For General Partners (“GPs”) of traditional VC funds, the decision to launch token-specific funds seems to be primarily driven by 1) dynamics around token investment size and 2) Limited Partners’ (“LPs”) concerns about regulatory risks. With regards to the former, token issuances (“mints”) are typically smaller and allocated across a wider pool of participants than a traditional venture round. As a result, a token allocation may not consistently meet a VC fund’s minimum check size, making a token strategy at odds with a traditional equity-based fund’s investment mandate.
On regulatory risk, there is still much uncertainty about how governments will treat fungible and non-fungible tokens. In the US, Gary Gensler, the Chairman of the Securities and Exchange Commission, has criticized crypto and suggested that the space needs stronger investor protections. Simply put, the rules are still being written in real-time. LPs who allocate capital to gaming VCs may be comfortable with venture risk but not this novel regulatory risk. BITKRAFT founder Jens Hilgers cites regulatory risk as one driver of their token fund formation in a recent interview with GamesBeat: “investing in tokens as an asset class is something where, after consultation with some of our LPs, we got to know that some of them are actually not comfortable investing in something that’s still — I don’t want to call it the regulatory wild west, but regulation is still in the making.”
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In addition to new venture fund strategies, the amount of capital flowing into game-based tokens has a few other potential implications:
More blockchain game projects. Projects usually complete an initial token mint prior to actually developing a game. Developers use proceeds from the token issuance to fund their project roadmap, which includes the game’s development. The process is similar to how Kickstarter works. With even more funding flowing into blockchain game tokens via fund formation, developers are likely to have more confidence that they can raise the funds necessary to execute on their game ideas, resulting in more blockchain game projects.
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Potential governance issues. Several blockchain games have announced governance tokens that allow holders to directly influence a project’s direction. The idea is to decentralize ownership among a game’s users and community. However, there could be governance issues if institutional investors – who are primarily motivated by financial returns rather than fun gameplay – end up centralizing ownership in a project by acquiring a sufficient number of tokens. Much like we see in public equity markets, are we going to see “activist” token funds emerge that re-shape the direction of projects? Will investors always play nice with gamers? VC firm Andreessen Horowitz has written extensively about governance and token delegation best practices. Among their decisions, a16z is transferring their voting rights to others so that these “delegates” can more actively participate in a project’s governance. This is similar to a shareholder proxy. Per its writing, a16z seeks individuals with diverse perspectives, alignment to the project’s success, commitment to the project, full independence from a16z, subject matter expertise, and a history of stewardship. While this approach is to be admired, we can imagine instances where issues arise and/or parties have an opportunity to act in bad faith.
More funds to share with a game’s community. More funds flowing into token economies means that blockchain game studios have more funds to share with their communities. This dynamic can create a strong network effect that differentiates blockchain games from traditional ones. In doing so, certain metrics – such as UA costs and retention metrics – will likely benefit, all else equal. However, the longer-term success of blockchain game economies will still depend on attracting users who are not primarily motivated by financial returns, in our view.
Higher prices especially for rare and popular tokens. This is perhaps the most obvious. More capital chasing tokens will result in higher prices for fungible and non-fungible assets, all else equal. For example, a digital asset fund purchased the rarest NFT in the Aurory project (a blockchain fantasy RPG) for 2,400 Solana tokens, equivalent to $384,000 at the time.