Everyone is getting into ve-tokens, including venture capital firms that make investments with long time horizons.
In its latest round of funding, Electric Capital has raised $1B for two new funds that it will use to purchase tokens and equity in cryptocurrency projects that deepen blockchain communities, decentralize web3 infrastructure, and further democratize finance, the firm said in a statement today.
The firm declined to disclose the backers of this new fund, noting that it’s almost entirely university endowments, large non-profit organizations, and foundations.
“Founders in Web3 need crypto-native investors who understand the unique support that protocols and Web3 companies need through the inevitable crypto cycles,” said Avichal Garg, cofounder of the firm, in a statement.
In an interview with The Defiant, Garg explained that this set of investors is crucial for the way Electric Capital wants to invest. It needed to build these two large funds with investors that would buy into a 10-year lockup.
A long commitment like that gives Electric flexibility to support certain kinds of DeFi projects, particularly those with liquidity objectives.
The new funding supports a $400M fund that does both equity and tokens. The second fund is $600M designated for only tokens and coins. Electric did this because it believes the equity market in tech is overheated. Opportunities remain in token-only deals because many investors are ill-equipped to make those kinds of deals.
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“There is a lot of money out there, but most of the money is chasing a relatively small number of things,” Garg said. “In the near term we’re really optimistic about a lot of the crypto networks and we think a lot of that is where the real returns will be.”
One project that Electric has supported for a while illuminates how a long lock-up is powerful in DeFi: Frax Finance.
With a large pool of funds and investors who have made a big commitment, Electric can support a project like Frax Finance in a couple ways that are unusual outside of crypto.
First of all, Electric sits on a large pool of stablecoins. So if FRAX wants deep liquidity in automated market makers around the crypto market, Electric can support it by putting its stables in opposite FRAX. If all goes well, Electric should still get passive income off those pools, but it helps improve FRAX’s liquidity depth at relatively little cost or risk to Electric.
Second, it can back Frax in its objectives to secure incentives on different networks. Frax is a project that works overtime to win strong liquidity incentives on Curve, as one example, by getting heavily involved in the meta-protocol, Convex. Convex is entirely devoted to dominating decisions over which liquidity providers get the most new emissions of Curve’s governance token, CRV.
Electric can help the Frax team do well here, supporting its push for more rewards to the pools that have FRAX in them. Thanks to its long term lock-ups, Electric can also get into the voting-escrowed (ve) token game. “Once you’re doing 3 or 4 year ve token lockups you’re really boosting your voting power,” Garg said.
Other VCs might not be inclined to make such substantial lock-ups in order to have maximum clout on the network.
Of course there’s been a lot of pushback in the grassroots of crypto over VCs that wield too much influence. Garg argued much of this is driven by VCs that aren’t actually longterm aligned, however. They make big moves for a temporary gain, and that frustrates the actual users.
“A lot of people who call themselves VCs are not. They are really more traders,” Garg argued. “I think some of the feeling that people have in these communities is warranted.”
Electric’s prior round raised $110M. Like most new funds when they reach the announcement stage, Electric has already made several investments out of the new funds, into rounds that are not yet announced.