While investment firms ponder ICOs, this team is barreling ahead with a $100 million ICO fund

Most investors are trying to get a handle on initial coin offerings, which have begun racing through the tech ecosystem like a fire, veering off in multiple directions and causing excitement and confusion and some degree of terror as they grow in number.

In the simplest terms, the offerings enable startups to create their own digital currencies and sell them to users who can either redeem them later for the startups’ services, or sell them on a coin exchange at a later date.

Because the offerings are unregulated, most venture capitalists remain wary of them, even as their very line of work suddenly looks threatened. (Why sell equity to an investor when your customers are willing to throw money at you?)

However, one San Francisco-based firm is barreling full steam ahead into the world of ICO investing: Pantera Capital, founded 14 years ago by Tiger Management veteran Dan Morehead, whose team was among the first to launch funds focused exclusively on bitcoin and other digital currencies.

That Pantera is again chugging past its peers into territory they view as uncertain isn’t surprising. (Pantera has done pretty well with bitcoin, which it began buying when the currency was valued at $65. Today, one bitcoin is valued at roughly $2,500.) Still, the size of its newest fund — which has already garnered $35 million and Pantera expects to close with $100 million by summer’s end — seems like an outsize gamble, even for the gun-slinging outfit.

To learn more, we talked yesterday with Morehead, Pantera partner Paul Veradittakit and new hire Joey Krug, who previously co-founded Augur, a decentralized prediction market platform that raised $5.3 million in an ICO in 2015 — long before the rest of us had ever heard the term.

Krug, who was also nominated to be a Thiel Fellow last year, will be the co-chief investment officer of Pantera’s new ICO vehicle alongside Morehead.

TC: ICOs have taken off this year, and in the last couple of months in particular. How long have you been thinking about this fund?

DM: We’ve been working for months to set up a couple of fund entities. Part of that was adding Joey, who will be co-managing the fund with me, with Paul’s help in sourcing the deals.

TC: And who’s investing in this thing? Individuals? Institutions?

DM: We have one very large strategic investor who I don’t think I can name. The rest are institutions and individuals who are interested in getting exposure to the token market.

TC: Are some of those institutions venture firms?

PV: Yes. The irony is that many venture firms have prohibitions in their fund documents that don’t allow them to invest directly in tokens or bitcoin, so many can’t. But a number of VCs and venture funds have invested in the ICO fund because they want to become better educated; they also want some financial exposure [to these new assets].

TC: AngelList has helped create a new fundraising platform for startups wanting to stage ICOs and there are other cryptocurrency funds, but I’m not aware of another fund that’s investing expressly in these deals. Are you? Either way, can you explain how the fund will work?

DM: I’m not aware of another fund that’s focused exclusively on ICOs. How it works, we’ll be buying pre-sale ICOs, so we’re committing to purchase tokens prior to the public sale, then again in the public auction.

PV: We’re basically getting a discount to the ICO price by getting in early, when it’s just a team and a whitepaper [that explains the technical aspects of the product, the problems it intends to solve and how it is going to solve them]. Meanwhile, we help provide the right connections, whether in terms of marketing or recruiting or business development.

TC: Regulators seem to be waiting to see what happens with ICOs, but you can imagine them coming in. My understanding is these tokens are being structured as sales of services or products rather than as securities that are subject to certain disclosure and registration requirements. What if something changes?

DM: All these new currencies are along a spectrum and have various attributes, and various regulatory bodies around the world, including the CFTC and the IRS, have taken clear stances on them already. Other agencies haven’t ruled on them, but I think it’ll be the same with token sales, where there will be a period of time where they figure out how they fit into existing regimes or whether new regimes are needed to regulate token sales.

TC: How many startups have you funded so far with this ICO fund, and what’s your investing criteria?

DM: We’ve invested in [the coming ICO of messaging app] Kik, 0x, FunFair, Omise and Civic. We’re also a venture investor in Civic from years ago.

JK: Our preference is protocols where the token is integral to the functioning of service itself — in protocols where tokens are the only exposure to the network.

TC: Are you looking for a particular allotment of tokens? 

DM: We don’t have any special criteria that we have to meet. We look at each project on an individual basis. We often want to be the largest investor, but it depends on the size of the token sale itself. I think in the Kik and FunFair transactions, we’re the largest [token] shareholders, but we’ve participated in others where we’re not the largest.

PV: Right now, the token economy is estimated to be around $4 billion. We think Kik is a seminal moment in that it’s a well-funded company that’s disrupting its whole business model and moving over to a token model. If it’s successful, we think we’re going to see more growth-stage companies disrupt their entire models and move to token models. And if these companies are raising hundred-million-dollar token rounds, this can get large really quickly.

TC: In terms of exiting, you’re investing in pre-sales, helping these companies get ready to build their products and services and stage their ICOs, then the plan is to sell your tokens on the growing number of exchanges out there once those tokens rise in value?

DM: Right, there are probably 10 exchanges right now that [we might use], including KrakenPoloniexBittrex. If more pop up and have fair prices, we’ll also use them.

TC: How many positions would you hold at any one time?

DM: Ten to 20.

TC: Are you looking to invest in founders with a certain type of background? There’s so much activity right now; I think it’d be hard to pick the winners.

JK: We’ve looked at hundreds of deals and we’re actively tracking 30 right now. You don’t have to have been a founder previously to start one of these things. Being an entrepreneur before has some advantages, because you know how to run something. But it’s not the same advantage you’d have, running another sort of businesses.

These token projects are so different. They’re owned by the community, meaning a lot of the decision-making and governance involved in most businesses isn’t quite as relevant.

TC: Are you looking for a certain academic background?

JK: All things being equal, if someone has built an open source community on a large scale, that’s probably the most relevant experience.

TC: Do ICOs supplant VC at some point?

DM: In the long run, you could see the disintermediation of venture capital. I mean, the web browser Brave raised $35 million from its ICO in 24 seconds.

In the second quarter, ICO issuance was greater than venture capital, with $210 million [invested in ICOs] versus $180 million [invested into startups by VCs]. We do expect that transition to continue; it’s why we’re doing what we’re doing.