Alchemy Founders Nikil Viswanathan and Joseph Lau
In today’s frothy crypto environment, where nine-figure venture capital rounds seem to be handed out to startups like foam fingers at a football game, it can be easy for a casual observer to assume that all participants are blindly following FOMO-driven over-exuberance.
However, there is significantly more going on below the surface.
For instance, while firms like Andreessen Horowitz (a16z) and Paradigm Ventures make waves with headlines trumping their $2+ billion funds to invest in the next wave of Web 3.0 companies, leading crypto firms are starting to rewrite the rules of venture capital on their own terms.
As an example, leading U.S. cryptocurrency exchange Coinbase, which went public this year via an $86 billion direct listing on Nasdaq, has an extremely active venture capital unit, one which you’ve probably never heard of. According to PitchBook, Coinbase Ventures has made a whopping 187 investments since early 2018, though they tend to write smaller checks as far as venture capital goes ($50,000-$250,000) and prefer not to take board seats.
Coinbase claims it is more interested in growing the crypto ecosystem than any sort of material gain, at least right now. “Return isn’t the primary metric by which we measure success,” said Shan Aggarwal, head of Coinbase Ventures, to the New York Times earlier this month.
Now $3.5 billion blockchain infrastructure company Alchemy, which offers easy to use software for developers to write crypto applications and is perhaps the market leader in the race to become the Amazon Web Services of crypto, is throwing its proverbial hat into the ring.
Revealed exclusively to Forbes, today the company, which powers virtually the entire NFT industry and processes $45 billion worth of transactions on an annualized basis, is launching its own venture capital fund to invest in current clients named Alchemy Ventures. Much like Coinbase Ventures, Alchemy’s primary motivation is bootstrapping the industry, rather than receiving 100x returns through an exit such as an IPO 5-7 years from now.
“Our whole goal as a company is to bring Web 3.0 to the world,” says CEO Nikil Viswanathan. “The way we do that is by empowering developers to create great products. That has been primarily done by building the best, or the only really full developer platform, but we also look at this in a very holistic way.” Alchemy’s client support also includes introductions to investors and clients, facilitation of business connections, and help with recruitment.
Building on the success of these activities on an ad hoc basis, the company is institutionalizing the process, using $10 million from its own balance sheet. However, Viswanathan says that this number is just a starting figure, and the company is prepared to dramatically increase it moving forward. And much like Coinbase, direct financial returns from the investments are not the most important consideration.
“People have offered us a ton of money to invest on their behalf, but we decided not to [take it] because we want to have ultimate control over which companies and investments to invest in. We don’t want to be driven by the Northstar of just maximizing return on investment, we have a little bit of a different way of thinking about it,” says Paul Almasi, head of Alchemy Ventures.
That said, Alchemy will not be investing on its own. It will be co-investing alongside prominent VCs such as a16z, Pantera Capital, Coateu, and Draper Fisher Jurvetson. These will be symbiotic arrangements, where Alchemy will rely on these firms to handle term sheets and lead negotiations, according to Viswanathan. At the same time, those outfits see Alchemy offering a distinct informational advantage in the highly competitive world of venture capital investing.
Specially, the nature of Alchemy’s platform, which requires it to operate nodes on all of the prominent blockchains today and often provides a first look at promising new companies just launching their products, gives it a unique level of perspective and insight into the most promising use cases and teams in crypto today. In a world where razor-thin information advantages can make significant differences, consider the cutthroat world of high-frequency trading where shops angle to be inches closer to a trading venue as an example. Alchemy’s insights can help a firm get in early with a promising new company that may not have otherwise appeared on their radars.
“I do think they’re very plugged in, and they have relationships that we might not have. And so I think it’s a win-win for everyone. It makes a lot of sense,” says Ali Yahya, a16z general partner on the crypto team.
Since Alchemy’s business is dependent upon developers building useful and intuitive blockchain applications on top of its technology stack, this approach could in a way also be seen as a hedge or investment itself. In this light Viswanathan notes that Alchemy is following in some of its Web 2.0 counterparts’ footsteps. “It’s similar to Facebook and Google doing investments into infrastructure and the Internet for developing nations so they can get more users [in those countries],” he says.
Of course, Alchemy will still face certain challenges as the program matures. One in particular will be finding a way to avoid letting client firms that do not receive investments from feeling left out, especially in an industry like crypto where themes of decentralization and egalitarianism are endemic to its DNA. Facebook ran into such an issue in 2016, when its plan to offer ostensibly ‘free internet’ to communities in rural India was rebuffed by locals who saw the program as a thinly-veiled way to encumber them to Facebook’s suite of services.
Additionally, investing in peer firms can sometimes lead to uncomfortable marriages as companies grow. For instance, Binance, the world’s largest crypto exchange, was an early backer of FTX, a competitor led by Sam Bankman-Fried, the richest person in crypto (FTX is in talks to raise a new round of funding at a $32 billion valuation). The transaction was undoubtedly a profitable one for Binance, turning its $75 million investment into $2.3 billion dollars in a little more than 2 years, but perhaps it would prefer to not have such a competitor breathing down its neck today.
Of course, these concerns are far off in the future for now, and likely ones that Alchemy would be happy to face moving forward.