areas and questions that we have? What are some of the things that we want to make sure are validated as part of what we're hearing and the opportunity or the risks that we see? And then from there, we move pretty quick. If that sort of all checks out after that, we'll usually move forward pretty quick on looking at, is this something we can fund, and move towards a deal that same day or the next day. So the whole thing can be as fast as a couple of days to 14 days sort of thing.

Jon Finger (:

Excellent. I'd like to shift the focus to talking more about your fundraise in particular, really those early conversations with LPs, but even to today. When you're talking with potential LPs, how do you de-risk a fund strategy that is focused on a relatively newer sector, right? You're not looking at LBOs of 50 million widget manufacturers. So how do you try to address those concerns with LPs?

Aly Madhavji (:

It's a good question. I mean, we are in a very risky sector, right? And sort of pair that additional risk with a lot of scams and other things that sort of happen in our industry obviously makes that pretty high risk space. And then you pair that with the stage that we're investing in companies, which is pre-seed and seed is, you get to a pretty high risk level, right? And so the way that we do it... There's a number of different things. But one, when we actually make investments. So as I mentioned, there's those 90 different things that we're looking at, it's sort of very detailed in the way that we analyze companies and sort of break it down. We break down every single company that we talk to on the phone. We break it down with three reasons why we would not want to do the deal, so three weaknesses, and then two strengths at least that we see.

Aly Madhavji (:

So even if we're not going to accept a company based on a call, we actually do it with every single company, actually break down all their strengths and weaknesses, understand where the opportunities are, et cetera. And so this is something that helps us to sort of dive deeper. And then as part of that, when we do make an investment, we actually generally start off with smaller investments, or our first checks are normally capped at 200k, right? So we invest pretty early. First check is generally between 60 to 200k. And then we go and work with those companies pretty hands on. So we typically have calls with them every single week, at least for the first few months. We'll have project plans with every single company across operations, marketing, tech, finance, and have a pretty good idea of how things are progressing on a week to week basis with our companies. We'll have meeting minutes from every single meeting that we do with them.

Aly Madhavji (:

And so with all of these things, it helps our companies to solve a lot of challenges, because any issues, any challenges that they're facing, they look at us more as their partners, not as their investors. We can help them break down some of these barriers, connect them into some of the right people, et cetera, and sort of get through these bottlenecks. So that helps us actually de-risk a lot, because then when we see some pretty good progress that we like, we can go write a larger check, which can be up to 5 million in the fund. So that gives us, I think, a big advantage. Obviously can be more time consuming, but the way that we look at this is, it creates such significant value for us and our investors by being very involved, especially in this space when there's a lot of gaps. And we can also accelerate our company so significantly through all the challenges that startups might typically face in the blockchain and crypto space.

Aly Madhavji (:

So that's, I think, a big advantage for our companies, and we can help sort of help them get to a point of monetization or whatever sort of that strategy is around that in a quicker manner. So that sort of one part. The other part is, as a fund, we actually went and got regulated. And so we got licensed by MAS, and we think this was an important step. I think we're still one of the only ones in this space that's actually licensed, but by the Singapore regulator, which is, you know, one of the most reputable regulators in the world. And the reason we did that is because we thought this was sort of the right direction for creating better investor protections and confidence. And so as part of that, we've got very detailed conflicts of interest processes. We've got processes where the GPs or any of our employees can't invest in a startup unless the fund rejects it, or after the fund has already participated with the amount that it wants.

Aly Madhavji (:

And this actually, I think, is really important because you actually don't see this. And some of this stuff might sound very basic from a traditional investment standpoint, but in the web three space, you actually see this problem all the time. Every day, every week, you see this problem, where fund managers could be investing instead of their funds or front running their funds. You see this as actually a pretty common issue right now. And so we don't have any of those challenges, which I think is good, because we've set out very specific sort of criteria and rules around this. And so I think all of these things also help to protect our investors. And then the fact that we invest at such an early stage, and we also invest in quite a few companies in the industry, I think gives us benefit to being able to, one, partner our companies to reduce risk, but two, gives us a very strong diversification benefit in this space.

Aly Madhavji (:

So overall, I mean, we think our strategy has been, one, historically quite successful, but two, we look at it going forward as a strong strategy for risk adjusted returns in this space.

Jon Finger (:

What were some of the most important considerations for you as GP when selecting LPs to partner with? How important was an LPs experience or interest and knowledge in the blockchain and other emerging technology spaces? How did you approach that?

Aly Madhavji (:

Yeah, so very good question. So for us, it was critical, but in a little bit of a different criteria than maybe how you framed it, right? So the way we looked at it is, we want the best people in the world to be involved in our fund from every sector that we saw that could add value to our companies, right? And that's our goal at the end of the day, was figure out who could actually add value to our companies, and then how do we get them involved? And so in part, and I'll give you some examples, right? So in our fund, we've got everything from a number of major blockchains that invest in our fund, which can be very valuable, because now our companies have very clear access to number of major blockchains as a starting point. And not only those. Many other blockchains, we still work with. And we made that very clear with those investors, that we would not do anything exclusive, we wouldn't... nothing like that, but it's good.

Aly Madhavji (:

It's a win-win for our companies to have clear access to them. They have clear access to our companies as well, but also things like some of the biggest market makers in the blockchain space, some of the biggest smart contract auditors in the blockchain space, which is also very important. Because whenever the industry gets a little hot, it's actually very hard to even get a smart contract auditor, which then starts exposing companies to security risks, right? And smart contract auditors can literally get as expensive as a hundred thousand dollars a week to hire. It is very expensive in this space when the industry's a little hot. And so being able to just get priority access, because their investors in our fund, has helped our companies a lot, all the way to investors that are, you know, very plugged into major sports teams and leagues to running multi-billion dollar business lines in household products or supply chain or other things that could benefit our companies that are sort of on that front to a number of fortune 500 senior execs that are involved in our companies that give us access to fortune 500.

Aly Madhavji (:

So we've got a very strong mix across the board. And for us, it was very strategic. And keep in mind, for us, it had to be in some ways more strategic because we have that ultra transparency, right? So we're not looking for pure capital without any other benefit because we're giving real time access to our startups and being able to connect with our startups, and be able to invest in our startups with no fees. So we don't even charge any fees for co-investments to any of our investors. And a big part of that was in exchange, we want them to be helping our startups. And so there has to be an angle where they're the world's best at something. And when that need comes up, our companies can tap it, right? So that could also be experts on debt markets, experts on go public or spec markets, or all sorts of things, so we can cover the entire spectrum of needs that our companies are going to need over their entire life cycle.

Jon Finger (:

That's fantastic. I love how thoughtful you were with the LP base and how you structured that, and what was important and what you were offering. With emerging manager programs on the rise the past few years, and really a heightened focus with the LP community, what do you foresee for the future of the landscape with respect to LPs willingness and desire to invest with emerging managers and first time managers, especially those with a niche focus and not just being a generalist.

Aly Madhavji (:

This is, I think, a really interesting question sort of at this point in time, at this juncture, right? So you're seeing, I think, sort of a two pronged, or sort of two directions that this industry is going in some ways, right? So you've got clearly, I think, a number of funds, especially when you start looking at public money, family offices, larger family offices, or more traditional family offices hesitate, and sometimes are a little bit slower at looking at some of these emerging technologies. Definitely hesitation on first time managers, especially if we're talking about endowments, public money, pensions, that sort of thing. And then you're seeing an entirely different story sort of getting created or sort of emerging with some clear, fund to funds, allocators that are very clearly going after emerging managers and first time managers.

Aly Madhavji (:

And so this has actually been, I think, quite interesting to see. And I think there is plenty of capital starting to grow for first time managers and emerging managers, which is a good sign, but I think there still needs to be a unique angle, right? So there needs to be something that you do better than anyone else in the world, right? What is going to be that unique, competitive advantage that you have, or unique sourcing ability, or unique way to add value to those companies that gets you into deals that otherwise you wouldn't get into, and showing sort of a track record on that. And I think that sort of the key questions that you're going to get when getting analyzed as sort of a first time or emerging manager. And so that experience can come from all sorts of different places, whether that's what you' doing, sort of outside of what you were doing before, or if you were doing a number of angel investments that you had access to, very early angel communities and could show a track record on picking great deals early and how you analyze those, et cetera.

Aly Madhavji (:

But I think these sorts of things are critical, but I would say there's probably more capital now than ever before out there for emerging and first time managers. And I think you're starting to see some of those more traditional managers either change their policies or start to dabble into some of these aspects. I do think some of the bigger, like public money, endowments, pensions, larger allocators need to really look more closely at these smaller micro funds or sub 50, sub hundred million dollar funds, because I think that's where you have opportunities for really moving the needle at earlier stage startups. And I think there's, in some cases, higher returns that can be achieved, or much higher returns that can be achieved. And I think there's a lot of great managers early out there, and I know we work with some as well, that could be worthwhile for some of these to start getting exposure to, even with a small amount of their total capital, right?

Jon Finger (:

So you touched on it. Maybe we can dive a bit deeper. What are some changes that you would like to see within the emerging manager ecosystem in the coming years?

Aly Madhavji (:

I mean, I think one, as I mentioned, there's starting to become, I think an entire strategy that's emerged for a number of investors, allocators that are looking for emerging mangers, and I think this is good. I think there's still a long way to go with larger allocators, and we want to start seeing them making more bets. I mean, if you're allocating a number of billions, starting to make small bets on a number of funds at an early stage can give you a much better mix in your portfolio. Especially when you start looking at these early sectors, if you started investing in blockchain already, rather than waiting for some of these larger funds to emerge, I think you're at a pretty good position had you already started doing that. And then I think the challenge with only going into these larger funds that have had say multiple funds and gone and raised billions of dollars is, they're not actually investing in an early stage of this technology anymore, right?

Aly Madhavji (:

They're going to go write minimum checks of $2 million or $5 million to companies. And so they're not playing even in the same range and opportunity set as some of these other funds earlier than them. And so even from a strategic standpoint of running the fund, you can actually find some really interesting emerging managers, back them, and then use that as a way to partner with the other funds that you've invested in at our later stage. And you can actually start to create even more opportunities and more sort of upside over time, probably by making those links. And so I think that sort of one part. I think on the emerging manager side, what we need to see is really pushing forward on what is that key value proposition, right? If you're going to go invest in female founders, how are you going to go do that better than anyone else in the world? Right? How are you going to source better than anyone else in the world? How are you going to analyze and determine which companies make the most sense? Right?

Aly Madhavji (:

Or, can you already start showing a track record on that? Even if it was smaller investments, angel investments, even advisory, how can you show that? Right? And I think these are certain things that you're going to need to see. Same thing with if you're investing in founders of color or LGBTQ, or all sorts of different strategies that you're seeing emerge. I think the big thing is how do you communicate that at a way that you're doing it better than anyone, and then aligning as well with funds that have similar objectives or interests, right? So, even... We didn't even talk about, say sustainability and UN sustainable development goals, right? But if you actually start tracking these across companies that you're involved in and start having more transparency or a strategy for more transparency, you'll find funds that are interested in allocating to managers that can track and show the impact of certain companies on the sustainable development goals. Now, they're achieving those, right? So I think these are different things that are also important from emerging fund managers.

Jon Finger (:

Yeah. And I think in addition to the fund managers, having that ability to influence change, where we see a lot of that as well is with the LP community, and whether it's pensions or insurance companies or otherwise, who really have these mandates, that they're trying to advance, whether it's diversity or other sustainability type goals, whatever it may be, but using their capital in a way that influences more change is something that we see all throughout the ecosystem. So recognizing the challenges in raising a first and second vintage of a fund, what are some teachable moments you and the team encountered along the way that you can share with the audience?

Aly Madhavji (:

Yeah. I mean, there's been a lot of different things. I mean, one thing that we did that was maybe different from other funds, or at least helped us get started very quickly is, we started with very low, a very low sort of threshold to launch the fund out of the 75. And so once we hit that, we already had a ton of warehouse deals that we wanted to do. And so we just started deploying already in great companies. And what was really interesting to see, and I think this is maybe a little bit more common in the blockchain space, is right now, there's so much capital at later stages in the blockchain space, and so so much height. And so a lot of our deals just got big very quickly, and sort of started having very significant returns to the overall fund.

Aly Madhavji (:

And so that actually made it a lot easier to then go continue to raise the rest of the fund when people could see, "Hey, they're already 3x uninvested capital, and it's been a month or two, right? Or now, it's, I mean, even more significant, but I think that was a pretty big advantage, is just try to get a couple of people that believe in you get a small amount of capital and start following through on that sort of objective and that strategy and thesis that you have and start deploying in companies that people really like, because it is a different case to have something warehoused, to have actually started to do deals.

Aly Madhavji (:

It's still beneficial to have it warehoused, even more beneficial if you've already made the deal happen. And I think that's a big deal. That helps. If you've got companies that you've advised or done angel investments into, and they've done really well and you've supported them, it helps a lot to have a cheerleader, different founders that are willing to cheer lead for you. And if they have to do a call or two here or there with potential investors and be able to share how you drove a ton of value to them and how you supported them really early, that can help a lot. And that was sort of another big factor in our case where we've been fortunate enough to back a unicorn from pre-seed stage that was very vocal about how we've helped them and supported them even when nobody would. And so these types of things can be very strong catalyst. If you've already started to form what your team could look like, and the people that are around it obviously makes it easier than it being, say just a sole GP or two GPs.

Aly Madhavji (:

If they can start to see who the rest of that team is and can meet them, and they're already sort of working on sort of the overall vision and building this out, it makes it even more helpful. So we also had that advantage, I think having sort of the sort of fund one, and then now doing fun too. So I think with all of those different things, it's about really showing and being able to demonstrate indicator success, indicators of processes, things that you're doing that are different that are going to give you a unique, competitive advantage as well, that I think are very critical, right? And I think if you can do that, there's a lot of capital out there right now for managers that can show and demonstrate some of these aspects. And I think a lot of people want to support emerging managers right now as well, which is I think quite different from in the past.

Jon Finger (:

Absolutely. So I touched on it at the intro. You certainly keep very active outside of being a fund manager, authoring three books. How do you decide what other projects to get involved with outside of your direct involvement at Blockchain Founders Fund?

Aly Madhavji (:

That is a very good question. The three books are almost like a past life, but I did put together a few books in the past just to help people know things that I wish I knew when I was going through them. And so a lot of those were sort of more education focused. And that worked out really well. I mean, I still get a ton of people reaching out to me on those and how it's helped them, and that's the sort of thing that I think matters. In terms of other things outside of that, I am on a couple of public company boards, but I need to be super selective on things that I do outside of that are on that front, in terms of say like more professional or work base, just because we're now at 94 companies. And so that takes up plenty of time, and we're continuing to go out and back a lot of incredible founders. So I have been working to reduce sort of outside commitments and just continue to focus on our companies.

Aly Madhavji (:

But I agree. I think there's... What's been interesting, I think, in what we do, because we have a fairly broad mandate is, we can actually see and learn things that are happening across near the every sub-sector of the blockchain and crypto space. And that then culminates into pretty much every major vertical in the traditional world, or some relation to. And so that's helped us also to learn a lot from world class founders that we have in our portfolio, et cetera. So that's also been a really good way for me to just... Every day, we're excited to wake up in the morning and just learn new things, and work with some of the brightest people we've ever worked with. And that, I think, helps a lot to do what we do, because we want to make a difference, we want to help founders achieve their vision, and we want to have fun doing it. And that's sort of the way that we always approach things.

Jon Finger (:

That's great. So final question, Aly, what is the most important advice you would give to another emerging manager that you wish someone provided to you before fund one?

Aly Madhavji (:

Yeah, it's a good question. I think I alluded to it a little bit, but I think it's figure out where you're the best in the world at something, figure out how to already start making progress on it and be able to demonstrate that effectively. And then figure out how to... I would say start small. Even if the broader or larger goal is much bigger, start small and start proving it out, right? So if you can even demonstrate it with limited capital and start following through on those investments and showing what's happening, I think that's the best way to already get people to get more involved in what you're doing and what you're trying to build out. And I think with all of that, it's rethinking the existing system, and how are you going to go do things in a way that also gives a lot of benefit to your LPs and transparency to your LPs, right?

Aly Madhavji (:

So we did a system of real time access for LPs, and that was just more from a philosophical standpoint, where we said, "We wish we had this, and we think it would be valuable." And so we were like, "This is the way that we wanted to approach things," but we hadn't actually seen any other fund do that. I'm not sure if any other fund does that even still, but we hope other funds do it. We think it's actually necessity in the long run in this space. And if anyone wants any feedback or advice, we're always happy to provide it and help move along, move forward on these things.

Jon Finger (:

That's fantastic. So a big thank you to our guest, Aly Madhavji, for coming on the podcast today. You can find him on LinkedIn as well as on Twitter at @blockchainff, and his personal account is @aly_madhavji. Thanks to our listeners for tuning into this episode of Funds Flow, and we'll see you next time.

Aly Madhavji (:

Thanks so much, Jon, for having me on the show.

Jon Finger (:

Thank you, Aly.

Voiceover (:

You for joining us on this episode of Fund Flow. To learn more about today's discussion, please email host Jon Finger, at jfingermcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuire Woods for informational purposes only. By accessing this series, you acknowledge that McGuire Woods makes no warranty guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views information or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuire Woods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.

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