Investing Billions - E97: How Institutional Investors Access Crypto

Episode Date: September 24, 2024

Drew Myers, Co-Founder and Managing Partner of CrossLayer Capital sits down with David Weisburd to discuss the key to small funds thriving in pre-seed investing, how time diversification tame crypto volatility, and identifying persistent top quartile crypto funds. The 10X Capital Podcast is part of the Turpentine podcast network. Learn more: turpentine.co – X / Twitter: @dweisburd (David Weisburd) -- LinkedIn: CrossLayer Capital: https://www.linkedin.com/company/crosslayer-capital/  Drew Myers: https://www.linkedin.com/in/drew-myers-8764aa22/  David Weisburd: https://www.linkedin.com/in/dweisburd/  – Links: CrossLayer Capital: https://www.crosslayercap.com/  – Questions or topics you want us to discuss on The 10X Capital Podcast? Email us at [e-mail] -- TIMESTAMPS: (0:00) Episode Preview (2:01) Investment strategy: emerging vs. established managers and fund structures (4:20) Identifying alpha in venture and liquid crypto investments, comparison to biotech (6:12) Diligence and alignment in GP-LP relationships; lessons from Makena Capital (10:37) Approach to VC China strategy and parallels in crypto; early market mistakes (16:01) Divergent interests between GPs and LPs; systematic frameworks and investment theses (18:27) Portfolio construction and diversity with idiosyncratic bets (22:12) Pre-seed investments and their impact on return profiles (24:11) Managing risk in volatile markets and differentiating managers (27:26) Persistence of top quartile returns and market cycle impacts (29:30) Advice for institutional LPs entering crypto; regrets and lessons at Crosslayer (33:33) Closing remarks

When I started working in China, one of the first things I did was try to figure out who are the top firms, you know, what are the best brands? One of the things I quickly realized was the best brands in the space were the groups that did the most deals. Like they were the ones that the most entrepreneurs interacted with. They were the ones that most entrepreneurs talked about, but they were not necessarily the groups that had the best returns. I think the same thing is like true with crypto. What we care about as an LP is like, does the VC have good judgment? Do they pick the right things that are ultimately successful? What we're looking for is like just picking the best managers. And when we add a new manager, we very much want them to be like

complimentary to the portfolio, right? So there's like little overlap in the deals they've done historically with our existing managers. There are areas of like competitive advantage or differentiation. It's generally true that valuations go up much faster than risk goes down. Tell me about how you go about differentiating whether a manager is actually sophisticated or just knows how to talk the talk. Joe, I've been really excited to chat with you. Welcome to 10X Capital Podcast. David, thank you for having me. It's great to be here. It's great to have you. So what is CrossLayer Capital? So we are a fund of funds. We are 100% focused on the blockchain space. We primarily invest in

closed-end venture funds. And today there's more than 300 funds dedicated to crypto. And so we strive to pick the very best funds. Why is that that there doesn't seem to be that many crypto fund of funds? It's got such a volatility to it and also historically a great return. Why aren't there more crypto fund of funds in your opinion? I think they'll come over time. I mean, I think we're still pretty early days for the space. And so I think as more allocators and others recognize the value of a fund of funds and the value of the crypto space and how kind of important it is as a wave of technology that we'll see more of them. To me, it was an obvious opportunity to build one. I don't know why there's not more of them. So you invest in both emerging and established managers. Tell me more about your strategy.

The space today, there's hundreds of funds. Many of them aren't that institutional. So you can kind of just like weed them out fairly quickly. In terms of the groups that we consider like tier one, they've kind of been around for some time. They have a track record. And so what we do is identify the groups that we think are really the best, but then have kind of a capital base that meets the opportunity.

What's most attractive is getting in early stage investments. So you want to be pre-seed, seed, and not in kind of later stage rounds at really high valuations. We kind of invest across all vehicles, but the bulk of our capital is going to go into like closed end funds that are kind of managers that are dedicated to space, that are kind of built out operations are kind of institutional managers. And just to define a closed ended fund is a private equity type vehicle where you have investment period and you have DPI as positions come back in open ended fund being similarly to a hedge fund where you're investing in tokens and they get marked on a quarterly basis. It's clear that there's alpha in the closed ended fund where these are very hard to access early stage rounds in crypto, the pre-seed and seed rounds. Where's the alpha in the open-ended funds?

Is it access? Is it thesis driven? Is there some kind of liquidity or trading aspect? The first thing I would say is these are just wrappers, right? So they're just a structure. And the actual investment strategy and approach within these funds, it can actually be identical in each case. I mean, you tend to venture tend to be more oriented towards private investments, and the open ended tend to be more liquid, as you say. But it's interesting when a lot of the crypto funds initially were all open ended funds. And the reason for that is a lot of the assets in

the space are tokens, and they are kind of evergreen in nature, right? They're not they don't have like a finite life in a traditional sense. So a lot of that shifted just because the structure is problematic in that the space is highly volatile and you can have, funds can be way under their high watermark for periods of time, which is not great as an investor. You can have the GP, you know, taking a lot of money off the table over time, you know, which is not great. Where the venture fund, you're very much aligned, like the GP makes money when you make money, when you get a distribution. And so there's like much stronger alignment there.

In terms of alpha, on the venture side, it's just about identifying companies, startups, protocols early on that have significant potential. And that will be kind of an important part of the ecosystem or infrastructure stack or consumer app or something. And you kind of drive your alpha from identifying early and being right.

On the liquid side, it's not actually that different. So what's interesting about the crypto space is you have a lot of the calm projects, but like projects that will launch a token, and they launch it pretty early in their lifecycle. So they're not, these are not mature businesses, you know, like this is two, four years from being started. And so they're still very much like early stage companies effectively. And there is alpha in identifying the ones that in the same way you might look on the venture side is like the ones that have significant potential, the teams that you think are kind of executing well. And so for the groups that on the liquid side, there's kind of the beta side of it, like

buying a Bitcoin, ETH or Solana. But then the alpha side is identifying these smaller cap tokens that you think have tremendous potential and just because something launches doesn't make the nature of what they're what it is like that different it's not the same as tech where like you know in tech you have uber going public 10 years later like it's a sign of like maturity for that company yeah but for yeah crypto is very early it reminds me of portfolio managers that focus on microcap public securities just because they're public. They might not be heavily covered and that might be alpha there.

One other comparison. Before, when I was at McKenna, I used to work on like biotech. Like I did both kind of private side and the public side. And you had like, you know, these companies go in public, right? Preclinical phase one. They're like still like early stage companies. And some of the best managers were ones that could like move across the cycle, right? They're sort of cross markets. And I think the same thing is true in crypto. Like, you know, we want like these

small funds that can do the early stage, but we also, for some of our larger funds, we want them to be able to both do the liquid side and the private side. A lot of LPs privately tell me that they would invest in the crypto asset class, but they're concerned about some of the shady characters and some of the misalignment, people having different wallets that they don't disclose. How do you diligence your alignment into the GPs that you invest in? The space is maturing. I think the best practices in space have been kind of improving steadily. But in terms of alignment, I mean, we think of alignment as like one of the most important things, you know, so in terms of private investments, like, I think the better firms, like specially registered investment advisors, like they

don't really make personal investments in the crypto space, certainly not in the private side. So no private, like investments whatsoever in the crypto space. I think the best practice is actually not to make investments in like smaller cap tokens either. The firms that are kind of buttoned down, like have a compliance officer there, you know, just like you'd see in the traditional like tech side, like you have people monitoring all their personal trades. And that's very much like best practice in space. There's certainly lots of firms that I think are not acting appropriately. And so we try to weed those out. Sometimes we're talking to founders and we hear about situations about firms asking for certain personal allocations and things like that. And so, yeah, we were very

conscious of that and very much want to avoid any firms that are to kind of participate in those practices. It's intuitive that in a more opaque industry, you would want your GPs to be more regulated. What percentage of your portfolio roughly is in RIAs or U.S. domicile? Most of our firms are actually registered. You know, the venture exemption does not work for investing in token assets. So if you are investing purely in private deals and some of those launch tokens, you can get away without being registered. We do have some firms that are not registered. A much higher percentage of the firms operating the space are registered investment advisors relative to

traditional venture. You spent nearly 15 years at McKenna Capital, which is a $24 billion OCIO, Outsourced Chief Investment Officer. What did you learn at McKenna that you bring to CrossLayer today? I spent much of my career at McKenna. I started there about nine months after McKenna launched. It was a spin out from the Stanford Management Company. So it was, you know, very much followed like the endowment style approach to investing the David Swenson model. You know, I started the route of undergrad. I spent a couple of years kind of doing investment operations. And then I spent more than a decade on the VC team there. In terms of lessons learned, I mean, I think two of the important lessons I learned is one, alignment is one of the most important things.

Like how is the LPGP structure structured? Are there dynamics around it where you just have divergent interests? And I think, you know, I've definitely learned some lessons there in terms of the alignment is just one of the most important things. The other would be that like track records are backwards looking and it's not the track records aren't important. They are, but you have to kind of know what you're looking at and not use them kind of as not extrapolate forward. So those would be two lessons learned. I think the other thing I would say is I did have the opportunity there to build many sub portfolios like within venture. So like the first one was, you know, I worked on building out the VC portfolio in China, and then eventually biotech.

And then of course, I did crypto as well at McKenna. Some of the things I learned there, like that I think are relevant to CrossLayer, you know, like when I started working in China, you know, one of the first things I did was like, try to figure out, okay, who are the top firms? Like, what is, you know, what are the best brands? And, you know, one of the things I quickly realized was the best brands in the space were the groups that did the most deals. Like they were the ones that the most entrepreneurs interacted with. They were the ones that most entrepreneurs talked about, but they were not necessarily the groups that had the best returns. And I think the same thing is like true with crypto.

Like I often talk to a founder who will tell me about their like VC firm that they like the best. And they're not like, somebody says those firms are like groups that just have bad returns. And it's just one thing that like I think about is just like what founders optimize for and what like as an LP you want to optimize for

are different things. Tell me a little bit more about that. What we care about as an LP is like, does the VC have good judgment? Like, do they pick the right things that are ultimately successful? A founder, you know, they might care about the firm's brand. They might care about the support services or how that company, that VC firm might be able to help them build their company, which is like important for the founder, but it's not important for us as an LP. And to the extent that we care about value add

is the extent that it helps that firm source new deals or that gives them a reputation that gives them an edge in the market. But to the extent that it doesn't do that or that they don't have good judgment, it's just not that relevant. And so I think value add is one of these things that everyone's like,

oh, what's the value of this VC firm? And we you know, we don't necessarily care that much. I mean, I think it's, it matters if it is their source of differentiation, then we do care, but it's not, there's often like, you know, we're in one firm that I think does very little value add, but they're just really good. I want to double click on your VC China strategy. So you mentioned that your first step was getting a lay of the land. How did you do that? How long did it take you? Who did you talk to? Walk me through that. And the first thing I did was just there was the more notable firms in the space. So I just got connected with them all. And so I think the first step was just like meeting managers. It's

not so different than we've done in the crypto space is like, try to meet all the relevant firms that are like kind of have the biggest brands that people all know about. And then from there, you try to meet like some of the more emerging firms, the newer firms, and you just try to build like a kind of a list of who's operating the space, what their experiences and track records. And then, you know, when I started, there was one investment, maybe two investments in China at that time. It was kind of the end of when you had like these US firms, like, you know, with a IC in Palo Alto, like approving deals in Beijing, you know, obviously, that was like a horrible model that like, didn't really work that well. But in partly just because like the ICs had no idea like what was actually happening in China, the firms that did the best

were like, like a US firm that had like an independent basically operation IC in China, or like the groups that were like specialized that were like, you know, had were kind of domestic born, not so different than like, what's happened with crypto, which is like, you know, initially, you had firms in the US, you know, that would like hire a junior partner to do like crypto deals. But then the rest I see like had no idea, like actually how crypto worked and it just didn't really work as a model. And then you saw those like that talent, like leave those firms, start their own firms.

And like the groups that were like dedicated to the space have like done better. And partly there's like the volatility of asset class, which is, you know, like if you don't have a dedicated pool of capital, it's been very difficult to like invest in the space, like especially in the, through the cycle. But after your experience at McKenna, you spun out to do CrossLayer in a way you again, wanted to map the market of the crypto venture market. How did you go about doing that? I started investing in crypto at McKenna. At McKenna, we met some of the early funds, like 2015, we probably met one of the first funds being raised in the space. We kept meeting funds all the way until like, kind of 2019 when I got approval to start investing in space. So there was a long period of time there where I was interested in the space was meeting founders in the space. I started with like, you know, a deck and started convincing the private equity team initially, then like the larger IC, I wrote like a long thesis on it and eventually just like got that support

and approval to move forward in the space. And so it wasn't until 2019 that that happened, but then I spent several years at McKenna mapping the landscape. So by the time I'd left at DeCross Lair, like we'd already done a handful, maybe eight investments at McKenna. So we'd done a number of investments

and we'd kind of already mapped the space. But in terms of how we mapped it there, I mean, the space is still pretty small back then. There wasn't like that many funds. I mean, it's really exploded the last couple of years. I don't know. We started with the more established firms. There's a handful of allocators that were interested in the space. And so we'd all talk to each other and we'd all share different names of firms that we met with. And then we kind of slowly kind of made a list. And even then we would like look at PitchBook and see, okay, who's doing these deals? And then try to reach out.

Like if we saw a name that we hadn't met and try to reach out to that firm and meet them. What lessons did you... You met 50 managers or more before you made your first investment. You proceeded to make eight investments. What were some of the early mistakes that you made at McKenna that you corrected when you started CrossLayer? We started with like the larger firms in space that had the best brands, which I now don't think is like that relevant. But that's like where we started. Partly too, like we just didn't know the crypto space that well, right?

We're still trying to figure it out, still understand like what mattered. We invested in one of the firms that we thought of as like one of the more like crypto native firms in the space. But I think the integrity of the firm and the founder like wasn't that high. And the alignment wasn't good. We did an open end fund. It was not a great experience. And so I think now we're like very careful about open end funds. And we're also very careful about the people we partner with. And nothing went like horribly wrong. We made money off that investment. But it just there was a lot of things that we're did not like about that experience. But another one that like just seems so investment, but it just, there was a lot of things that we did not like about that experience. Another one that like just seems so obvious, but I think sometimes you got to like learn lessons for yourself.

We backed a fund where like some of the GPs had involvement in the crypto space in DAOs and protocols. And at the time we thought it would like provide like unique deal flow and access and it was part of their secret sauce. But the reality is just like was bad alignment and several of those GPs end up leaving. And we kind of knew like there's like this LP playbook, like you only back people that are like 100% focused on managing the capital you're giving them. You know, we kind of made an exception there and never again. Is there ever a time that you can invest into GP that's not full time on the strategy? We would be very cautious about that. I don't know. Like there's been lots of firms have kind of incubated, started companies. I think you'd just be very careful.

A lot of times you have founder economics going to the GP that are not the same as LP. It gets very messy very quickly. Obviously, there's situations where that can work. It's not something that we would, or let's just say we'd be very cautious about it. We generally want the team focus, especially the key members of the GP to be 100% focused on managing the capital. Congratulations, 10X Capital podcast listeners. We have officially cracked the top 10 rankings in the United States for investing. Please help this podcast continue climbing up in the rankings by clicking the follow button above. This helps our podcast rank higher, which brings more revenue to the show and helps us bring in the very highest

quality guests and to produce the very highest quality content. Thank you for your support. You've mentioned to me that in crypto as an LP, it's really important to understand where there's divergent interest between the general partner and the limited partners. Give me some examples of some non-obvious times when there's divergent interest between GP and LP. One of the reasons we like emerging managers is you have very clean alignment. An emerging manager is very focused on making that fund a success. And they have no other products, no other fee streams. And where I think as funds get bigger and they add different products, and they have a junior team that maybe has become more senior and they need to allocate capital to them, that's not necessarily in the LP's interest. And so that would be more of like the subtle one, but I think the most common. I always liked the idea of accelerators

because they're kind of, they see a lot of companies coming through there. They have a lot of visibility into the teams that are operating, they're kind of building new products. But oftentimes, like the alignment's bad, like they're just, the economics kind of are not the same. And, you know, the fund almost kind of becomes this like fall on capital. That's, I want to say like the prop up those companies, but the interest of the Accelerate and the interest of LP just are not the same. Especially with emerging managers,

we want to be with funds that, where you have like somebody that kind of has a chip on their shoulder and is like highly motivated, wants to win, but like also doesn't want to build an empire, right? Like we don't want that kind of like empire building mentality like within the fund. AUM building. Yeah, we don't want that kind of like empire building mentality, like within the fund. AUM building.

Yeah, we don't want them to build lots of AUM, lots of products. Like that's just not in our interest. And like, especially with a new fund, if they're like talking about multiple products before we launch one, like that's not a good sign for us. You mentioned when we last chatted that you gravitate towards groups who have a clear framework of what is interesting and that go after that systematically.

What's a good example of that? One of the more recent things is, you know, we've kind of had this thing like Bitcoin 2.0, which is basically like trying to make Bitcoin more productive, where you're like smart contract platforms or wallets or different things are kind of being built on top of Bitcoin to make it more productive. Like some people were early to that thesis, and they maybe they published on it, and they were kind of at the front end of that wave. Like now it's like a consensus view, basically. But but you know, groups that were actually thoughtful,

maybe they invest in a bunch of pre-seed deals in that space. Maybe AI crypto is like another one. Like that's kind of a hot theme right now. You know, one of our managers published a piece on AI crypto, like before chat GBT came out, like they were clearly like intentional about this being an interesting category and they've researched it and they wrote about it. And like, it's very obvious that they weren't, they're not just like reacting to like the hype of the day or like the themes that, you know, that are popular now. A lot of times,

like to be in those pre-seed deals, like you need to put a stake in the ground, like in a sub theme. And that's how you kind of meet groups that are like building that space, interested in that space. And we think it just generally results in like a more, you know, intentional framework that results in like kind of a better that results in kind of better outcomes. When you're making idiosyncratic bets like AI and crypto or Bitcoin 2.0, how do you think about portfolio construction? So most of the firms we back are generalist firms. So there's been like, you know, there was a period of time we had like all these like DeFi dedicated funds, but they've all kind of broadened out just because it was like too narrow focus and DeFi kind of went through a rough patch. And, and so for us, like we might do more specialist funds at some point, but at this point in time, most of the funds we back are generalists, but most of

them have, like, they might be in one or two ecosystems. And so if you want to like kind of capture the market, you know, if you're in one manager or two managers, like you're not going to capture it because like people, the space is too broad to like have expertise and everything. So for us, we're not necessarily choosing ecosystems. What we're looking for is like just picking the best managers. And when we add a new manager, we very much want them to be like complimentary to the portfolio, right? So there's like little overlap in the deals they've done historically with our existing managers. There are areas of like competitive advantage or differentiation. You know, as you say, like maybe they are like prominent in the Solano ecosystem. And maybe we don't have that much exposure to Solano.

So they're like complementary to our portfolio. And so we think of it more that way. It's not like we're trying to like kind of have strict targets for different things. It's more like let's just make sure that like we're backing kind of independent thinkers that kind of come from different parts of the ecosystem or operating in different parts of the ecosystem. So for us, it's, it's more about like kind of having fairly concentrated position of kind of high conviction managers. And there's not like a target for like this much emerging managers or this much like Solano ecosystem. Just to play devil's advocate, why even have established managers in your fund? There are flywheels to venture, right? Like people do one, like over time, people like learn and get better over time, right? Two groups that are really good do have

some lasting power, right? Like they've built like a really strong team. Yeah, there's persistence. There's a flywheel to brand and sourcing and these things matter. And so, you know, like we're very conscious of the established groups are backing. We're not like blindly backing them. Right. And like, we definitely believe that like most firms firms have a lifecycle, they can only be exceptional for so long. And so over time, the team grows, the strategy changes, you know, the dynamics around it just make them less competitive, or they just AUM has grown to point it's just harder to like, keep those returns consistent. So we do see like a natural cycle of, you know, emerging managers coming to our portfolio, we're gaining conviction in them, making them a core check back in for a number of years, and then expecting that

over time that most of them aren't going to be these like intergenerational like firms, right, that they will be discontinued. Is top quartile and crypto similar to venture in that it's an access class in that there's more LP interest and GP capacity? Or is it still nascent in a way that you could access a perennial top quartile funds? When we started CrossLayer, there was a number of funds that were oversubscribed. And so this is like the beginning of 22. But as the market kind of fell apart, basically no one's oversubscribed. There's been one fund oversubscribed in the last year that I know of. So generally everyone's open. And it's because like post FTX, there's just like was no or very little LP money coming into the space. And so, and it still remains true.

Like we're still in a wave of funds being raised now. They're all being raised at much smaller sizes. So I would say that access will be relevant again in the future, but like right now it's not really about access. It's mostly open. Sounds like a good time to get a toehold in some of these franchises. Oh, absolutely. Almost pretty much any fund that you want to get into, you can get into. The harder thing is, right, like it's just a judgment piece, right? Like which are the best

funds? The selection part, I think is still like difficult for a lot of groups. And if you're only backing one or two funds, people tend to go for like, there's just a very large kind of established brands that kind of have the most institutional feel. But in most cases, we don't think those are like the ones that are gonna generate the best returns. You mentioned when we last chatted that you gravitated towards managers who are there before rounds come together. Tell me about that.

One of the most attractive return profiles is to be in a pre-seed deal for something that works out and in a small fund. So like what we really care about is what is our look through ownership in an investment. And so what happens with smaller funds is we get much higher look through ownership in an investment? And so what happens with smaller funds is we get much higher look through ownership. And so a pre-seed deal can return a fund

and it can be meaningful for us within a small fund. And so the dynamics around that are quite attractive. And so that's one of the reasons we want to be pre-seed. The other reason is, I think it's generally true that valuations go up much faster than risk goes down. And so you can have a pre-seed round to a seed round, and you can see a 3x markup. And it might be 8 months later, 12 months later.

And oftentimes, it's not significantly de-risked. And we often think we're just better off getting more ownership in those pre-seed rounds. And the reason it's just not more common is if you're a large fund, it's just, you know, you can get more dollars to work later. But if you're in small funds, it's a significant advantage. And then the last thing I would say is goes back to, you know,

we want managers that are intentional. And I think pre-seed is much harder to do because you actually have to, you know, go out and source them and or not even source them. Like you have to have a view on a different subsector and then be kind of milling around in that area to find founders that are also interested

in those categories to be there before the round even comes together. And so for us, it's a sign that someone's an independent thinker, that they're a leader if they're actually there before round comes together. I'd also say we always talk to founders like, okay, how did they source it? How do you meet them? Where did that relationship start? And it's oftentimes someone's interested in a category, they're meeting one founder, and then that founder might be like, oh, there's this other guy that's also working on something, you should connect with them. And so it's just, we'd like it because it's the most attractive return profile.

And it requires like groups that are like very intentional about, you know, what they're investing in, right? As opposed to like the seed or series A, which are kind of widely shopped around, you have lots of VCs are just, you know, waiting for deals to come to them and then like assessing them on an ad hoc basis. Given the extreme volatility in crypto, which I believe is more volatile than any asset class in the history of asset management, do you end up optimizing around a larger portfolio, given that you could capture some of the idiosyncratic upside while also de-risking? Or do you use a similar portfolio strategy as you would for an early stage venture fund? We think time diversification is the best way to manage risk.

You want to be invested over many vintage years. How many? We actually started out with thinking like we'd be a two year, but I think a three year for us is like what we're going to do going forward. Like especially as a fund of funds, you have significant diversification because your investment dollars might be under four or five years. And so there's just no way we're going to like miss over that period of time. But with venture, you want to be steady allocators, right? Because it's hard to know, like even if it's the top of the market and things feel very bubbly, you don't know which funds are going to then be invested in the bear market in a better time. Like we backed a number of funds, like beginning of 22. And like some of those funds are going to absolutely crush it because they haven't been invested in a great time. And so

I think that the trick is like not to overcommit when things are like frothy and just be steady allocators on the venture side and then be opportunistic, you know, when things are like at the bottom of the market. The big mistake that a lot of LPs make, right, is like, you know, there's a lot of hype around it. It's exciting. And people invest money kind of at the bottom of the market. The big mistake that a lot of LPs make, right, is like, you know, there's a lot of hype around it. It's exciting and people invest money kind of at the wrong time. And then they don't allocate in the bottom of the market.

And then, and so like steady allocations is really important to invest in the space and time diversification to manage volatility. Tell me about how you go about differentiating whether a manager is actually sophisticated or just knows how to talk the talk. Yeah, I mean, this is the lesson I learned at McKenna, which is like, it's so easy to be kind of drawn to people that are very articulate and well-spoken. And just because they're

articulate doesn't mean that they have like independent views. And I think part of the problem is, you know, most of the decisions we make are on imperfect information that, you know, we don't like we're looking at an unrealized track record. We're looking at team changes that where the outcome of those changes aren't totally clear. And so it's very easy to kind of over index, I think, on people that are articulate. So how do we deal with that? One is just like be conscious of it. And the other is just to make sure we kind of validate our thesis and not on the margin kind of being like kind of pulled because we're like, oh, they're just very compelling and be like, well, OK, what have they actually done?

How do we think this portfolio is actually doing? And kind of just try to be more fact based. It's also that like it's not that someone that's very articulate can't be a great investor. They absolutely can. It's just that like it doesn't. And they are right. A lot of the best investors are articulate. It's an important skill for raising money.

So it's hard to be like a GP that can't raise money. But I think you often see like a partnership where somebody is like the more articulate one and raises the money and the other person, you know, is this kind of one of the significant, you know, investors. Do you have issues with that as an LP? No, no, no, not at all. I mean, we like different skill sets. It's like CEO and CTO. Absolutely. I mean, we like when we see two GPs and they're like very complimentary in their skill set. I think that's, that's great. Like it can be, you know, sometimes you have somebody that's like visionary, but like not in the weeds at all. And then you have like someone else that's like very detail oriented, like things like that. Like we definitely appreciate,

we certainly won't back like teams that haven't worked together before. Like that's just like, we just won't do it. But I think groups that have like a history of working together, compliment each other. I think that I see that as a very positive sign. We spoke earlier in the interview about the persistence of crypto returns, similar to venture. There's a University of Chicago study that more than 50% of funds that are top quartile persist in top quartile in venture capital. In crypto, when is it more likely that funds persist in top quartile? And what are some signs that a fund may depreciate in terms of their performance?

I think that's difficult in the crypto space is you have a lot of funds from the 2017 to 2018-19 period that have done exceptionally well, just absurdly well. And I'm not sure that period of time is that relevant to going forward. It was just like a less competitive time. There was a lot of just a lot of things people invested in. They all worked, they all launched and were successful and had very high valuations. I mean, some of them are now failing, but from just a fund return perspective,

it was a unique period of time. And so when we look at funds now, like we don't place that much weight on some of those early funds, just because it was just a very different time period. In terms of things that we look for that whether returns will persist, you know, obviously it's just like, are they, are they raising a lot more capital? And then as a result, is the strategy changing?

Are they moving kind of more upmarket, which is very common. I think there's elements of like, what, what are the GP's motivations? Like some people make a lot of money where, you know, in crypto, sometimes it happens fairly quickly. And I think some people, it just doesn't matter, right? Like they're just still so driven and focused on what they're doing. And other people, it just changes the dynamic. And they're just, you know, they have more of a team and other people are making decisions. And so we care a lot about like, you know, who are the decision makers and how are things evolving as firms grow and build. So I think GP motivations, fund size, strategy drift. I mean, those are some of the, I guess, the big things in terms of whether we think there'll be as persistent over time.

I, you know, in it also, it's like, I guess it depends also like what their competitive advantage is. Like if it was like they, they kind of had dominance in the ecosystem and then their brands like less relevant ecosystem, you know, that might be another sign that like, you know, we often look at a fund to like, are they leading checks? Are they getting good ownership? You know? So if they're doubling their fund size, like, but they're not their ownership numbers aren't that good. Like that would certainly be a red flag. That's a bad sign.

I've had some crypto friends say that every bull market has almost completely new winners when it comes to investors and entrepreneurs. Is there like this very high half-life to influencers in the crypto market? Or is that a slight exaggeration? I think we're going to see more persistence over time. I think the one thing that might change is like a lot of the money's been made in infrastructure. And so you've had people that are, I think, very good at the infrastructure side. And if we start to see like consumers start to take off, like you probably see a different set of managers that like dominate consumer.

You know, just like in the last cycle, we had kind of NFTs and other things, kind of some of those platforms, like the people are backing, those are just different than a lot of people are backing infrastructure. There's a lot happening like the deep end space, the decentralized physical infrastructure space, there are some managers focused on it, there's some managers that certainly a lot more dominant in it. I think certainly you have like the Solano ecosystem has, you know, really kind of risen to prominence now. And so I think, you have like the Solano ecosystem has really kind of risen to prominence now. And so I think it's very possible that we see some breakouts on the Solano ecosystem and like some groups that are like closer to Solano ecosystem. So yeah, I think there is some truth to that. You will see a greater dispersion of groups like you'll see some rotation in the groups that do really well every cycle. A lot of institutional LPs continue to be on the sidelines when it comes to crypto funds. Some of them have embraced Bitcoin, Ethereum, Solana, but they're still reluctant to go into the asset class. What are some key pieces of advice you would give a foundation, endowment, pension fund as it comes to entering the crypto asset class? For most

institutions, it's best to look at the space like venture, right? So that it's part of your venture portfolio. And because your existing manager set is not going to capture this opportunity, like, or if they do are doing a few deals that, you know, it's not the deals you necessarily want to be in, that it's important to make allocations in the space to venture, and that it should be part of your venture program. And I think it's sort of what we did in McKenna. We like, even if we did open and fund McKenna, like it's all part of venture. Like, and the reason for that is it's, we see it as the highest for us asset class and we see it as technology, right? Like this is you're investing in startups in the technology space. It fits

nicely, like in your venture portfolio, you know, Bitcoin sort of a different thing, right? Like it's this idea of like digital gold and you know, it might fit somewhere else in your portfolio, but it's very different than like, I guess what we're focused on, Bitcoin is sort of a different thing, right? Like it's this idea of like digital gold and, you know, it might fit somewhere else in your portfolio. But it's very different than like, I guess what we're focused on, which is like productive assets, like things that are going to be applications and services, you know, built on blockchains. And I think that very much is like a venture opportunity that most allocators should have in their venture portfolio. What are some of the regrets that you have from the first couple of years of CrossLayer? We're pretty happy with like what we've done. I think we bought a bunch of secondaries. I think in hindsight, I would have bought like even more.

Like we were good with opportunistic stuff, but like I kind of wish we were like did even more. Like it was just like we certainly as a market kind of got, we're kind of depth of the market. Like it impacted us, right? Like I think there's certainly like lessons learned in just the psychology of it. And, you know, I think we remained active, but like we should have been like more active. But I think that's true for a lot of groups. Like you kind of have this feeling of like, okay, like, like it's hard to invest in a declining market.

Like that just keeps declining. Like it's just like a tough thing to do. So just to double click on that. So you're seeing your portfolio go down. In retrospect, you should have bought more and essentially dollar cost average the dip. It is interesting. So, you know, like, we were like quite aggressive early on doing funds. And then actually, there was very few funds raised for like a year period there. So we, it wasn't like there was actually a ton of like venture opportunities to do because like, there was no capital to be raised. And so no one was really raising capital. On the opportunistic side,

we were thinking about putting on more like beta exposure or investing more in open-ended funds but what we realized was like some of the lp secondaries like had significant liquid exposure and we could buy them at huge discounts and so that's like where we focused our energy was like let's just we bought several of them we bid on one a large one as well that we didn't get that's where we focus our energy more to your point like if we um we should average in more like especially the one open-ended fund that we're in we're up significantly on that fund now but like we should average in more, like especially the one open-ended fund that we're in, we're up significantly on that fund now, but like we should average in right at the bottom too. It's just hard.

Like once you see something decline 50% to like buy more of it. On that note, this has been a really illuminating podcast. Thanks for jumping on and I look forward to continuing the conversation in person. Yeah, absolutely. No, really appreciate you having me on. It's been great to chat with you.

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