Venture capitalists are supposed to be on the front lines of new technology.
But when it comes to cryptocurrencies and blockchain startups, VCs have been gun-shy.
Matt Huang, a partner at Sequoia Capital, understands the wariness. After all, investing in blockchain startups means betting on complex, new technology and putting your faith – and capital – into largely unproven alternatives to equity.
Despite the risks and the fears of a “bitcoin bubble,” Sequoia and Huang are jumping in. The storied VC firm, which made a name for itself with early bets on companies like Oracle and Google, has invested millions in two blockchain startups – Orchid Labs and Filecoin – and two cryptocurrency hedge funds, MetaStable and Polychain Capital.
We checked in with Huang to find out what gives him confidence to invest in this emerging industry and how crypto is changing both the tech landscape and the business of VC investing.
He thinks the technology is exciting and that the companies have the potential to change the world.
Sequoia's most recent investment took place at the end of October, when it led a $4.7 million seed round in a company called Orchid Labs - an open-source blockchain project that aims to reduce internet surveillance and censorship.
Blockchains are digital ledgers that record everything that has ever happened involving them. It's the technology underpinning popular cryptocurrencies like bitcoin and ether, and companies that use blockchains to build their core products can also use them to create tokens as a form of equity.
Orchid Labs created a blockchain called the Orchid protocol. On top of that, the company is building a decentralized overlay to the internet that it says will be impenetrable to national firewalls and other forms of censorship.
The company compares it to Tor, an overlay that lets users anonymously browse websites and is often associated with the dark web - unlisted and sometimes criminal websites that require special software to access.
Huang said Orchid's mission struck him as both achievable and useful in today's political climate.
"There's lots of exploration right now around what are the interesting or useful applications beyond bitcoin," Huang said. "Orchid struck us as one of the first killer apps that we can see getting broad appeal. It also has an important mission that we think is very timely in the world today."
The blockchain technology that underpins Orchid's product also provides the mechanism for investing in the company. Sequoia's investment was in the form of a SAFT, or a Simple Agreement for Future Tokens, an emerging fundraising technique in which investors buy a share of cryptotokens from companies.
He has followed the sector for long enough to know that it's more than just hype.
When asked what makes Sequoia feel comfortable investing in blockchain, Huang said he had spent enough time in the sector to tell the difference between world-changing projects and hype.
"The technology is really interesting at first blush, and I think that's what draws a lot of people in - it's an exciting new platform," Huang said. "Then you look at some of the behavior that's occurred over the last year, and a lot of the elements feel like a bubble. I think that turns a lot of people off."
Huang said he had been following the sector for many years and thought this recent wave of blockchain enthusiasm had a different color to it.
"Once you spend enough time in the area, there's enough real substance coming to the forefront and strong legitimate teams working on interesting problems that I think it is a really promising space for investing," he said.
He sees people leaving great jobs at Google and Facebook to join blockchain startups.
Huang said he was also assured by the number of technically savvy people taking the blockchain space seriously and even leaving stable careers at established companies to join startups working on the emerging technology.
"There's a huge influx of people leaving places like Google and Facebook to work on projects in the space, and I think of that as the most promising indicator," Huang said.
Still, he thinks the industry needs to set better standards for fundraising.
Sequoia used SAFTs to invest in both Orchid Labs and another blockchain startup, Filecoin. SAFTs, in which investors are promised a set number of tokens that don't yet have value, are popular because they allow investors to put money toward the technology rather than in a centralized company.
SAFTs are particularly useful for investing in products like the Orchid protocol, which ultimately could become an open-source project supported by a community of engineers rather than a structured team. Huang compared this to the bitcoin protocol, which was developed by a team but has spread like wildfire after becoming open-source.
Most venture-capital firms - Sequoia included - are used to the old equity model in which investors purchase private shares of a company, often while mentoring the founders to help the company reach its full potential.
SAFTs are such a new way of investing, however, that many venture capitalists are writing the rules on the go, Huang said. In the long run, though, he hopes to see some of the best practices developed in venture capital trickle into this new way of doing business.
"One of the big distinctions between equity and tokens is that there are more protections around equity," he said. "Investing in SAFTs is new territory, and I think what you're seeing is that a lot of this ecosystem is learning in real time how best to structure these things."
He continued: "We're really interested in seeing more of these venture mechanisms enter the blockchain space. It's not to say that you have to copy exactly what evolved on the equity side, but you don't have to reinvent from scratch either, and there are definitely best practices."