With a debut venture fund of $150 million, BlockTower is poised to take advantage of the crypto winter

In the noisy venture capital landscape, crypto investors have emerged as some of the most aggressive in branding their business. They have written white papers and launched podcasts; on social media, partners at multi-billion dollar firms have become minor celebrities even 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 taking a different approach. A previously unannounced $150 million fund that is part of a larger hedge fund and credit business, BlockTower barely has a website. The company’s Twitter account, despite its ten thousand followers, has yet to tweet.

Instead, Miami-based BlockTower and Klocanas, the venture arm’s Brooklyn-based head, want to make moderation — and old-school financial ties — their calling cards. Keeping the fund relatively tidy at $150 million, BlockTower is looking to invest at a pace (10 investments so far this year) and check size ($500,000 to $5 million stakes, with $20 million deployed so far) that will help it to stick with their better-known, faster 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 a larger firm can’t: true power users in crypto-focused institutional finance who can contribute to to create markets and provide assets for lending businesses to get started.

“We live and breathe what we invest in, because otherwise, who are we to advise them,” says Klocanas. “We want to lead by action, and hope our actions speak for themselves.”

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 the fintech and blockchain student organization. While pursuing his MBA, he began working at local crypto software maker and incubator ConsenSys in 2017, helping to launch new projects and perform several business development roles. After brief stints at several other crypto projects, he joined VC firm White Star Capital in January 2020 as a principal, helping raise the first digital asset fund, a $50 million vehicle that backed startups including Ledn, Paraswap, and Rally.

In late 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 late 2021 filing listed the firm with nearly $1 billion in assets; at today’s prices it has more than $500 million.

In 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. Pitch: BlockTower can 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 said 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 eventually capped the 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 10 investments so far this year, with $20 million. The firm looks to write $500,000 to $5 million checks it can lead or co-lead into companies and crypto projects in 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-oriented 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 work that, while lacking a crypto-focused product today, may use crypto as a central part of their business in the future, it said Klocana’s.

Investments include Lighthouse, a potential search engine for the metaverse where the firm led a $7 million funding round with Accel in May, and Aptos, a startup founded by former Meta employees seeking to carry the torch from its Facebook parent. the company’s abandoned blockchain project.

But BlockTower’s value is more apparent with early-stage companies like Maple Finance, a startup that helps lending companies raise 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 another startup looking to connect real-world assets to such liquidity pools, Centrifuge. The alliance is more valuable than the venture dollars themselves, says Centrifuge CEO Lucas Vogelsang. “It brings all this technology we’re building closer to their networks, 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 adopter could play a valuable role in the ecosystem, several venture capital peers said. Forbes. “A lot of 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 were not authorized to speak to the press .

At Hack VC, an infrastructure and DeFi-focused crypto VC firm launched last year, co-founder and managing partner Alexander Pack said “crossover funds” with hedge fund arms had their trade-offs, pointing to turbulence at Tiger Global and Coatue Elsewhere in Startup Investments. But Pack was cautiously optimistic in crypto. “If BlockTower can leverage its hedge fund to provide on-chain liquidity to the seed portfolio, it could start network effects and help the portfolio win out against competitors,” he said.

Another factor in BlockTower’s favor may be the timing. Klocanas and his fund hit the market just as crypto fell into a “crypto winter” that has included cratering cryptocurrency prices and a noticeable decline in venture dollars. Companies 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 earlier.

The struggling sector is unlikely to bode well for BlockTower’s flagship hedge fund. But with a young and small portfolio, BlockTower faces little pressure to deliver immediate returns. The pace of investment, meanwhile, means it still has most of the fund to spend as purchase prices fall and other investors wind down activity in the category.

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

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