With A $150 Million Debut Venture Fund, BlockTower Is Ready To Take Advantage Of The Crypto Winter – Forbes

In the noisy venture capital landscape, crypto investors have emerged as some of the most aggressive to make their business into a brand. They’ve written white papers and launched podcasts; on social media, partners at multi-billion-dollar firms have become minor celebrities themselves within the crypto bubble, sharing predictions and memes for their legions of followers.

BlockTower Capital, a new venture practice led by investor Thomas Klocanas, is opting for a different approach. A previously unannounced $150 million fund that’s part of a larger hedge fund and credit business, BlockTower barely has a website. Its corporate Twitter account, despite its 10,000 followers, has yet to tweet.

Instead, the Miami-based BlockTower and Klocanas, its venture arm’s Brooklyn-based leader, are looking to make moderation—and old-school financial ties—their calling cards. By keeping its fund relatively tidy at $150 million, BlockTower is looking to invest at a pace (ten investments so far this year) and check size ($500,000 to $5 million bets, with $20 million deployed so far) that will help it hold its own alongside its better-known, faster-paced mega fund peers. And as one of four vehicles within BlockTower, a crypto-focused financial firm with a flagship hedge fund, market-neutral fund and lending business, Klocanas, 31, says he can offer startups something that a bigger firm can’t: real power users in crypto-focused institutional finance who can help make markets and provide assets for lending businesses to get off the ground.

“We’re living and breathing the stuff we’re investing in because otherwise, who are we to give them advice?” Klocanas says. “We want to lead by actions and hope our actions speak for themselves.”

The French-American Klocanas cut his teeth in investment banking as a sell-side analyst in London before attending Columbia Business School, where he was co-president of its fintech and blockchain student organization. While getting his M.B.A., he started working at local crypto software maker and incubator ConsenSys in 2017, helping launch new projects and performing several business development roles. After short stints at several other crypto projects, he joined VC firm White Star Capital in January 2020 as a principal, helping raise its first digital asset fund, a $50 million vehicle that backed startups including Ledn, Paraswap and Rally.

At the end of 2021, with crypto projects flying high and cryptocurrency prices soaring, Klocanas was considering raising his own fund when he met Matthew Goetz and Ari Paul, both 38. Goetz, a former Goldman Sachs investment banker, and Paul, a former University of Chicago endowment manager, had launched their own hedge fund, BlockTower, in 2017, to focus on crypto investments in a way they felt traditional institutions could not. Along with a flagship fund that could make long-term investments in public and private markets and in cryptocurrencies themselves, they added a market-neutral fund, as well as a developing credit business. A filing from the end of 2021 listed the firm with nearly $1 billion in assets; at today’s prices, it has more than $500 million.

By teaming up with Klocanas, Goetz and Paul saw an opportunity to dive deeper into the private, startup-side of investing, where the firm had already made more than 40 investments on its own. The pitch: BlockTower could combine the expertise and financial clout of its traders with the deep domain expertise of Klocanas on the startup side. “You can’t fake being a crypto native,” Goetz told Forbes in July. “The DNA of winning venture franchises is different today than the Sand Hill Road game of the last 40 years.”

The trio set out to raise $100 million and ultimately capped their fund at $150 million early this year. Backers include MassMutual, French investment bank Bpifrance, former Midas List investor Roger Ehrenberg and the Teacher Retirement System of Texas. While other firms have invested hundreds of millions in as little as six months, Klocanas claimed, BlockTower has made just ten investments so far this year, deploying $20 million. The firm looks to write $500,000 to $5 million checks it can lead or co-lead into companies and crypto projects at their early stages, aiming for equity stakes of up to 10% in a startup, or up to 5% of a token protocol.

BlockTower often targets finance-minded crypto projects that focus on interoperability between blockchains, credit or payments. But the firm has also written checks to “digital asset adjacent” businesses in mobile, social media, decentralized governance and future of work that, while they lack a crypto-focused product today, may use crypto as a key part of their business in the future, Klocanas said.

Investments include Lighthouse, a would-be search engine for the metaverse in which the firm co-led a $7 million funding round with Accel in May, and Aptos, a startup founded by ex-Meta employees attempting to carry the torch from the Facebook parent company’s abandoned blockchain project.

But BlockTower’s value is more obvious with early-stage companies like Maple Finance, a startup that helps lending businesses pool capital and lend it to other crypto token projects. There, BlockTower’s own lending experts provided knowledge and capital to set up one of Maple’s own first lending pools.

In May, BlockTower announced a $3 million token sale and strategic partnership with Centrifuge, another startup looking to connect real-world assets to such liquidity pools. The alliance is more valuable than the venture dollars themselves, says Centrifuge CEO Lucas Vogelsang. “It’s bringing all this technology we’re building closer to their network, their LPs and users,” he said. “That’s the much more exciting part.”

BlockTower’s ability to bring resources to such projects as not just an equity investor, but an early institutional user, can play a valuable role in the ecosystem, several peers in venture capital told Forbes. “Many other funds are not set up to support this, so I can see it being a valuable addition to the ecosystem,” said one prominent crypto-focused investor who asked not to be named as they weren’t authorized to speak to the press.

At Hack VC, an infrastructure- and DeFi-focused crypto VC firm launched last year, cofounder and managing partner Alexander Pack said that “crossover funds” with hedge fund arms had their tradeoffs, pointing to turbulence at Tiger Global and Coatue elsewhere in startup investing. But Pack was cautiously optimistic in crypto. “If BlockTower can leverage its hedge fund to provide on-chain liquidity to its seed portfolio, it can bootstrap network effects and help its portfolio win out against competitors,” he said.

Another factor in BlockTower’s favor could be its timing. Klocanas and his fund hit the market just as crypto fell into a “crypto winter” that has included cratered cryptocurrency prices and a noticeable decrease in venture dollars. Firms invested $4.4 billion in the third quarter of 2022, according to startup investment tracker PitchBook, down from $7.6 billion and $10.9 billion in the previous quarters, and down about 50% from a year before.

The sector struggling is unlikely to be a good thing for BlockTower’s flagship hedge fund. But with a young and small portfolio, BlockTower faces little pressure to provide immediate returns. Its pace of investing, meanwhile, means that it still has most of its fund to deploy as buy-in prices drop and other investors pause their activity in the category.

Since it never publicly bought into the hype of investors posting publicly about having “diamond hands” or “laser eyes,” two memes associated with buying and holding cryptocurrencies, BlockTower faces no backlash from investors who may be more critical of firms that appeared to be cheerleading the past cycle of speculative activity. Asked if he considers himself a “degen,” short for “degenerate,” a popular self-ascribed term for crypto true believers, Klocanas said: “I’d say I’m both a crypto pragmatist and a ‘degen.’ I believe in both visions, side by side, on different time frames.”

While projects like Helium face partial delisting, and others, like Celsius Network, have gone bankrupt, Klocanas pointed to NFT company Sorare, whose CEO tweeted in late September affirming that its dollar volume, trading volume and number of unique buyers will all still be up from January, as a counter example. The days of quick 100x returns on investments in crypto may be over, he said. But BlockTower, he added, is happy for crypto startup exits to look more like typical venture capital returns. “There’s a lot more to crypto than trading prices.”