Originally published on Substack — April 8th, 2022
The world of venture capital is changing dramatically. And it continues to change more and more quickly. We're on internet time now. Venture capital is an industry that has been fairly stable for the last 50+ years. Now every year we see any number of forces that could dramatically change how capital is allocated to startups.
I've dubbed the people driving those changing forces as "renegades." I laid out some of the characteristics of the renegades of venture capital recently. These aren't just solo capitalists or startup funds. Any fund or investor who is disrupting the status quo in venture and realigning their offering to optimize for a founder's needs and odds of success can be a renegade. One of my favorite things is to reflect on the impact these people are having. I'm young enough in my career that I welcome radical change. It shakes up the way startups get funded and how companies get built.
The Renegade: Paradigm
In 2017 crypto was experiencing a real moment. The price of bitcoin increased from ~$1K at the beginning of the year to a peak of ~$19K in December. At the time Fred Ehrsam was just stepping away from helping to run Coinbase; a job he'd been doing since he helped co-found the company in 2012. Meanwhile Matt Huang was an investor at Sequoia. He met Fred after working on the investment team at Sequoia evaluating Coinbase for an investment. Sequoia ultimately said no, but Fred and Matt kept in touch.
"[Matt] invited [Fred] to pitch another startup idea to the firm involving blockchain technology, a decentralized computing platform owned by users, powering a virtual reality metaverse. That idea didn’t lead to an investment either, but the pair later exchanged 60 emails brainstorming potential business ideas related to crypto before deciding to launch their own VC firm, Paradigm."
Some might think the beginning of 2018 was a rough time to start a crypto-focused venture firm. That year bitcoin prices dropped by 80% and we entered what many referred to as a "crypto winter."
But for Matt and Fred it was a relief.
"Both were relieved when the Bitcoin bubble burst in early 2018. Out flowed the dabblers, day traders, and daily Bitcoin price updates on CNBC. To Ehrsam and Huang, those who remained represented the more attractive long-term investments – people who would look smart and have built big businesses by the time the hype cycle swung around again."
Fast forward to late last year when they announced a new $2.5B fund, the largest crypto fund ever. They were clear about their approach to backing crypto founders: total immersion.
The Innovation: Frontier Immersion
"The best way for us to contribute to this revolution was to build an investment firm uniquely adapted to crypto, so that we could be the best possible partner to crypto entrepreneurs and communities. We’ve immersed ourselves in the frontier of protocol research and the culture of Web3. And we’ve built a team of domain experts around research, engineering, security, talent, communications and marketing, legal and policy, and everything else crypto entrepreneurs might need to advance their projects."
I can't emphasize enough how different that product is. When most venture firms are trying to be everything to everyone Paradigm took a different approach: try to be everything for a very specific someone.
Venture firms have always been a somewhat removed participant in a company’s life. Even the seed investors who are pouring blood, sweat, and tears into these companies they back. There is always a certain level of removal because the VC’s fate is tied to a broad portfolio of companies. Paradigm would be different. Unlike traditional venture firms that are 100% invested in equity stakes of companies Paradigm would invest 60% in "alternative assets like digital tokens and the currencies themselves."
In effect Paradigm is saying to crypto founders, "we live or die on the same thing as you.” In 2018 after they closed their first fund they called all $400M of capital and plowed it into Bitcoin. Talk about conviction.
This fundamental immersion in the frontier of crypto required an entirely different org chart than most traditional venture firms. The way Paradigm has built their team is, I believe, going to be something people point to for decades as the starting point of a fundamental shift in how all venture firms are structured.
Building The Org Chart of Innovation
When they announced their latest fund, they pointed to a team of "domain experts around research, engineering, security, talent, communications and marketing, legal and policy." I've written before about the traditional venture org chart. At the top you have a group of investor partners who are God and dictate every component of the strategy to the firm. But at Paradigm they've built for expertise rather than control.
The way Paradigm has structured itself is fundamentally different than most venture firms. When you look at this structure it feels more like a company. Is the investing team important? Absolutely. But are they god dictating how everyone else works? Definitely not.
Paradigm promoted Georgios Konstantopoulos in late 2021 as CTO after he had been working on their research team for about a year. A few things that are important to note here.
Valuing Non-Investor Contributors: In their press release Paradigm mentioned that they met Georgios because they frequently saw him as an advisor to their companies. He could be a CTO at any number of companies but he chose to work at Paradigm. He isn't a glorified IT guy like you'll see at a lot of venture funds. He sees the opportunity at Paradigm as high quality enough to forego working at any of the projects Paradigm is backing. He doesn't feel like a second-class citizen who needs to pivot to the investing team to feel successful.
Promotion Path: Most non-investors at venture firms have very limited upward mobility. The fact that someone like Georgios can be promoted within Paradigm creates an opportunity for everyone who works there. Just because you're not actively on the investing team doesn't mean you're doomed to work under an ever-rotating cast of investors in order to be successful.
Outside of building their own team like an innovative company they're also staying true to their ethos of becoming immersed in the frontier they're helping to build. Paradigm hired Dan Robinson as their Head of Research back in early 2019. The program he's running is fundamentally different than almost anything that exists at a traditional venture firm:
"It's part of the broader Paradigm vision of being one of the most helpful and savvy investors in this space. And then individually, for Paradigm Research our goal is to try to build this into a very strong applied research institution. One of the visions is to do a miniature version of what Bell Labs had. They ran this really phenomenal research laboratory that created a bunch of novel innovations like the transistor, the satellite, solar panels, and information theory. And so to really build a team that can actually produce ideas like that. That's the aspirational goal for the research team."
The level of collaboration Paradigm's team has with the ecosystem they're supporting is more than just "helpful." It's net new contributions. They're getting into the weeds and contributing to the projects they're helping to build. Some kind of equivalent would be like a venture fund having software engineers contributing to open source projects. It's game changing.
What Does This Mean For Venture?
I am obsessed with the ways venture capital is being forced to change and adapt in an ecosystem of company building and market creation that is changing faster and faster. Of everything I've seen, out of every new model or way of doing things I've explored Paradigm is one of the most obvious examples of a firm that is building their offering very differently.
I've written before about what it means to be a "product-led venture firm."
"Very few firms have a clear answer to the question "what is your differentiated product?." There has never been a better time for venture firms to stop and think about what a product-led venture firm would do."
Some of the people who will stand still long enough for me to rant about how impactful Paradigm is on the world of venture will say things like, "yeah but crypto is just fundamentally different." I strongly disagree. First? Because crypto is going to impact every venture firm sooner or later, so the point is moot. And second, even firms that are not heavily dedicated to investing in crypto will be impacted by Paradigm's way of doing things whether they prepare for it or not.
I can't emphasize enough how much Paradigm's org chart will change the way they're able to innovate as a firm. We're moving out of the age of a handful of old white dudes around a table with identical backgrounds telling everyone else what to do. Any firm that doesn't acknowledge that they're building a product of one kind or another is going to eventually struggle to attract anyone other than cookie-cutter wanna-be VCs.
The caliber of people working at Paradigm have passed up opportunities to work at some of these game-changing crypto companies because they're valued as contributors at Paradigm. No one is going to do that if they just have to go cow-toe to whatever a GP decides he wants them to do. No world-class engineer is going to go to a firm just to be bossed around by someone who hasn't built a product in 10+ years if ever.
Beyond the org chart that Paradigm is demonstrating for the rest of the world you also have this element of collaborative contribution. Some people point to founders taking money from Tiger as an example of how founders just want to be left alone. But at the very same time? Paradigm exists. Wading deeper into working with their companies than any firm before them. And founders love it. Both things can be true because founders aren't robotic replicas of each other. They want different products from different people to fill different needs. And Paradigm is filling a lot of those needs and then some.