One Year Down

Dear TCG Crypto investors, collaborators, and friends,

With over a year of the fund underway, we are excited to share with you our first Year in Review letter surrounding our portfolio and key areas of focus. In this letter, we outline our thesis for how we’ve invested over the last year, the areas where we’ve worked to build stronger points of view, and where we’re excited to spend time in 2023. Read on:

By the Numbers

In the first half of this year, we closed TCG Crypto Fund I at $120M. We invested in 21 companies in 2022 (and 25 overall, including our first batch of investments in 2021) — you can read about many of them here. We are thrilled to continue to partner with these founders and teams.

We grew our team to five. This year, Dilveer Vahali, previously Deputy General Counsel at TCG, joined our team full-time as General Manager and Lead Counsel to help us in our legal & operational efforts. We were recently lucky to bring on Zion Thomas who was previously investing independently (read more about his independent theses here). We also welcomed the addition of Sophie Fujiwara from Stanford over the summer, who collaborated with us on our fund thesis (below) and helped us build out more granular frameworks like this one.

Our Thesis

At TCG, we obsess over how new technologies will change the way consumers spend time on the internet. Over the past year, we have centered our investing strategy around the thesis that in web3, the most durable consumer businesses will be built around passion, where new forms of digital ownership will accelerate existing behaviors and the creation of new consumer experiences.

The first step in evaluating these types of businesses is looking for evidence of passion.

• What makes people behave the way they do?

• What, outside of market cycles, drives interest and participation?

• Where are there pockets of interest or obsession on the internet, and how can it evolve?

• What are practical and applicable needs that make people's lives better?

There should be high engagement, authentic origins, and a willingness for consumers to spend time and/or money. Once passion is discovered, we then look at how crypto can either accelerate or create net new behaviors in that interest zone.

“What is possible now that previously felt either personally or professionally prohibitive?”

These passions aren’t necessarily net new. Consumer businesses in crypto don’t need to be centered around an entirely new market (though they can be — related thoughts here); they can  unlock a new experience within an existing market, expanding the ways in which consumers can engage.

Much of this thesis mirrors TCG’s early thinking on Internet content businesses (see: Goldin Auctions, Barstool Sports, Food52, and Epic Gardening), where the most successful companies are anchored to having hugely passionate audiences. Peter Chernin expands on this in his interview with Patrick O’Shaugnessy on Invest Like the Best (2022):

“If you look at what’s happened to the world over the past 20 or 30 years, the broadcast networks back in the ’70s, ’80s, were surviving on what I would characterize as the middle, stuff that was inoffensive to the largest number of people. What’s happened is the middle in every single business is gone, gone, gone forever. And the world is split into two things, these gigantic events, the Marvel movies, the Super Bowl, the Grammys, The Beatles documentary… where technology enables those events, technology has largely supercharged those events, they’ve enabled you to deliver them to people all over the world.

And then the second thing that’s happened is technology has enabled niche passions. If you think about yourself as a consumer of entertainment, a consumer of anything, you gravitate towards those two things, you want to say, “I want to be part of that big event, I want to watch the Super Bowl, I want to watch the new Marvel movie, I have to go see Hamilton from New York.” You want to indulge your greatest passions… And the last thing you ever want to do is spend time on something that feels generic and safe in the middle. Because you don’t need to anymore.”

We believe the fundamentals of web3 further unlock this notion of passion, giving audiences and communities the ability to dig deeper and participate actively in the things they love most. This centers around the fact that these platforms are no longer driven by an individual’s ability to observe and follow along, but rather contribute by being an owner in the experience itself. You see this play out in portfolio companies like Arkive and Hume, as well as in companies we admire from afar like Krause House, Mad Realities, LinksDAO, and Cabin.

What We’ve Learned

We’ve learned a lot over the last year, and there are areas where we’ve worked to build stronger frameworks and evolve our point of view. Some callouts:

The path to consumer “scale” has changed

A year ago, we placed a lot of weight on the concept of “onboarding” — how can we bring new users into the crypto ecosystem for the first time? We continue to be excited about new consumers entering the landscape, and we’re always searching for products that improve the pathway to crypto-native products. However, as we lean into our thesis around passion, spending time in specific interest areas on the internet (in incumbent spaces, like gaming, and entirely new ones, like DAO governance), we feel that growth will come less from driving new users into the existing market landscape, and more from bettering the utility of existing foundations to make it more meaningful to crypto’s existing user base. Instead of looking at expansion as horizontal, we believe the path to meaningful value is vertical, achieved by going deeper within these existing zones.

Another helpful framework we’ve worked to implement is prioritizing convenience. Take MetaMask, for example, which grew exponentially from 545,000 MAUs in July 2020 to over 10M by August 2021 due to a surge of interest in “DeFi Summer,” where yield farming acted as a hook for consumers. At that time, it was obvious for consumers to use MetaMask to take advantage of DeFi yields, as MetaMask was far more accessible (widely supported) than any competitor. Today, although newer (and often better quality) wallets have emerged, MetaMask still maintains mass scale because it continues to be the most convenient option: it was first to market, so it owns distribution (almost always listed as the first option or the only alternative to WalletConnect) and allows for a natural onboarding, and the flywheel continues. This is not to say we’re not excited about new wallets entering the space — in fact, it’s quite the contrary. But instead of looking for “high-quality” solutions with marginal improvements to UX, we look for wallets that make engaging in web3 more applicable than what was possible before. It’s why we’re excited to partner with companies like Genesis, which is building a new system to explore web3, starting with a novel interpretation of a mobile wallet — designed natively for identity, navigation, personalization, and media.

As we continue to rethink this notion of scale, we find ourselves spending less time on products built on top of new, experimental markets and behaviors. Instead, we focus first on existing areas of passion — either in incumbent areas, like gaming or music, or in new areas that channel existing interest behaviors, like the crypto-native communities of Nouns and Proof Collective. Along this vein, we are grateful to work with companies like Arkive, Hume, Medallion, and Immortal Game that provide experiences and solutions for individuals within these highly proven passion verticals.

With new tooling, projects move direct-to-consumer

Over the last cycle, crypto was largely pay-to-play. We saw the rise of NFTs and tokens as financial mechanisms that led to both ownership and speculation, but as these tools have evolved, we’ve seen verticals compete on this, leading to free consumer experiences that utilize on-chain data instead of on-chain financing. While it of course remains a massive feature, crypto is becoming less and less about financialization alone.

For example, the narrative around NFTs largely began as giving royalties back to the original creator, but with the emergence of platforms like LooksRare and SudoSwap, royalty commissions are no longer competitive, leading to the rise of royalty-free NFTs and companies/projects needing to monetize in more creative ways. Similarly, social products on-chain never quite made sense when people had to pay per post, because it was more convenient to communicate off-chain than on-chain. Now, however, protocols like Lens are absorbing the costs of building on-chain in pursuit of creating more on-chain data for the network.

As crypto continues to evolve, tech increasingly becomes a commodity and liquidity becomes less of a moat for consumer businesses. We see this in the development of vertical NFT marketplaces and liquidity aggregators like Reservoir, FirstMate, Snag Solutions, and others. These marketplaces provide more flexibility and convenience than ever before — consumers no longer have to go searching across platforms for the best price, and NFT project creators can now spin up their own verticalized marketplaces while leveraging aggregated liquidity. Previously, NFT projects would spend huge amounts of upfront time and capital to build a beautiful mint site for primary sales, and would then immediately let go of their customers by allowing them to move to third-party marketplaces for secondaries. With better tooling, and with liquidity removed as a moat, these projects are increasingly working to own the vertical business with more and more of a focus on brand and user experience. Some examples here are Pudding (a vertical marketplace built specifically for the Proof ecosystem), Sound Market, and Truth Labs’ new Goblintown marketplace.

The business model of free-to-own

In consumer businesses, we’ve noticed a shift in NFTs from direct revenue streams towards levers for distribution by way of ownership. Throughout this cycle, we saw myriad companies and NFT projects monetize primarily by way of secondary sales. This model decays quickly, as it produces one-off revenue, contributes to user churn, and limits the ability to forecast the long-term business. If retention is important, relying on secondary revenue alone is unsustainable.

We believe that value will accrue to tokens and NFTs, and that these novel financial mechanisms will continue to drive revenue in crypto businesses. However, we anticipate a shift in NFTs from direct revenue streams to levers for distribution. If the initial action (say, minting an NFT) is the goal, then there is little incentive for consumers to stick around afterwards — in fact, it’s often better for consumers to get out than stay in. If the mint instead becomes free (used as a clever acquisition hack to unlock an experience), then consumers stay to discover the evolving utility and newness. We’ve seen this free-to-own business model pioneered by companies like Starbucks and Reddit, as well as web3-native businesses like Limit Break and our portfolio company Branch. Other verticals are getting creative with this model, too: Mirror and Paragraph utilize free NFTs as newsletter subscriptions, and Arpeggi and Blocktones (in partnership with Hume) encourage on-chain collaboration and co-creation for artists. We’ve also seen some of the most successful & innovative NFT projects over the last year launch as free mints, including Potatoz (became a top 150 OpenSea collection within three months of launch) and Rainbow Zorbs (unlocked a special Rainbow wallet app icon when minted, processing over 125,000 mints in three days). They follow in the footsteps of CryptoPunks (launched in June 2017 with a free mint), which we’d be remiss to not include!

The point is, we believe NFTs can foster stronger relationships than the ones created via email, and we anticipate much of this technology will become obvious native functions for many use cases on the internet today. The focus is shifted away from monetizing the first interaction with the consumer and instead towards building a better, tighter experience between a seller and a buyer. It’s about creating direct-to-consumer everything.

Where We’re Looking for 2023

Some of the areas getting us most excited:

Mobile-first experiences

Today, crypto applications are almost entirely web-native. There are almost no widely used mobile-native web3 apps. If web3 is to reach true consumer scale, we will need to see the emergence of mobile-native web3 applications to shepherd in the casual consumer.

So what mobile-native web3 user experiences might come about? Some predictions include geolocated NFTs (like Mirage or Superlocal), augmented reality web3 games (like Jadu), AR digital art (like Anima), social web3 wallets (like our portfolio company Genesis), and immersive galleries for digital assets (like our portfolio company Cyber). We cover this in more detail here.

Mobile is the dominant way we access the internet, driving 60% of global traffic. In emerging markets, many people exclusively use mobile. Rainbow has been the dominant mobile wallet in the immediate crypto-native community, but in countries like Argentina, all of the most popular wallets are mobile-first, like LemonCash, Buenbit, and Belo. In our own portfolio, we are grateful to work with emerging markets DeFi lending company Jia, where founders Zach and Cheng are building off of their learnings at Tala to bring blockchain-based financing to small businesses through a mobile-first interface.

The biggest obstacle for web3 mobile will be incumbent platforms continuing to rent-seek any in-app transactions that happen on mobile-native platforms. Outside of simply abiding by existing platform rules, solutions here are on a spectrum: on one side, we’re excited by the emergence of platforms like ethOS (a native mobile operating system for Ethereum) or Solana Mobile to rebuild a crypto-first mobile experience from the ground up, and on the other side we see web3 companies circumventing these hurdles altogether by building mobile web apps (see: Primitives) instead of building for iOS.

New modes of media production

Interfaces like block explorers and analytics platforms aren’t just technical crypto products — they’re tools for storytelling. In a world of on chain public data, every company is a media company. You see this with viral accounts like Zachxbt and Nansen Intern, who effectively act as public goods for the crypto ecosystem at large through market-specific investigative journalism by way of Etherscan and other tools.

On that note, it’s worth noting that trust in media is arguably at an all-time low (see: this Axios report from July, The Twitter Files, and Bari Weiss’ The Free Press, to name a few). On-chain media becomes relevant for a couple reasons, namely because it democratizes the ability for any individual to see important activity and information at the inception of its development. While in traditional media we would have had to rely on a banner brand for our news or source of truth, today we can piece it together through our collective ability to create off the information we find. We are excited about the tools to support this new behavior.

The other aspect of on-chain media that excites us is the ability to sign messages to signify their validity, which Fred Wilson articulates well here. A signed message confirms that the address of the signer is, in fact, the person who wrote that message, and in many cases (like on web3 publishing platform Mirror, for example), these messages are stored entirely on-chain (e.g. on Arweave), so the content exists independently of any third-party platform. As Fred writes, “we will need tools to manage our identity and our humanity.” Signing messages on-chain is a powerful step in this direction.

Infrastructure to power ecosystems at scale

As the market cooled down, infrastructure took the reins. We saw the modular blockchain thesis become much more popular, with innovations like app-specific chains in the Cosmos ecosystem as well as the increased attention towards vertical scaling as Ethereum L2s achieved significant traction as execution layers. Next-generation blockchains like Celestia focus entirely on one piece of the blockchain stack (in this case, data availability & consensus), and other teams have devoted their efforts to building implementable systems that lend themselves to a modular architecture like the OP Stack, Polygon Supernets, and AVAX Subnets.

As we supercharge the abilities of crypto to process transactions more efficiently, we vastly increase the number of potential consumer applications. We hope these advancements in technology will usher in an emphasis on equal participation in crypto, no longer gating access to drops or experiences by gas fees or limited distribution.

Additionally, as this new infrastructure allows more and more data to be stored on-chain, we see a rise in desire to parse that data, too, with human-readable block explorers and data aggregators like Ora, Breadcrumbs, and Once Upon. These tools follow a larger trend in transforming technically challenging undertakings — like spinning up app-chains or integrating NFTs into games — into low or no-code processes via tools like Constellation or Stardust. Other areas within this broader trend that excite us include fiat on/off-ramps (like Bridge) and customer intelligence & communications solutions (like Plex, Garden, and Dispatch).

In Conclusion

We hope this piece illuminates where we hope to spend time and collaborate in the coming year. If you are spending time either building or investing in any of the above areas, we’d love to hear from you. Additionally, if you are working on something outside of this scope, or think there’s an area in which we should spend more time, we would be grateful to connect and learn from you.

The best thing about doing, well, anything, is the people with whom you get to do it. We are immensely grateful to our founders for their partnership and we thank you all — investors, collaborators, and friends — for being in our corner. We look forward to hopefully spending more time with you in 2023, and we invite you to reach out if you’d like to chat further or dive deeper on any part of this letter.

Team TCG Crypto

Disclaimers

None of the information discussed herein is intended to be or should be construed as financial advice, or an offer to sell or a solicitation of an offer to buy an interest in any security. Certain companies referenced herein are included by way of example and are not companies in which TCG Crypto has invested to date nor companies in which TCG Crypto intends to invest. The information set forth herein has been obtained or derived from sources believed by the author to be reliable and has been provided solely for informational purposes. Nevertheless, the author does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness.