How Does a Blockchain VC Fund Choose What to Invest in?

As Bitcoin and Ethereum soar to all time highs, we take a look at how successful venture capital funds eye up their future winning investments

The blockchain industry is once again booming, with pioneering startups changing the face of finance, e-commerce and a myriad of other sectors. As capital floods into this ever-evolving space, venture capital firms search for diamonds in the rough, looking to invest in the innovations of tomorrow. 

In this article I speak to Charles Read, an angel investor focusing on protocol investments and Co-Founder of Rarestone Capital, a prominent venture capital firm in the blockchain space. Over the years, Charles has been involved in the DLT, DeFi (Decentralised Finance) and NFT sectors as both a collector and investor, eventually moving into Venture Capital as a way to both invest in and support the world’s most talented blockchain founders and project teams.

When asked about his overall approach to investing, Charles told me:

“I back founders primarily. Good founders can come back from difficult obstacles, they can pivot when required, and they’ll usually come through the other side. On the other hand, while I acknowledge I’m not the most technical analyst I am good at reading people. My gut feeling has a remarkably high hit rate, which I pray doesn’t end anytime soon. When we’re investing as Rarestone, I make up for my shortfalls with an amazing team. We are diversely skilled, highly active, and as a collective we don’t really have any weaknesses. Not many can say that.”

With that being said, I wanted to look deeper into what ticks the right boxes underneath the hood a blockchain project that makes Charles and the Rarestone Capital team want to invest in their future development. Below is a selection of Rarestone’s current investments and an insight from Charles as to why they chose to support the teams behind the projects.

Please note: The following is not an endorsement to buy any of cryptocurrencies mentioned. I am not invested in any of the projects or cryptocurrencies mentioned and I was not paid to write this article.

Mask Network

Coined “The Portal to the New, Open Internet”, Charles refers to Mask Network as a “Bridge to Web3 for Web2 apps”. Applications like Twitter are centralised, but we all use them; with Maskbook, you can interface with Web3 while using them. For an example of how this works, with Mask installed anyone can now airdrop tokens to their twitter followers, or encrypt their tweets so that only Mask users can read them.

"This is about restoring privacy and enabling more value from these traditional applications to be funnelled to the user, rather than the company in control of the application."

Using Mask Network, when you search for a cashtag ($) you can see that Mask adds additional features to the twitter interface, such as price tracking, exchange and swapping directly through the popular decentralized exchange Uniswap.

The above is what is seen when hovering over the Alchemix tag ($ALCX) using the Mask Network extension on Twitter.

"The implications of this have the potential to be a real game-changer, as Twitter users in theory they don’t even need to leave Twitter to trade."

Charles and the Rarestone team believe that the most attractive thing about Mask Network is that it doesn’t require users to do much apart from install a plug-in. It’s not trying to take over or replace Twitter, but rather add extra layers of privacy and customisability for the user as well as allowing them to interact with Web3 directly. 

ALEPH

Aleph provides cloud computing and decentralised storage for Web3, allowing blockchain enabled applications to securely access trusted off-chain data or computation within just a few lines of code. 

"What’s interesting about Aleph is that it’s much further along than most competitors in terms of product development, yet still seems to be a bit of a sleeping giant. It is cross-chain compatible and has committed use from multiple chains already."

Aleph didn’t raise funding other than OTC sales from the team and was built from the ground up in a grassroots fashion. Pretty much all significant ALEPH token holders are long term supporters and running nodes - including Rarestone who run the Friends of Rarestone node.

The project is also supported by nodes from globally recognised companies including Ubisoft’s Strategy Lab and Synaps, the decentralised identity provider that handled KYC for sales including Polkadot.

Charles insists that considering Aleph’s already aggressive adoption and the growth that projects such as Filecoin have seen, the project has a lot of room for growth in the coming years.

Web3API

Universally compatible smart contract APIs mean you can use any program language with any protocol. Something that has really skewed adoption of some protocols is that they require rare programming languages that not many developers use.

With Web3api, this issue is solved. The team celebrated a win at HackFS, an ETHGlobal hackathon focused on building the foundation for the Ethereum ecosystem and with prestigious judges such as Vitalik Buterin, Austin Griffith from Ethereum Foundation and more judging. The Web3API team were presented four awards at the hackathon. The engineering team have a background building protocols such as Balancer, Gnosis, Aragon, Metamask and more.

"Web3Hub is the portal to the Web3API ecosystem, and will allow developers to discover, use and integrate the API of their choice. The project presents a major milestone for the development of Web3, opening the door for wider adoption by the traditional software development community."

Web3API is governed by a DAO (decentralised autonomous organisation) and the token holders will control all financial decisions, on-boarding of new developer teams, partners, and future control over the API standard.  As it’s built by Web3 veterans, my research on this DAO makes me very confident in the approach.

My Neighbour Alice

MNA is a desktop game built by Antler Interactive. Originally viewed as somewhat of an outlier in the space, the project went largely under the radar and was ignored by most because of the funny name and concept. I asked Charles why he and Rarestone had decided to invest in the blockchain-based game:

"Antler Interactive was acquired by Chromia in 2019 for an undisclosed sum. What makes that acquisition interesting is that Antler are an award winning gaming studio who have an incredibly talented team of developers - combine this with Chromia’s technology that is ideal for building blockchain games, their teams ability to incubate and you have a winning combination."

During this difficult time of lockdown and economic turmoil many people are craving interaction, turning to games like Animal Crossing to connect with their friends. These are what Charles calls web-spaces and reflects the new world we are moving toward; an open metaverse.

The game taps into this and players are rewarded while they play. In MNA, the world around you is player-owned and player-built. Every asset you deploy in game is an NFT owned by you, so you can truly own the experience. 

"It’s nice to see the Chromia Foundation putting this acquisition to good use, and sets precedent for more acquisitions across the industry that may spawn incredible blockchain games and applications."

Investment in the project was a no brainer for Charles and Rarestone, with Charles also now advising the MNA team on product roll out, strategy and marketing. 

Biconomy

Biconomy are on a mission to simplify the experience Web3 offers by providing powerful APIs that offer gas-efficient meta-transactions, and the team behind the project created the project with one mission in mind; to make blockchain-based applications work seamlessly and conveniently for mainstream users, especially those who are new to the blockchain space.

By tackling the bottlenecks and barriers to entry that have so far stunted the overall growth of the blockchain space, Biconomy look to accelerate a Cambrian explosion of adoption. With this new and exciting platform users do not even need to download digital wallets or buy cryptocurrencies from exchanges; the platform has automated the whole process for them.

"A new Biconomy round is coming and the Rarestone team are now looking to also contribute in a big way; we believe the project is a potential Unicorn for 2021. "

As well as a strong team, Biconomy has the support of several well established projects such as blockchain Matic (now Polygon), as well as DeFi behemoth Curve Finance and others.

As an angel investor in Biconomy and good friends with Founder Ahmed Al-Balaghi, Charles believes that the project represents a perfect storm in the current market conditions, with the demand from other projects in the space looking to partner with Biconomy overwhelming.

The next 5 years in blockchain venture capital: What does the future look like?

When asked what he sees the blockchain investment landscape looking like in the coming years, Charles tells me:

"The landscape is evolving much faster than it ever has. I feel that we're entering a rapid epochal shift similar to what humanity experienced as we transitioned into the information age; the growing institutional interest in digital assets, combined with the red pill that NFTs and digital artwork present to the mass market and the leaders of the internet (celebrities with influence) is a recipe for absolute fireworks in the next 5 years. We're absolutely ready for the inevitable cultural whiplash that follows."

Rarestone Capital is a Venture Capital fund focused on backing remarkable project founders on a mission to make positive societal change through technology. You can learn more about the Rarestone Capital portfolio and investment thesis over at https://rarestone.capital.