Original article by: Joel John, Shlok Khemani
Original translation: Luffy, Foresight News
For the past week, I’ve been spending time on a mountaintop in Kerala, southern India. It’s been a strange place, sheltered from Trump’s tariffs, because Kerala has always been great at connecting the global with the local. This place has been exporting pepper all over the world for thousands of years. According to William Darymple, a peppercorn from here was found in the mummy of an Egyptian pharaoh thousands of years ago. But what does this have to do with today’s article?
In fact, this highlights how networks work in the context of trade. A thousand years ago, the port here facilitated the transportation of gold and spices, and thus became a gathering point for capital flows. Similar stories are playing out in London, New York, Calcutta, Hong Kong and many other trading centers, but some places do it better than others and are deeply integrated into the global trade network.
The crypto venture capital space shows a similar pattern, following an extreme power law distribution. But because we are always chasing the latest industry trends, the laws behind it have not been studied in depth. In the past few weeks, we have created an internal tool to track the network of all crypto venture capital investments. But why do we do this?
The reason is simple. As a founder, knowing which venture capital firms often co-invest can save you time and optimize your fundraising strategy. Each transaction is a fingerprint, and once we visualize this information on a chart, we can interpret the story behind it.
In other words, we can trace the key nodes behind most of the fundraising activity in the crypto space, just like finding the ports in modern trade networks, which is no different from what merchants did a thousand years ago.
We thought this would be an interesting experiment for two reasons.
1. We maintain a venture capital network that is a bit like a fight club. This venture capital network covers about 80 funds. In the entire crypto venture capital field, about 240 funds have deployed more than $500,000 in funds at the seed stage in the past year. This means that we directly contact one-third of these funds, and nearly two-thirds of them read our articles. This influence is beyond my expectations, but it is true.
Still, it’s often difficult to track where the money is actually going. Sending founders updates to every fund would just be noise. That’s where tracking tools come in, like a filter to see which funds have invested, in what areas, and with whom.
2. For founders, understanding how funds are deployed is just the first step. It is more valuable to understand how these funds perform and who they typically co-invest with. To figure this out, we calculated the historical probability of a project receiving investment from a fund and then receiving investment in subsequent rounds, but the situation becomes a little blurry at later stages (such as Series B) because companies often issue tokens at that time instead of traditional equity financing.
Helping founders identify which investors are active in the crypto VC space is the first step. The next step is understanding which funding sources are actually performing better. Once we have this data, we can explore which fund co-investments have the best results. Of course, this is not rocket science. No one is guaranteed to get a Series A just because someone writes a check, just like no one can confirm a marriage after a first date. But whether its dating or VC fundraising, it always helps to know what youre getting into.
VC Aggregation Effect
We apply some basic logic to identify the funds that invest the most in subsequent rounds in their portfolios. If a fund has multiple companies that successfully raise money after the seed round, it is likely doing something right. The value of a venture capital firm’s investment increases as its companies raise money in the next round at a higher valuation, so subsequent round investments are a reliable indicator of performance.
We take the top 20 funds in the portfolio with the most follow-on rounds and calculate the total number of companies they invested in at the seed stage. With this data, you can effectively calculate the percentage probability of founders getting follow-on rounds. If a fund sends out 100 seed round investment letters and 30 of them get follow-on rounds within two years, then our calculated graduation probability is 30%.
It is important to note that we set a strict two-year screening period. Often, startups may not choose to raise funds at all, or raise funds after two years.
Graduation Rates for Portfolios of Well-Known Venture Capital Funds
Even among the top 20 funds, the power law distribution is very clear. For example, getting an investment from A16z means you have a one-in-three chance of getting a new round of financing within two years, which means that for every three startups A16z invests in, one will get into Series A financing. Considering that the graduation rate at the other end is as low as one in sixteen, A16zs graduation rate is quite impressive.
The probability of a venture capital fund ranked near 20 on this list obtaining a follow-up round of financing is only 7%. These numbers may seem similar, but in reality, a one-third probability is like rolling a dice with a number less than three, while a fourteenth probability is roughly equivalent to the probability of having twins, and the results are completely different.
All kidding aside, this shows that there is a clustering effect among crypto VC funds. Some VC funds are able to plan subsequent rounds of financing for companies in their portfolio because they also have growth funds. So they will invest in the same companys seed round and Series A round. When a VC fund doubles down on the same company and increases its stake, this usually sends a positive signal to investors who join in subsequent rounds. In other words, the presence of a growth fund within a VC firm has a significant impact on the probability of a companys success in the next few years.
In the long run, venture capital funds in the crypto space may gradually evolve into private equity investments in projects with significant revenue.
We have a theoretical suspicion of this shift. But what about the actual data? To examine this question, we considered the number of startups in the investor group that received subsequent rounds of funding, and then calculated the fraction of companies in which the same venture capital fund participated again in subsequent rounds.
That is, if a company receives seed round investment from A16z, what is the probability that A16z will invest again in its Series A round?
The probability that a venture capital firm will make additional investments in subsequent rounds of financing for a portfolio company
A pattern quickly emerged. Large funds with more than $1 billion under management tend to make follow-on rounds more frequently. For example, 44% of all startups in the A16z portfolio that received follow-on rounds received follow-on investments from A16z. The probability for Blockchain Capital, DCG, and Polychain was about one-quarter.
In other words, the investors you choose at the seed or pre-seed stage are far more important than you think, because these investors tend to support companies they have invested in multiple times.
Joint Investment
These patterns are learned after the fact. We are not suggesting that companies that don’t get funding from the top VCs are doomed to fail. The goal of all economic activity is either to achieve growth or to generate profits, and if you can achieve one of these, the company’s valuation will increase over time. But understanding these situations does help increase your chances of success. If you can’t get funding from these top 20 institutions, one way to increase your chances of success is to leverage their investment networks, in other words, to build connections with these capital hubs.
The following figure shows the investment network of all venture capitals in the crypto field in the past decade. There are 1,000 investors in the figure, and there are about 22,000 connections between them. If an investor has a common investment with another investor, a connection will be formed.
This chart may look complex, however, it includes funds that have gone out of business, never returned funds, or are no longer deploying investments.
Investment network of all venture investors in crypto over the past decade
The following chart gives us a clearer picture of the market trend. If you are a founder seeking Series A funding, there are about 50 funds that have invested in rounds of more than $2 million. The investor network that participates in such rounds consists of about 112 funds, and these funds are becoming more and more concentrated, and their preference for co-investment partners is becoming more and more obvious.
From Seed to Series A, the investor groups you can seek funding from
Over time, funds have developed a habit of co-investing. That is, when a fund invests in an entity, it often brings a peer fund with it, either because of complementary skills (such as technical expertise or the ability to facilitate market entry) or based on a partnership. To study how these relationships work, we began exploring co-investment models between funds last year.
For example, last year:
Polychain and Nomad Capital have 9 joint investments
Bankless and Robot Ventures have 9 joint investments
Binance and Polychain have 7 joint investments.
Binance and HackVC also have the same number of joint investments
Likewise, OKX and Animoca have seven joint investments.
Large funds are becoming increasingly selective in their selection of co-investors.
Robot Ventures participated in three of Paradigms 10 investments last year.
DragonFly has co-invested with Robot Ventures and Founders Fund in 3 of the 13 total investments
Likewise, Founders Fund co-invested with Dragonfly on three of its nine total investments.
In other words, we are entering a phase where a smaller number of funds are making bigger bets, with a smaller number of co-investors, and those co-investors tend to be well-known institutions with long-standing reputations in the industry.
Relationships among the most active VCs
Another way to look at the data is to analyze the behavior of the most active investment funds. The matrix above analyzes the funds with the most investments since 2020, and how they relate to each other. Youll notice that accelerators (like Y Combinator or Outlier Venture) and exchanges (like Coinbase Ventures) have made almost no joint investments.
On the other hand, you will also realize that exchanges usually have their own investment preferences. For example, OKX Ventures has a high percentage of joint investments with Animoca Brands. Coinbase Ventures has more than 30 investment collaborations with Polychain and another 24 with Pantera.
We found three phenomena:
Despite the high frequency of accelerator investments, they rarely co-invest with exchanges or large funds, likely due to different investment stage preferences: accelerators tend to invest at the earliest stages, while large funds and exchanges seek growth-stage investment opportunities.
Large exchanges tend to have a strong preference for growth-stage venture capital funds. Currently, Pantera and Polychain dominate this.
Exchanges tend to work with local players. OKX Ventures and Coinbase have different preferences for co-investment partners, which highlights the global nature of capital allocation in the Web3 space today.
So if venture capital funds are clustering, where will the next wave of marginal capital come from? I’ve noticed an interesting pattern where corporate capital has its own clusters. For example, Goldman Sachs has had two co-investment rounds with PayPal Ventures and Kraken over its history. Coinbase Ventures has 37 co-investments with Polychain, 32 with Pantera, and 24 with Electric Capital.
Unlike venture capital, corporate capital is typically directed toward growth-stage companies with a clear product-market fit (PMF), so it remains to be seen how this pool of capital behaves as early-stage venture financings decline.
The evolving network
Source: The Square and the Tower
I wanted to study networks of relationships in crypto after reading Niall Ferguson’s The Square and the Tower a few years ago. The book reveals how networks connect the spread of ideas, products, and even diseases. It wasn’t until we built the funding dashboard a few weeks ago that I realized it was possible to visualize the network of connections between sources of capital in crypto.
I think datasets like these, and the nature of the economic interactions between these entities, could be useful in designing MA and token acquisitions from private entities, both of which we are exploring internally. They could also be used for business development and partnership initiatives. We are still figuring out how to make this dataset accessible to specific companies.
Back to the topic of this article, can an investment network really help a fund outperform the market?
The answer is a bit complicated.
A fund’s ability to pick the right team and provide large amounts of capital will be more important than its connections to other funds. However, what is important is the relationship between the general partner (GP) and the individual co-investors. Venture capitalists do not share deals based on fund brands, but with people. When a partner moves to another fund, the connection transfers to the new fund.
I had a hunch about this, but had limited means to test it. Fortunately, a 2024 paper looked at the performance of the top 100 VCs over time. In fact, they looked at 38,000 rounds of investment in a total of 11,084 companies, even breaking down to seasonality in the market. The core of their argument comes down to a few facts:
Past joint investments do not guarantee future collaboration. A fund may choose not to work with another fund if previous investments have failed. Think of the investment networks that broke apart when FTX collapsed.
Co-investing tends to increase during periods of mania, as funds rush to deploy capital more aggressively. During periods of mania, VCs rely more on social signals and less on due diligence. During bear markets, as valuations are lower, funds deploy capital more cautiously and often invest alone.
Funds choose partners based on complementary skills, so a round filled with investors who specialize in the same areas often causes problems.
As I said before, ultimately, co-investing doesn’t happen at the fund level, but at the partner level. In my own career, I’ve seen individuals move between institutions, often with the goal of working with the same person no matter which fund they join. In an age where AI is replacing human jobs, it’s important to understand that relationships are still fundamental to early-stage venture investing.
