In the world of Web3 Venture Capital, the landscape is rapidly evolving with unique characteristics and investment approaches. As highlighted in the previous article (PART I), traditional venture capital firms are expanding their coverage of Web3 projects, while dedicated Web3 VC firms are actively funding early-stage startups building on blockchain technology. In PART II of this series, we will delve deeper into the life cycle of Web3 VC firms, exploring the various stages they go through, including fundraising, investments, operations, and exits. By understanding the intricacies of Web3 VC life cycle management, we can gain valuable insights into the inner workings of these firms and the strategies they employ to navigate the ever-changing landscape of the Web3 eco.

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The whole life cycle of a Web3 venture fund mainly consists of 4 stages: Fundraising, Investments, Operations, Exits.

Fundraising

There could be multiple fundraising channels for Web3 ventures:
● Regulated venture fund entity: Accredited investors only
● Proprietary fund: Internal capital, Employees of the manager and its affiliates as investors, Employees as notional investors (actual investors being their relatives or friends), etc.

Investor profile management, KYC, subion and redemption management
At Investor onboarding stage, the client profile needs to be well kept. Meanwhile, a Know Your Clients (KYC) process with workflow will be inadequate for compliance purposes. The ideal process should be with the following 4 steps: obtaining materials from investors, internal review, approval, and record keeping.
Correct bookkeeping of investors subions at the beginning (most venture funds are closed funds), shares transitions during the running period, investors redemptions at the closing stage will be essential. So VC firms can clearly calculate the return for each investor and carry interest when it goes to the closing stage of a venture.

Regular reporting to investors
Regular reporting to accredited investors is crucial. It is not just for satisfying the compliance requirements, but also building up transparency and trust between fund managers and investors.

Normally an investor report should consist the following sectors:
● Fund summary: fund size, deployed capital, number of investments, realized proceeds, key indicators (IRR, MOIC, etc.)…
● Performance: graphs and charts demonstrating the performance trend
● Portfolio summary: a list of full portfolios with key indicators of investments
● Key updates: fund-related or portfolio-related updates managers like to provide.

Investment

There are 3 layers in venture investment which need to be well managed and correlated: Funds/ Proprietary Fund, Portfolios and Underlying Assets.

Bookkeeping of funds/ proprietary fund
Regulated funds can be in complex structure (feeder fund- master fund- funds), and can offer multiple classes. Proprietary funds can also be allocated to different portfolios by multiple portfolio managers. So there could be various business scenarios that need to be under bookkeeping, for compliance and fund accounting purposes. Therefore, a management tool needs to provide enough flexibility to support different business scenarios.

Recording portfolios investment information
As mentioned, Web3 ventures invest in lots of portfolios. So keeping good track of the investment info of all these portfolios matters:
● Investment information: investment date, amount and currency, pre-trade and post-trade valuation, shares holding…
● Key terms of the agreement: SAFE/ SAFT details, anti-dilution clause, exit clauses, preferential liquidation rights, others…
● Legal and financial files: agreements, portfolio’s deck, whitepaper, other legal documents…

Tracking underlying assets
Underlying assets of the portfolios are equity/ SAFE, tokens/ SAFT or a mix. It’s essential to book them properly at investment stage, especially the initial valuation of them:
● For equity/ SAFE/ SAFT: The initial investment (the cost) is always viewed as the intrinsic value of the tokens before the token goes listing.
● For liquid tokens: Normally based on real-time price from centralized/ decentralized venues. It may differ for each VC firm when it comes to which price source is used as a valuation source. But overall, the majority of them are using the price from CMC, or the median price of major Centralized Exchanges (CEX) as the Fair Market Value (FMV).

Operations

Fund accounting for funds/ proprietary funds
Like all large fund houses focusing on secondary market trading, inhouse operation team of venture capitalists should also perform fund accounting so that they can compare with the fund admin reports. Middle officers should take care of the following points to get the correct NAV, management fee, waterfall carried interests, etc. :
● Multiple-layers fund structure
● Subion and redemption
● Fees accrual and amortized
● Regular re-valuation of equity/ SAFE and tokens/ SAFT (Please view ‘Re-valuation of underlying assets’)
● Different fund shares, which lead to different investor bases, minimum subions, management fees, and carried interests…
● Liability/ Loan recording for the scenario of employees being notional investors while actual investors being their relatives or friends
● Others

Valuation of assets
Web3 VC firms need to frequently monitor and adjust the valuation of the portfolios (equity/ SAFE and tokens/ SAFT) in daily operations, since
● The crypto market is highly volatile.
● There is a large deviation between tokens’ market price and intrinsic value when they just go public .

1.Performing haircuts helps better reflect the tokens’ intrinsic value in such situations. Meanwhile, setting a premium will also help uating the token value, when there is good news within the eco/ projects.

After the ‘FTX Collapse’ on Nov 8, 2022, Sequoia, Paradigm, Softbank and Temasek all marked down their FTX investment to zero. Meanwhile, asset managers who have exposure to ‘FTT’ (FTX utility token) also performed huge haircuts or marked zero for the token value.

Token vesting and unlock schedule
Tokenomics in the whitepaper determines the token vesting schedule and unlock arrangements.

The Vesting schedules of portfolios differ. Most tokens are non-linearly distributed with cliffs (meaning investors receive tokens on specific dates, rather than receiving a portion of them gradually), while few are linearly distributed.

AXS Allocations and Unlock schedule

For token unlock, there are 3 common ways in general:
● Tokens will be only distributed at the mutually agreed token unlock dates.
● Tokens will be distributed at Day 1, but locked by smart contracts.
● Tokens will be distributed and unlocked at Day1, but both parties mutually agreed not to sell until a specific date.

It can be overwhelming for operation managers to reconcile cash flows and portfolio managers to remember all token unlock schedules, when it comes to 100+ portfolios. A management tool with the following features can help increase efficiency in their daily work.
● Future cash Flow prediction (token receivables)
● Auto-reconciling whether cash flow matches with token receivables
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● Reminders for token unlock

In some special cases, portfolios may negotiate to change the token distribution dates. Therefore, the vesting schedule and future cash Flow also needs to be easily modified.

Yield generation (further)
Web3 projects usually try to let token holders to hold by incentivize staking in liquidity pools. As a passive yield generation, VC firms might participate based on their judgement to market. In such scenarios, the portfolio manager needs to understand the performance split into 2 sources: primary market investment and secondary market trading, while the operations team needs to understand the cash flow split between vesting receivable and income from Investment.

Internal analysis and reporting
Internal analysis reports will be comparatively more detailed than investor reports. Apart from key indicators (AUM, MOIC, IRR, investments, proceeds, FMV, etc.), internal analysis reports will also include investor breakeven analysis, etc..

frax price
We have talked about exit strategies in Web3 venture deals. Specifically, how and where will VC firms sell the tokens at exits?

Where to exit
● CeFi: exchange or OTC. If the token is listed in CEX, there’s a way to sell on the central limit order book. There are different OTCs provide RFQ or ution service for tokens as well.
● DeFi: Some new coins didn’t get listed in CEX, but they are usually found in the permissionless DEXs like Uniswap, Pancake Swap or Biswap, etc.

How to exit
If the tokens have not been listed, but liquid at DeFi protocols, ‘Swaping’ helps with the exits.
If the tokens have been listed on CEXs or DEXs, currently Web3 ventures are selling them in 2 ways:
● For ventures with their own trading team: Sell the tokens themselves with smart TWAP algo.
● For ventures without a trading team: Find market makers to sell the tokens for them and the market makers will either quote a price with haircut, or charge an ution service of 0.5-1.5% of the total uted value.

In either way, traders always trade with an algo to split the orders instead of selling all tokens at once to avoid huge market impact. Time Weighted Average Price (TWAP) and TWAP with random order sizes will be core algos used. And one single Order and ution Management (OEMS) with connection to multiple trading venues will be helpful to traders.

1Token covers Web3 VC life-cycle management

Covering the whole business cycle, 1Token provides a one-stop solution for Web3 ventures.

Fundraising Stage

● Investor profile management and KYC workflow
● Subion and redemption management
● Regular investor reporting

Investment Stage

● Bookkeeping funds/ proprietary funds (supporting funds with complex structure, e.g. Feeder-master-fund, funds with different shares, etc.)
● Recording investment information of portfolios (supporting both fund’s portfolio view and investment manager’s portfolio view)
● Tracking underlying assets

Operation Stage

● Fund accounting on both liquid fund and illiquid fund
● Ruation adjustment for underlying assets
● Token vesting notice and token unlock s
● Internal analysis reports

Exit Stage

● Liquidity analysis for token selling in multiple venues
● Realized and unrealized gain tracking
● Calculation of carry interest

1Token has API integration with 80+ centralized counterparties (mainstream exchanges, custodians, banks, etc.), 20+ blockchains and 100+ protocols, and 1Token can support API connection to more counterparties based on clients’ needs.

Founded by a crypto-native team with 7+ years of experience in crypto Quant trading, 1Token provides one of the best institutional-grade financial software for crypto institutions to manage portfolios, risk, and accounting.

Our team would be keen to meet potential strategic investors who share a deep knowledge of financial SaaS, and are actively investing in the crypto finance vertical.

For further conversations, please feel free to reach out to our head of Capital Markets - Annie Li (annie.li@1tokentech.com).

Quick Facts:
● Currently supporting 40+ global crypto institutions
● Top client profile incl. 3/5 top crypto exchanges, Animoca, Ant Alpha, Alfa 1, LTP, Matrixport, Nickel Digital, Nexo etc.
● $12M raised from Sumscope, Gate, Matrixport, Folius, and K3 Ventures