By James McDowall, Founding Partner, Arcanum Capital
In the world of traditional finance, private equity firms have long been known for their old-school approach to investing, characterized by large capital deployments into established companies with the aim of generating substantial returns over a relatively long period.
However, as the financial landscape undergoes a seismic shift with the rise of Web3 technologies and decentralized finance (DeFi), there is a growing realization that private equity firms need to adapt their strategies to remain competitive in this new era.
More than almost anything else, private equity firms – especially in nascent, hyper-growth tech spaces – can benefit from the Y Combinator approach, which involves selecting projects that are strong in most areas but may be missing one piece that can be supplied by the network and resources of the VC group.
One of the key advantages of operating this way is the newfound ability to open up engagement and focus on early-stage investing in startups and nascent companies. In the Web3 era, where disruptive technologies such as blockchain, decentralized applications (dApps), and non-fungible tokens (NFTs) are reshaping industries, the Y Combinator approach provides firms with the foresight and tools to identify and ultimately invest in promising early-stage projects.
By shifting focus towards early-stage investments, private equity firms can gain exposure to innovative technologies and business models that have the potential to deliver outsized returns in the long run.
Of course, you don’t need me to tell you that the Y Combinator approach has been wildly effective in the modern era, with Y Combinator itself being one of the most successful venture capital firms in the world. The firm’s success can be attributed to its unique approach to investing, which involves providing startups with a range of resources, including mentorship, funding, and access to a vast network of investors and entrepreneurs.
This approach has helped Y Combinator identify and invest in some of the more marquee startups in the world, including Airbnb, Dropbox, and Reddit, to name just a few.
In response to this success, venture capital firms are now applying a similar structure and mentality to their investment strategy, with their reach extending beyond capital commitments. By providing startups with the ancillary resources they need to succeed, VC firms can help ensure their investments are as successful as possible, generally leading to greater returns.
They can also proliferate their own circular economic ecosystem, which grows more important every day.
Within their self-created and sustaining network, VC firms are then able to get more creative, thoughtful, and forward-looking with their projects, considering companies that lack the already proven mature growth and revenue traditionally needed and still need a few gaps filled within their model; for example, investing in great groups that may have amazing vision, but have largely ignored marketing/pr strategy, or one that lacks an advisory board or a few particularly-focused developers, or even one that is still searching for another key piece of their GTM and/or infrastructure.
This approach is especially effective in global blockchain startups, where a hands-on, activist approach is critical for investors dealing with brilliant, but sometimes less-than-organized teams who are flying the plane while it's being built, so to speak.
Let’s get granular here with great examples from a couple of Arcanum Capital’s portfolio companies:
Two Case Studies: Kandola and Cross The Ages
Kandola
Kandola’s value proposition hit us right where we live: Building a decentralized data-as-a-service platform that guarantees data security, data integrity, and data privacy while catering to the real-time storage and retrieval needs of applications, transcending today’s digital economy with new opportunities for innovation and growth across sectors.
The challenges reside in being able to handle the sheer volume, variability, and velocity that general purpose data transactions are known for and delivering on the Web3 promises of greater security, transparency, and accountability.
Their platform brings data closer to Web3 smart contracts and DApps by enabling real-time analytics and AI training and deployment on unified data views (data lakes) that span across application-generated data, blockchain data, and outside-world data.
What they are building is not only applicable to Web3, but it also caters to the storage and retrieval needs of IoT, healthcare, social, and gaming. In their case, it was primarily infrastructure, on top of our usual hands-on guidance with things like branding, that has really propelled them forward:
Siddharth Banerjee, Founder and CEO of Kandola, said, “We are incredibly fortunate to have Arcanum Capital as one of our key VCs and early investors. Their unwavering support has been instrumental in propelling our project to new heights. Beyond providing crucial liquidity and financial backing, Arcanum has been a pillar of guidance and a bridge to invaluable network connections.
Notably, their and especially James's proactive involvement in linking us with the node provider network during our testnet phase exemplifies his commitment to our success. James and Lucia consistently dedicate time to understand the intricacies of our project, offering insightful feedback and strategic advice. Their extensive connections within the Web3 community have opened doors for us, establishing our project in a well-respected circle.
Working with Arcanum has been more than a financial partnership; it's been a collaborative journey filled with mentorship and support. We're grateful for their ongoing commitment and consider ourselves fortunate to have such a seasoned and well-connected ally in our corner.”
Cross The Ages
Arcanum Capital met Founder Sami at a conference in Lisbon and knew almost immediately we needed to back Cross The Ages (CTA). The on-the-spot pitch was captivating and compelling, and we quickly formed a strong long-term vision for what we needed to do with CTA.
We advised them to build on Polygon, which they ultimately chose to do, giving us the leverage to approach Polygon Studios with the recommendation they follow us in with investment.
They initially said no, but we were so confident in the company and our vision for it that we managed to convince them to overturn their decision and join us in backing CTA.
Other investors who have followed Arcanum into Cross The Ages now include major game publisher Ubisoft, game-focused blockchain investment firm Animoca Brands, and in more recent news, covered by Cointelegraph, multi-billion dollar Japanese gaming goliath Square Enix, who also joined as an investor and strategic partner.
The funding is being put towards game and app development programs, talent retention, and go-to-market activities, and with such high-caliber backers and top writers and artists from franchises such as Star Wars and Game of Thrones, we expect a very bright future for this portfolio company.
Cross The Ages has been topping the App Store charts across several categories and geographies for several months, and we expect a significant uplift in valuation when it lists.
"I have had the pleasure of working with Arcanum as a VC partner, and I can confidently say that their approach to investing is refreshingly different. Unlike typical predatory VCs, Arcanum is dedicated to adding value and support beyond just writing a cheque. I highly recommend Arcanum for any founder looking for a true partner in their journey to success." Said Sami Chlagou, Founder & CEO of Cross The Ages.
About James McDowall
Following a career as a professional athlete, James has been researching, investing in, and advising early and growth-stage technology entities since 2017. He has played pivotal roles in creative and strategic direction and business development and is experienced in conveying technological solutions to governments, regulators, and financial institutions.
He gained invaluable alternative asset management knowledge and portfolio management experience during his CAIA studies and tenure with Swiss asset manager Tavis Digital in Zürich and has sat on the advisory board of the Swiss Impact Investment Association.
He then Founded Arcanum Capital in 2020 and successfully raised and deployed Arcanum Emerging Technologies Fund I and has managed this successfully over the past 4 years.
James excels in leveraging his strong global network of investors, entrepreneurs, and capital markets professionals to help finance and scale cutting-edge technology ventures.
About Arcanum Capital
Arcanum Capital is a venture capital firm focused on supporting enterprising and forward-thinking teams that are establishing decentralized networks and applications for the global blockchain ecosystem. Arcanum Capital's team consists of experienced investment professionals who understand what it takes to evaluate, incubate, and scale promising teams and ideas.
We have been on the ground as operators, investors, and incubators in frontier and emerging markets, including India, since 2013, and have worked with startups, decentralized networks, and publicly listed companies.
During this time, we have cultivated powerful networks and partnerships that are invaluable in helping our portfolio entities transition from idea to market and scale on the global stage.