The business says that its model for tapping into the world of crypto and digital assets startups is a good fit for wealth managers and their clients who want risk-adjusted, measured exposure to the sector.

A fund of funds investment firm has a highly suitable business model for those who want to tap into a broad range of blockchain technology startups rather than wager on a handful of companies, its founder says.

The technical complexities, and the permissionless nature, mean that anyone can launch these digital businesses just as anyone can launch a website. This makes expert oversight of a diverse portfolio even more compelling, Ruud Smets, chief investment officer and partner, Theta Capital Management, told this publication. 

“We realised that the fund of funds [model] is nowhere as applicable as it is here,” Smets said. 

This news service spoke to Theta after what has been another busy year for the cryptocurrency and digital assets sector. To the frustration of certain sceptics maybe, the price of bitcoin, has risen from about $13,000 at the start of January to just over $33,000. The demise of FTX founder Sam Bankman Fried on convictions for fraud buffeted the sector, as have some of the compliance woes of Binance, another crypto exchange. As reported here from Switzerland, how countries regulate this space has not yet converged into a single regime. To make sense of all this, while gaining exposure in a controlled way, seems to favour the diversification approach.

Venture funds
The organisation has a series of Theta Blockchain Ventures funds which allocate to more than 40 crypto-native venture capital funds. These, in turn, provide exposure to over 600 tech startups at the private seed stage which are building internet protocols and infrastructure. The firm thinks that investing in this next generation of tech firms offers exciting opportunities but it says that it has been a very difficult area for investors to access. Theta argues that allocating to venture funds investing in tech startups through a fund of funds structure is the most efficient way for investors to gain early access to quality projects and to filter out the noise. The firm says that its model, although highly innovative, is tried and tested, and has been investing in crypto-native venture capital since 2017. 

Theta first began offering their existing investors the opportunity to invest in the area in 2018 within their bespoke portfolios and then launched a series of funds.

“When we first began to look at the space, it really was uncharted territory,” said Smets. “There was a small number of what we now call crypto-native venture capital funds and we saw the opportunity to apply our fund of funds' expertise to them, we have been doing funds of funds in the alternatives space for about 20 years.

“We started with allocations for our existing client base, but then we began launching closed-end commingled funds, of which there are now three, Theta Blockchain Ventures I, II and III. Theta is looking to launch its TBV IV vintage early next year," Smets said. 

“We have already achieved very strong results for our investors from the funds and made large distributions from our 2018 to 2019 vintage. One of the attractive features of this space is that results are generated more quickly than in traditional venture capital.”

Specifically, when looking through to the underlying projects of the firm’s 2018 to 2019 vintage, only 13 per cent of them are valued below cost (on average at 0.46 times the investment), 9 per cent are still at cost, and 78 per cent are valued above cost and show average gains of 14.45x our investment. Of course, as Smets remarked, past performance is no guarantee of future returns.

Smets pays a lot of attention to the sort of cypto sector innovation going on and the type of firms taking shape. 

“We map the crypto ecosystem and there is a lot of core tech that develops over time. And we know all the specialised venture capitalists in the space and can get access to the best deals,” he said.

The Theta approach resonates with investors who lack detailed knowledge of blockchain technology but who want to have some exposure, he said. But also for industry insiders the strategy makes sense as the early-stage private deals are difficult to access otherwise and Theta obtains significant underlying manager fee discounts. The firm also reaches out to investors, and spreads an educational message, via webinars and newsletters. 

The time horizons involved in the crypto-related investment space are short, Smets said. From conception to launch can be as little as two years, or less. This means that holding periods for venture capital investors in this sector are shorter than in the more conventional forms of VC.

Smets also said that blockchain technology has many inefficiencies which create opportunities for smart investors to find alpha.

“These new protocols that blockhain technology enable, are very akin to traditional businesses. They have users that pay for using these protocols and you can own a piece of the protocol, and its revenues, by investing in its tokens. We therefore call these protocol businesses. At the same time they have this big advantage of being neutral internet infrastructure and therefore it can scale like nothing we have seen before it. It is as if you could own a piece of the SMTP protocol, and you would earn a fee whenever someone sends an email.  

“Ninety per cent and more of early-stage funding for protocol businesses comes from a complete cohort of crypto native VCs. 

“The crypto native VC space is all completely new. These business models were nonexistent before and they are counter-intuitive to traditional investors, which creates an opportunity for Theta to be the `bridge’ between the worlds of traditional finance and crypto native blockchain investments.

“So Theta acts as a bridge between traditional allocators and super-specialised VCs, offering world-leading access to the best investors and the leading startups that investors could not possibly achieve on their own,” he said.

Smets enthused about how blockchain is disruptive as a technology because it reshapes what is meant by trust in the financial services sector. With smart contracts, one no longer needs a specific entity, such as a government, to uphold trust, he said.

“But it would be wrong to think of the digital assets space as unregulated. Fund managers in the space like us, for example, are fully regulated like any other asset management firm. Regulators will need time to create full-fledged regulatory frameworks as the technology is very powerful but also very disruptive to the status quo. But we are getting there. Coinbase recently published an article [stating] that 83 per cent of G20 and major financial hubs have a framework in place. It’s mostly the US that is taking longer. But with more and more institutional adoption, such as the ETF launches, we are getting there,” he added.