LVC Series: Part 1 - The Origins of Triton Liquid

Disclaimer: This is not financial advice. Anything stated in this article is for informational purposes only and should not be relied upon as a basis for investment decisions. Triton may maintain positions in any of the assets or projects discussed.

This is a multi-part series on Triton’s investment process for liquid crypto:

• Part 1: The Origins of Triton Liquid
• Part 2: Liquid Venture Capital
• Part 3: Liquid Crypto Market Segmentation
• Part 4: Data Dashboards for Liquid Crypto
• Part 5: Research Process for Liquid Crypto

Liquid Crypto VC

As technology reshapes the finance sector, the emergence of Liquid Venture Capital (LVC) stands out as a novel paradigm shift. Situated at the intersection of conventional venture capital practices and public market dynamics, the emerging cryptocurrency asset class necessitates a nuanced approach. Cryptoassets offer unique investment and risk profiles that combine venture-style returns with a shorter investment time horizon and continuous liquidity. In this new asset class, LVC is primed to redefine investment methods, addressing many limitations of the traditional VC model and providing outsized returns with the benefit of full liquidity. 

The Limitations of Traditional Venture Capital

Traditional VC operates on the principle of illiquidity. Investors pledge their capital to startups for prolonged periods, frequently years, before a liquidity event such as an IPO or an acquisition offers returns. The VC model, while valuable in its capacity to foster innovation, is fraught with inherent constraints:

• The long-term illiquid nature of VC investments poses significant challenges. It restricts the agility of investors, locking up their capital and limiting their ability to react dynamically to real-time market developments.
• The traditional VC model exhibits a "power law" nature, wherein a small percentage of investments yield the majority of returns. Out of every ten investments, only 1 or 2 will succeed, while others fail or achieve only moderate success. This demands diversification to spread the risk and necessitates a sizable fund to absorb potential losses. 
• VCs generally require sizable capital commitments, which effectively limits the investment opportunity to wealthy individuals and institutional investors. This restricts broader participation and democratization of venture capital.

FJ Labs’ Novel Approach to Traditional VC

Fabrice Grinda and Jose Marin recognized some of the shortcomings listed above when they founded FJ Labs and devised a novel investment approach. As Fabrice discusses here, FJ Labs takes a unique, high-velocity angel investment approach to early-stage VC:

• FJ evaluates 40-50 deals per week,
• FJ invests based on two 60-minute calls,
• FJ does not lead, and
• FJ does not take board seats.

As a result, the FJ Labs portfolio consists of over 1,100 companies that span multiple investment stages, geographies, and industries in marketplaces and network effect businesses. Because of this approach, FJ is a small enough investor to exit at certain rounds, which helps solve for the illiquid shortcoming listed above.

This approach has worked well. Some of FJ Labs portfolio companies include Alibaba, Betterment, Coupang, Delivery Hero, Fanduel, Flexport and Rappi with over 300 exits, a 3.8X realized multiple and 37% realized IRR. FJ recently closed on $290M from the founders of Linkedin, PayPal, Supercell, Wayfair and MongoDB, families who run Estee Lauder, Banco Itau, El Corte Ingles and Walgreens Boots Alliance, and organizations such as Sequoia Capital, Atomico, Tiger Global, and H&M.

FJ Labs - Liquid Crypto 

Given the unique strategy FJ applies to traditional venture, it was the perfect place to apply a nuanced LVC model to the cryptocurrency arena. FJ Labs was already very active in the crypto space, with 47 crypto investments by June 2022. In July of 2022 we began incubating a new LVC crypto strategy for the fund. Over the next few posts, we will outline some of the methods we use to invest in and actively manage a diversified portfolio of liquid crypto assets. 

FJ Labs allocated $30M to this strategy in the fall of 2022. Though we started building small positions then, we did not begin deploying capital in earnest until late 2023. Below shows the fund performance as of close March 11, 2024.

On roughly $28M of invested capital, our strategy has returned 106%. Since November 2023, we have increased our market exposure from 20% to 90%.

Triton Liquid

Given the success of the strategy, we have decided to spin this out of FJ Labs and launch a directional, long-only liquid crypto fund called Triton Liquid Fund. 

Over the next few posts, we will outline some of the methods we use to invest in and actively manage a diversified portfolio of liquid crypto assets.

Why is now right for liquid crypto VC?

We believe now is the best time to pursue a liquid crypto strategy for several reasons:

• Crypto had never gone through a macro risk-off moment. Since these assets are still viewed as the riskiest portion of an investor’s portfolio, and because they are liquid, they are the first to get sold in an environment like the one we witnessed over much of 2022.
• The implosion of multiple funds, centralized lenders, and high-profile exchanges have further exacerbated the downside move across this space.
• The regulatory headwinds in the United States are the icing on the cake and have been the final shoe to drop in a year of negative news and sentiment surrounding this asset class.
• Since this is still a highly correlated asset class, the great projects with real revenue and sticky users sell off just as hard as the projects that have no real merit.
• Prior crypto cycles have been largely driven by speculation, but as the space continues to mature, fundamentals are increasingly important value drivers.

There are also now several shifts starting to take place on a macro level that point to a softening of the headwinds crypto has faced:

• Expected Fed rate cuts throughout 2024 and an increasingly likely realization of the coveted ‘soft landing’
• Increasing institutional interest and development around cryptoassets, including spot Bitcoin ETF approvals in the US for 'traditional' firms such as Blackrock, Fidelity, Franklin Templeton, Ark and VanEck
• A forthcoming flood of innovative protocols coming to market from founders that have been building throughout this bear market

Each of these are coming together over the next 18 months to spur a step-function change in the adoption of cryptoassets around the world. We believe that the above factors, combined with our proprietary evaluation process, provide a unique opportunity to realize venture returns in this emerging asset class.