Author: Nian Qing, Gu Yu, Chain Catcher
Recently, The Block published an article stating that the cryptocurrency venture capital company Paradigm has changed its website description since the beginning of this month. The relevant description has been changed from "Paradigm supports disruptive crypto/Web3 companies and protocols with as little as $1 million and as much as $100 million or more" to "Paradigm is a research-oriented technology investment company."
In addition, people familiar with the matter said that Paradigm is shifting its focus from cryptocurrency to also include "cutting-edge" technologies such as artificial intelligence. Of course, Paradigm has not fundamentally changed its mission and will continue to focus on cryptocurrency and Web3. The updated website copy is just to emphasize "technical research". Paradigm has long been exploring some companies that develop new technologies, such as AI Arena.
Even with a more reasonable explanation, Paradigm's "rebranding" still has a big impact on crypto users. Some people accuse Paradigm, which focuses on the crypto field, of transferring billions of funds used to invest in Web3/crypto to other technology fields, and question whether Paradigm's move has been agreed by other LPs. Others criticize that the firm believers in crypto who have been advocating "We believe that cryptocurrency will define the next few decades" suddenly erased the positioning of Web3, which is tantamount to "betraying the crypto revolution."
More than a month ago, Wang Huiwen, co-founder of Meituan, changed his signature from "Learning Crypto" to "Learning Artificial Intelligence", which also triggered a wave of discussion. The group of people who once shouted "All in Crypto" turned to AI, and it is hard not to be criticized for riding the wave. However, the negative emotions brought about by small things such as changing signatures and official website descriptions also indirectly reflect that the current crypto market is facing a serious lack of confidence.
But to be fair, are the reactions such as “Paradigm defecting from the Web3 revolution” a bit excessive? This article will analyze why Paradigm needs to reposition itself from a practical perspective and from the perspective of its existing portfolio.
1. Starting from the practical level
For a fast-growing fund, it is a classic and sustainable strategy for venture capital institutions to concentrate on a specific field in the early stage to obtain high returns, and then expand the scope of investment and diversify risks after maturity. In addition, Paradigm's modification of its positioning does not mean that it will withdraw from the investment in the encryption field. Earlier today, its co-founder Matt Huang said on his personal Twitter account: "Never been more excited about cypto (there has never been anything more exciting to me than Crypto)", trying to respond to the doubts about Paradigm's "paradigm shift".
This is the reality of the primary investment market. The new narrative that is on the cusp of the trend can gain more market attention. We can compare the recent financing status of the AI field and the encryption field:
Two days ago, Anthropic, founded by former OpenAI executives, received another $450 million in financing; at the end of April, OpenAI completed $10.3 billion in financing, with a valuation of $27 billion to $29 billion; and in March, it was reported that Inflection AI, an AI startup founded by DeepMind co-founder and LinkedIn founder, planned to raise as much as $675 million.
The amount of funding for the AI track is huge, and the financing ratio is also increasing. Some start-up projects in the Web3 field are also trying to take advantage of the AI trend. According to RootData data, Web3 projects with AI concepts have received a total of 10 rounds of funding in recent months. Worldcoin, which just completed a $115 million Series C funding round a few days ago, is also a crypto project related to OpenAI.
According to RootData statistics, the amount and number of financing in the crypto market have generally been on a downward trend since April 2022. Among them, the cumulative financing amount in April was only US$815 million, which is not only far lower than the same period last year, but also far lower than the data of the AI track in the same period.
In addition, venture capital institutions in the crypto bear market are facing the dilemma of high investment risk, low return rate or even no projects to invest in. In the previous article "Why did Paradigm shift its paradigm by deleting the official website's cryptocurrency description and entering AI?" in DeepChao, it was also mentioned that as a VC, Paradigm needs to invest money. When too much money is raised, the investment options will become fewer, and the expected returns must be obtained.
The more realistic reason is that Paradigm is still trying to get rid of the shadow of FTX’s bankruptcy.
According to statistics from The Information based on Paradigm's website, at least eight employees have left since early October last year, including two investment partners and four engineers. The resignations mainly came from Paradigm's engineering and investment departments. At the end of last year, Paradigm lost $278 million from the FTX crash.
In November 2021, before Paradigm announced the completion of $2.5 billion in new financing, it carried out a major round of expansion, doubling its size to 31 people. In the following year, Paradigm continued to expand, and the number of employees in the company once reached 70.
In addition to business operations considerations, the uncertain regulatory policies in the United States are also an important reason for Paradigm to reshape its brand.
After FTX collapsed, the US SEC began to review and prosecute some crypto projects that may have violated securities laws, including leading crypto companies such as Binance, Coinbase and Kraken, many of which are Paradigm's investment portfolio. Paradigm co-founder Fred Ehrsam has also repeatedly expressed concerns about US regulation on his Twitter.
In addition, due to multiple factors such as regulation, U.S. institutional limited partners have "very strong opinions" on labels such as "Crypto" or have certain risk concerns, especially some traditional large funds.
2. Paradigm’s team temperament has not changed
"Paradigm is a research-driven technology investment company" - this description after the brand reshaping is indeed not inconsistent with the temperament of the Paradigm team.
Paradigm has always adhered to the investment philosophy of research first, and technical research has always been its core strength, enabling them to actively integrate into the project construction of start-up teams.
Although four engineers left Paradigm in the first half of this year, there was also an important personnel change: in February, Paradigm appointed two general partners, Charlie Noyes and Dan Robinson, both of whom are research-oriented crypto technology figures. This appointment also continued its research-oriented investment philosophy to a certain extent.
In addition, the two founders, Matt and Fred, have experienced multiple cycles of cryptocurrency. They have an idealistic persistence in cryptocurrencies, but they are more rational and follow realistic investment strategies. Paradigm made its fortune by buying the bottom of Bitcoin early on, and in the bear market of 2018, they used most of the first $400 million fund raised to buy Bitcoin and Ethereum. Just in May, Paradigm's entity Paradigm One LP also purchased 810,000 shares of Coinbase at an average price of $61, with a total price of approximately $50 million, also participating in stock investment.
Therefore, crypto funds that have survived the early stages, including Paradigm, must be realistic and flexible in their investment strategies: if the primary market is sluggish, they can invest in the secondary market; if the crypto field is not doing well now, they can expand to a wider range.
In addition, from the perspective of team temperament, Paradigm, a tech geek, is always easily attracted to new technologies. Since ChatGPT became popular, both the founder and engineers of Paradigm have increased their attention to AI. The team also launched a ChatGPT-related tool flux.paradigm.xyz. Perhaps, from the perspective of investors' own concerns, investment in the field of AI is also a natural choice for the team.
3. Paradigm Portfolio Analysis
The change in Paradigm's investment direction has been largely reflected in its recent investment situation. As one of the largest funds in the crypto industry, Paradigm has only disclosed its participation in two financings (Conduit and Code4rena) since the FTX incident in November last year, which is a very low number among first- and second-tier crypto funds. In contrast, Paradigm invests in 1-3 projects almost every month.
Next, this section will provide a detailed analysis of Paradigm’s past investment strategies and styles based on public reports and RootData data.
According to RootData data, Paradigm has publicly disclosed 92 external investment rounds, of which 55 were led rounds, with a lead rate of 59.8%, which ranks second among all crypto venture capital funds with more than 10 investment rounds, second only to a16z. In addition, Paradigm is at the forefront in terms of large investment proportion, reinvestment rate and other data. At the same time, the total number of investments is not high, maintaining a "fine and beautiful" style and daring to place heavy bets.
In the NFT track, Paradigm's typical investment projects include NFT markets Opensea, Blur, Magic Eden, Zora, etc. Among them, Blur was led by Paradigm in March last year. At that time, Blur was still an unknown anonymous project. This year's outbreak of Blur has made Paradigm quite profitable.
However, Paradigm’s investment in Opensea is not a success. The investment took place in January 2022, and Paradigm led a $300 million financing with a valuation of $13.3 billion. However, judging from the current market conditions, this investment may also be a heavy loss. In April of this year, foreign media reported that Tiger Global had lowered OpenSea’s valuation to $3 billion. Recently, Tessera, an NFT fragmentation protocol that Paradigm has led many times, also announced that it will cease operations.
In the DeFi track, Paradigm's typical investment projects include decentralized exchange Uniswap, liquidity pledge protocol Lido, decentralized derivatives protocol dydx, etc. However, most of these investments occurred in the past few years, and since the beginning of 2022, there have been few investments in new DeFi projects, with only two projects, Exponential and Ribbon Finance.
In the CeFi track, Paradigm has invested in a series of well-known projects such as FTX, FTX US, Amber Group, Matrixport, Bitso, Rain, etc. The last investment was in January 2022. Among them, FTX and other failed projects also caused Paradigm to suffer huge losses in both economy and reputation.
In the infrastructure track, Paradigm has invested in well-known projects such as Optimism, StarkWare, Mina, Fireblocks, and recently invested in Conduit, an infrastructure for launching production-level Rollups based on OP Stack, Nxyz, a blockchain index and data infrastructure platform, and Ulvetanna, an enterprise-level zero-knowledge proof acceleration platform.
It is worth noting that Paradigm has also maintained a very restrained attitude during the "new public chain" craze in the past two years and has not disclosed any related investments, which is very rare among first-tier venture capital institutions.
In the fields of games, social networking, DAO, etc., Paradigm's investment frequency is even lower, with only about 10 transactions in total, and there are no particularly typical investment cases.
Crypto investment has encountered setbacks and the market is sluggish. New directions such as AI may be the best way for Paradigm to give LPs performance and returns. As for investment in the AI track, Paradigm invested in Numerai, a hedge fund project based on artificial intelligence technology, several years ago, but has not disclosed the relevant investment in recent times.
At present, institutions such as Polychian and a16z are still insisting on increasing their investment in Crypto, while Paradigm has decided to slow down its investment pace and extend its tentacles to larger tracks such as artificial intelligence. What kind of future will this new route lead Paradigm to? Perhaps only time can give the answer.