Hi Fintech Architects,
In this episode, Lex speaks with Matthew Le Merle - CEO of Blockchain Coinvestors, a leading blockchain and AI fund-of-funds. He reflects on the limitations of large institutions in adopting disruptive technologies and why he chose to back innovators over incumbents, using stablecoins as an example of asymmetric value creation. Le Merle explains his evolution from angel investor to institutional LP, highlighting the benefits of leveraging top-tier venture capitalists’ expertise in inefficient early-stage markets. He outlines the psychological challenges of venture investing, where failures appear early and outsized wins often take a decade, contrasting this with the faster liquidity but higher existential risk in token markets. Finally, he critiques institutional allocators for over-relying on efficient markets, under-allocating to venture despite its role in driving future value, and positions his strategy as fully committed to early-stage blockchain and AI as the highest-returning segments.
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Key discussion points:
Innovation Threatens Incumbents, Benefits Disruptors: Major technological shifts, from the internet to blockchain and AI, create winners and losers. Incumbents often resist disruptive change because it threatens existing revenue models, while nimble startups and tech-first companies can rapidly capture new market opportunities.
Venture Success Requires Navigating High Failure Rates: In early-stage investing, most portfolio companies will fail, often within the first 3–4 years. Returns are driven by a small number of outsized successes, usually via acquisitions rather than IPOs, requiring patience, resilience, and a disciplined investment strategy.
Inefficient Markets Offer the Greatest Asymmetric Upside: Early-stage venture and emerging technologies like blockchain and AI are inefficient markets where superior access, insight, and execution can generate returns far above those available in traditional, efficient markets like public equities or bonds.
Background
Before becoming CEO of Blockchain Coinvestors, Matthew Le Merle built a distinguished career at the intersection of strategy, innovation, and investing. A double first graduate of Oxford and MBA from Stanford, he began in banking and consulting with McKinsey, A.T. Kearney, Monitor Group, and Booz & Company, advising global giants from Google and PayPal to Bank of America and Gap Inc., where he served as SVP of Strategy & Corporate Development and Global Marketing.
Alongside his corporate roles, he was an active angel investor and member of leading networks like The Band of Angels and Keiretsu Forum, helping scale early-stage ventures and serving on boards across digital, fintech, and entertainment sectors, laying the foundation for his later focus on blockchain and emerging technologies.
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Topics:
Blockchain Coinvestors, Band of Angels, AngelList, Blockchain Capital, Pantera, Sequoia, Andreessen, BlackRock, Fidelity, Blockchain, DeFi, Decentralized Finance, Investment, Venture Capital, Angel Investment, Fund of Funds
Timestamps
1’33: From Consulting to Disruption: Matthew Le Merle on Pivoting from Advising Incumbents to Backing the Innovators
9’56: From Angel Checks to Global Funds: Building One of the World’s Largest Blockchain Co-Investment Platforms
16’50: Leveraging Top Venture Funds to Capture Blockchain and AI’s Biggest Winners: Evolving from Direct Deals to an LP Strategy
24’50: The Emotional Reality of Venture Investing: Coping with Early Failures, Long Timelines, and Rare Big Wins
32’13: Early Liquidity, Higher Risk: Why Most Token Projects Fail Without Ever Delivering Software
35’20: Backing Winners in Inefficient Markets: What Makes a Venture Fund Worth Investing In
42’59: Why Institutional Portfolios Miss the Future: The Case for Shifting Capital from Efficient to Inefficient Markets
51’08: The channels used to connect with Matthew & learn more about Blockchain Coinvestors
Illustrated Transcript
Lex Sokolin:
Hi, everybody, and welcome to today's conversation. I'm thrilled to have with us today, Matthew Le Merle, who is the Managing partner and CEO at Blockchain Investors. He's had an illustrious career across blockchain and early stage investing across some of the key companies in the space, as well as exposure to innovation more broadly. I'm really excited to talk with Matthew today and learn more from him. So, with that, welcome to the podcast.
Matthew Le Merle:
Thank you very much, Lex, and it's good to be on the Fintech Blueprint and meeting all of your followers.
Lex Sokolin:
Fantastic. So, let's start. Maybe not at the beginning, but in the roots of your career and the transition from sort of a very high-level consulting background to investing. What was that moment like? What was the environment and market like, and sort of what were your motivations at the time?
Matthew Le Merle:
It goes back a long way, and I don't want to overly date myself, but I started my career in consulting, became a senior partner of large firms around financial services group globally. For one, Carney and the Global Digital Practice for another co-led that with Booz. And in that time, I was first and foremost sort of a consultant advisor, working with big companies from the Microsofts and Ciscos and Intels to the Bank Americas and Visas and to BlackRock. And I started getting the opportunity early on to really understand the internet and what it was going to enable and do. But I was still not investing. I was seeing things happen, and I was working later with Google and eBay and PayPal and so on. So, I was in the right place at the right time, but I didn't invest. And that obviously, as you would imagine, starts wearing on your mind.
You start sort of saying, you know, I'm helping these companies launch this, that and the other. And the growth is enormous as we digitalize communications and content. But I'm on the sidelines from a wealth creation perspective. And so back in the early 90s, Alison and I. Alison is my wife and partner. Alison and I started doing a few internet investments and we didn't know what we were doing. And honestly, we were lucky, but we made mistakes as well. And then after a corporate stint, I decided to do it full time. And I did what a lot of people here in Silicon Valley do, which is I began as an angel, and I began to work with other angels, and I learned a lot and eventually transitioned to being a full-time sort of venture investor.
Lex Sokolin:
So you mentioned Booz and A.T. Kearney and then Monitor, and you were working at a very high level with financial firms right around the turn of the web to internet coming into fruition, where the banks doing things were they also, you know, participating in innovation at that stage, or was it the same feeling kind of you're watching things happen, but you don't really get to do digital transformation Like, maybe if you could place us in that moment of time.
Matthew Le Merle:
Yes, yes, it's a great question. And I do think past is prologue. So, if we dig around in this question, I think we'll learn quite a lot about what's happening today. You know, big institutions are full of people. And some of those people are great and innovative and creative people. But institutions have institutional ways in which they do things, including how they make money and how they, you know, come to market, serve their customers and so on. And I think when the internet first arrived, no one really understood just how much it was going to transform industries and businesses. And whilst we were firmly sort of trying to imagine the upside, the opportunity, we didn't really appreciate the downside, the value loss that would occur in entire industries. And so, you know, we look backwards, and we can see today that the newspaper industry, oh, you and I were talking about the digital art industry was completely transformed.
And in some respects, incumbents were put out of business, you know, lost a lot of money, had to close up shop. And we, you know, you and I sort of might laughingly remember the quote from the world's biggest retailer of CDs and DVDs that there's no need for digital distribution because I have a store in every corner. Well, of course they were wrong, and they went out of business. And today we all download content digitally, but we didn't understand it at the time. So, the banks and the payment companies that I was working with were full of good people, and they really did have good intention. And we did launch online, so I worked on heaps with the launch of Bank America. We launched digital payment solutions and there was some hope that we were going to make things cheaper, quicker and easier for everyone in those banking environments. But I think as the years went by, you would have to be a naive CEO not to notice that other industries were being disrupted and businesses were being put out of business. And I think the nervousness around technology and innovation began to rise, actually.
And that was disappointing for me as a consultant, because it meant that a lot of the work we were doing never got implemented. And so, in fact, for one big bank, I remember we worked on the digital payment strategy in the 90s, and almost none of that is executed even today, 30 years later. And at the same time, Lex, and I know this is a very long answer, I was also working for, you know, with people like, as I said, Google, eBay, PayPal and so on, and they just moved really, really fast. So, they would try and take exactly the same technology and against exactly the same idea, but they would implement it really fast. And that was very, very exciting. And so, I was able to see both sides of the coin, the people that were nervous about technology and how it would disrupt be those that were really taking it and running with it. And I decided to pivot because I'm in Silicon Valley for two years now to pivot entirely to working with the disruptors.
If I look at today and we can double-click on this if you wish. Let me just give you one example of today - stablecoins. And we know stablecoins allow democratized, rapid, essentially cost free or close to cost free movement of money globally over the internet, including a very small value. So, you can send a few dollars. Of stablecoin and make it work. Whereas, you know the costs of trying to send a few dollars on most payment rails, it doesn't pencil out. And you would say, well, that sounds like a good deal, right? That sounds good for everyone. Wouldn't everyone want to have payment rails that are quick, cheap, easy, and accessible to everyone? Sounds like a good thing. Well, no, actually, for a bank that destroys a lot of their profitability because they make a lot of money, because they're moving money slow and they get to charge a lot for moving money slow. So, they make money when the money is in their hands through things like float and fees float and interest rates and so on.
And in addition, they charge a lot of fees. So, a stablecoin is not so much a creator of value for a big bank. It could potentially be a destructor of their value. At least where they make it today. And conversely, for a tech company or retailer that has to pay a lot in percentage terms to move money over a Visa or Mastercard. A stablecoin could be a very good way of creating additional value in their business. And I was for a while they had a strategy at gap. So, I can explain exactly what I mean by that. So, you get these funny dynamics. Whereas two people looking at the same technology and the same solution might actually view it as an opportunity or a threat. And I just wanted to work with the people that unashamedly think that if it's good for consumers, we should be doing it and can figure out how to make money and value from doing it. So, I flipped 100% to backing the disruptive technology players.
Lex Sokolin:
It's a more fun position to be in isn't it? It's much more fun to be building out Google in the early internet than to be scanning all the books or backing Amazon instead of trying to save Walmart and Kmart and all the other marts.
Matthew Le Merle:
It feels it. So, I agree with you, Lex. I've never I've never got involved in a startup where we weren't positive, optimistic and excited. You and I know most of them end up failing. So, it doesn't, on average, it doesn't finish up feeling exciting and positive. It's a world. It really does. And for the entrepreneurs who are listening, that is the risk adjusted equation. You get to work on the most exciting opportunities in the world that could really create huge, huge benefits for everyone. But the failure rate is very high and it's a world of misery when your business is failing.
Lex Sokolin:
Let's talk about that world of misery. You started Angel investing and then transition to that full time and started building out vehicles to professionalize investing. Can you take us on a high-level journey in terms of company building, of how you went from your cutting personal checks to, you know, having one of the largest and active co-investment vehicles in the world and being involved in angel communities, and what are the key variables there?
Matthew Le Merle:
Well, that's a lot next, because that's actually, you know, almost 30 years of my life. At the beginning I knew nothing. I thought I knew a lot because I had been working with the world's biggest companies on helping them with strategy and go to market and all these things. And I did learn a lot. But when it comes to startups and entrepreneurial ism and technology, it turns out a lot of that doesn't really translate so well. You know, it's not that it isn't important for a startup to also worry about, you know, customer value and value propositions and go to market and so on. They do need to think about that. But there's a whole set of other things they have to do. Like how do you form a company and how do you set up your relationships with your co-founders, so you don't have disharmony and break ups later? And how do you raise money and how do you pitch, and how do you write term sheets that will be good for the investor, but also good for you and the company over time and so on and so on. And so, these are just examples obviously.
So, for me, I had to go down that journey. And angel investing actually is quite a good way for an individual to get started because, you know, the bets are small and you can learn a lot without actually having to pull the trigger too often, because you can still do all the due diligence and get to know a lot. It's like a fire hydrant of CEOs coming and pitching new technologies and new opportunities. So, in my case, I joined Band of Angels, and I joined Keiretsu. And later on, I took a role with keiretsu part time, sort of helping them scale up their own activities globally. And that was a good number of years. And I would say like, well, I did learn a lot. I was also fortunate to be around at the beginning of the launch of some of the platforms. And I saw you recently interviewed Angel, but the genesis of earlier things like white capital and off-road capital, second markets, I took a keen interest in those and learned about them.
And later on, Angel lists came along and then CoinList and Republic and all of the others that that taught me a lot to. So, the first phase is sort of get yourself smart. And in my case, it was early-stage investing, technology focused, Silicon Valley be an angel. Later, Alison, who in parallel was a private equity managing partner. She also got more interested in tech and so we started getting more exposure to venture capitalists. We started becoming LPs in VC firms. And, you know, as we got to learn more about that and leant into that, Alison became chairman of the advisory board very early at Blockchain Capital back in like 2014. And blockchain became a bit of a passion for other reasons. We were transitioning from angel to direct venture capitalist to now having a broader view where we were LP in many venture capitalists. And at a certain point in that journey, we actually stopped, and we said, what's the best strategy for us? And in fact, we wrote a book.
o we actually wrote a book where we actually pencilled out what could be all of the different participation models. For those people wishing to participate in innovation and technology, and in the combination of wanting to think through the best stance for ourselves. Plus, having just written a book about all of the ways in which different people can participate in innovation, we chose our own strategy. And our strategy is to be a very diversified early-stage investor by being an LP with the best VCs in blockchain and AI, and then secondarily monitor everything the best VCs do and look for follow on mid-stage investments where the market's clearing. And everyone clearly believes the emerging category leader or leaders are beginning to show their faces. And so that's what we do today. And the only other thing we do today is we do help blockchain companies go public because we think that's good for the world. And it's very hard. It's very hard for them to make that transition. So, we have a lot of experience, and we want to help with that transition.
We think the world would be a better place if we had DeFi and decentralized, distributed ways of doing things. But we at the other end of the spectrum, we need some more public blockchain companies to really nail home the point that this is now ready for prime time, and everyone should be on this new technology backbone.
Lex Sokolin:
That's a fascinating journey, and I'm really interested in the moment of transition. When you saw the opportunity to go from direct investment and looking at companies and founders and then treating other funds as an investment opportunity and as LPs, because, you know, the profile is so different, and the personalities can be really different. I'm wondering about that moment when you felt a fit, maybe with some of the first fund investments that you've done and maybe before that, like rewinding before that. What are some examples of successful direct investments you've done and the logic behind those? And then how did your first capital into fund managers feel like and compare relative to that process?
Matthew Le Merle:
So I think by now the audience has already figured out that Alison and I are pretty analytical. We had to be to be successful senior partners of some of the world's largest angel groups. Alison became CFO of BGI (Barclays Global Investors) now Blackrock for a while, which is now the world's largest asset manager. She and I helped launch iShares - which is today the world's largest financial product. So, we are very analytical, but we're also just people. And, you know, it takes a while to figure out what you're good at and what you're less good at. And those two things, it doesn't always happen quickly and easily. So, for us, it did take a while to figure out in this ecosystem what was our distinctive value and how could we play in a way that was appropriate for us, but also good for others? Because venture capital, especially early venture capital, it's a team game. You can't succeed by yourself. I mean, by definition, it's a team game as you stand up, successful companies with new technologies and so on. So, the analytical path included trying to figure out how do people make money as angels, as venture capitalists.
And we did a lot of analysis around that. In fact, I read all of the professorial studies, the Wilbanks and the Kaufman's and the NCAAs and the acres and, you know, the risk adjusted returns. And how big does your portfolio need to be, and what's the expected return, and where does it come from? And all of these types of things, what are the best practices of angels and VCs. So, we did read all of this and analyze all of this and think about it. And I can explain a little bit about why that would lead to our strategy. We had also just lived through the internet, so we also went back to the 90s and just asked a simple question. You know, if we had had capital in the 90s and we didn't because we started with nothing and we had five kids and we had private school and mortgages and all sorts of other stuff. But if we had had a lot of capital in the 90s, what would the winning strategy have been? And in retrospect, it was clearer to see the answer.
I mean, it was either be one of the world's best internet venture capitalists. If you had the skills and capabilities and could raise money behind yourself, or it was give your money to the world's best internet venture capitalists, the Sequoias, Andreessens, Kleiner Perkins, and then follow on invest when you could see the emerging category leaders, Which is a bit of a clue for why we're doing that today. But the other parts of the answer to your question, Lex, is to do with us. You know, we became more and more appreciative of the fact that we didn't understand technology as well as we needed to. So even though I just spent 30 years working on the internet, working on big data analytics and algorithmic decision making in the context of big companies, all these types of things. If you asked me to write code, I can't write code. And so I can't due diligence code. And in fact, I can't even due diligence as a software engineer to check if the software engineer is good at writing code.
Right. So, I'm missing some skill sets and I'm just using that as one example. In venture investing, there's a lot of skill sets that are good venture capitalist GP needs. And so, I started saying there's clearly people who are better than this than I am. And they have names like Bart and Brad Stevens of Blockchain Capital, or Nick Carter and Matt Walsh at Castle Island, or Paul and Dan at Pantera. They are actually better at blockchain early stage investing than I'm going to be. So, what does that mean? Does that mean I stop? No, I don't want to stop. I want to back the blockchain and everything. It's enabling. So, what's my distinctive way to play? And it ended up being Alice. And I agreed it would be what I just told you. Now, going to the other part of your question, Lex, which is what have we backed and how well has it done? Early on we had some successes, so we wouldn't still be doing this if we had only had failure.
So back in the 90s, we were not early investors, but we were early enough investors in a few things like America Online, or we did Amazon just post the IPO, Google just post the IPO. We did some other things pre-IPO that we were sort of appreciative of the amount of value that could be created by these various fast growing, successful internet companies. We had a lot of failures too. So you learn from your failures, and you certainly learn that losing money comes with the territory. And in fact, you lose money typically before you make money because the losses show up first, then the successes take longer. And then in the zeroes. Alison and I had also backed a few companies that did very, very well. Some digital entertainment companies, some Heymann companies. And Alison, as I already mentioned, was managing a private equity firm by then. So, there were a few, but nowhere near as many as there are today. So today we're actually investors in direct or indirect in 100 blockchain unicorns and growing rapidly.
Most of them direct. That's our strategy. Our strategy is to get capital deployed into through the hands of the best VCs, into the best companies being founded in blockchain and AI. And because we're early stage there will yield therefore, some percentage of successful outcomes. And in blockchain that's more than 110 blockchain unicorns. So, we like our strategy, but it's fit for purpose for us. You know, if I could have been one of the world's best direct venture capital investors, maybe I would have chosen that path. But I knew that I didn't have all the skill sets.
Lex Sokolin:
I want to pick up on. One of the things you said from a personal perspective, because it's something I'm struggling, may be the wrong word, but digesting in terms of the investor experience. And that is that the losses show up first and that you have to wait for the long term for the portfolio to really mature or grow up. And in my career, I've done things from asset allocation to equities investing, liquid investing to treasury management.
And a lot of the investing experience is you're deploying assets, and they go up a little bit every day. So usually, you feel good. And then occasionally there'll be a market crash, and you feel bad for that acute period. And then you have recovery again. And overall, the trend averages out. And so, you're up over the long term. But the like the day to day is generally things are getting a little bit better with venture investing. It's almost the you know, it's the complete opposite where you start out with a pool of capital and then you spend that pool of capital on a bunch of illiquid investments with people who have big dreams, you know, but with lots and lots of risk and very little transparency as to where you're going to end up. And so, the feeling is actually like every day you have less and less of your fund. And then occasionally and once in a while, you have a home run outcome on one of the companies that you've backed. And you can participate in that, and you can make it better and influence it.
But end of the day, it's almost the opposite of being invested in in equities. How do you deal with the psychology of this and any advice or thoughts for people going through that?
Matthew Le Merle:
So let's just first define the asset classes we're talking about. So, we have equities and now we have tokens. And for various reasons the answer to your question is different. So, on the equity front we know what that looks like. It's been around for a long time. Its formation which we call start up investing a formation. Seed rounds series A's as the preferred rounds kick off. At some point, we start calling it Mid-stage Venture Capital Series AB or BC, depending upon the segment you're in, the industry you're in. And then we have late-stage venture capital, which is really more private equity expansion capital, you know, big rounds, high valuations. And then something that's not well understood is the exits begin and the positive exits are acquisitions 90 plus percent of the time, IPOs less than 10% of the time.
So even though going public gets all of the newspaper headlines, the reality is it's very, very rare. And almost all successful startups that don't continue to be sort of private businesses, they'll exit through acquisitions of by larger, larger players. So, early mid late-stage venture. On the token side, I'll come back to that later. So, on the venture side we are primarily early stage, though we do selective mid and late stage follow-on investing. Angels by definition are early stage. There are very few angels that can do very large checks in the late stage. Family offices are sort of hybrid. Some family offices make a lot of small investments in the early stage. Some can write multimillion dollar checks into the mid stage. So having said all of that, the realities are early stage investing in angel investing, 60 to 70% of investment funds will show up with a 1X or less, which means they fail. And that failure will occur in the first three or so years. Normally very few things go out of business in year one.
They start going out of business more in year two, and then you have a big spike of failure in year three. In terms of success. 20 or 30% of outcomes will be a 1X to 5X, which doesn't really return a fund. But if you're an angel, you feel pretty good about getting 3 or 4 times your money back. Those will be almost exclusively small-scale acquisitions, and they'll typically occur in year four or 5 or 6. And then the big outcomes for both. Well, for angels it's very, very rare. For venture capitalists, it's certainly less than 10% of the time they'll get a 5X or better. But in that tail are the mega outcomes. The really big ones and the really big ones drive almost all of the return they get. And they'll typically take. They won't occur until year seven and later. So, you know, takes 10 or 12 years for Coinbase or Kraken to go public. So now if you ask me what's the emotional journey and how do you cope with it? The reality is you start up very optimistic and positive.
If you're an angel, you may be overexcited and you may make a lot of early investments, and you won't have gone through the doom cycle of failure. But it will happen to you whether you like it or not. And you'll start seeing a lot of your portfolio companies fail in years two, three, four, and you'll start hearing about acquisitions that don't occur. And you'll be disappointed, and you'll start realizing more and more that if an entrepreneur gets an acquisition opportunity early on, they need to take it more seriously, because often when they hang on, a failure occurs later. So, it's just not true that turning down the first acquisition is automatically the best strategy. Oftentimes, it turns out that was a bad strategy. So, the emotional journey is for an angel. It's a great deal of excitement and maybe over excitement, spraying out too many investments and maybe without a clearly defined investment thesis experiencing a lot of failure and feeling that they made a big, big mistake, and then suddenly something positive happens and you get a good outcome, and you say, oh, you know, one of my companies succeeded.
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And then if you're lucky, in years seven, eight, nine, maybe you'll get a handful more and then you'll suddenly do the math. Soon you'll say, wow, I did better than I thought I was going to do. And that was my journey. Now. Now, just on a probabilistically, there's a large number of people that begin as angel investors who never see a return on their capital, so they will be very, very depressed and disappointed. Just mathematically, it turns out about 30 or 40% of people with diversified angel portfolios end up with complete capital loss. But on the other hand, the expected return of angel investors is in the mid 20% net. So, on average there are there are a good number of angels who do very well. What's different about venture capital of course is, is you don't have a choice. So, you've raised the fund and you're in it for the duration, which is typically 10 or 11 years, and you don't have a choice. You're a fiduciary, you're managing other people's money, and you don't get a choice of changing your mind later.
And so, the emotional journey is actually a little bit different because the angels are saying, oh my gosh, I wasted all my family's money. And it took me so long to make that money, whereas the venture capitalist is losing other people's money in the early phase and doesn't have a choice but to hang on in there. And I think some of the less the other lessons learned. One of them I've hinted at, which is encourage your CEOs and entrepreneurs to understand that most exits are acquisitions. So, getting acquisition offers early on is actually an acceleration of the strategy. It's not a deflection of the strategy. Almost all startups end up getting acquired. So, if you get an opportunity to sell early why is that a bad thing. The IPOs are so rare that in practice that should not be your primary focus. I know that sounds odd, but most entrepreneurs should focus on building companies to sell them later and not build companies to take them public. Because building companies to take them public is such a rare, successful strategy.
Lex Sokolin:
Right. Although these days with the token markets, the math does change quite a bit. And there's a lot of early-stage stuff that has the unfortunate luck of early float.
Matthew Le Merle:
Yes. So, a couple of soundbites on tokens. And we do a lot of early-stage token investing as well. So the first point you've already made. You're absolutely right. Tokenized projects can go liquid earlier because for whatever reason people are willing to allow tokens to be publicly traded even if they haven't yet built software that serves a purpose, whereas we don't allow companies to go public if they don't yet have revenue and, and real products and services. So, you know, Nasdaq and New York Stock Exchange or London Stock Exchange wouldn't allow a team to take a company public if it was just a white paper and no software had been written, whereas in the exchanges and trading platforms of the token world. The majority of tokens are trading as public liquid tokens without any software having been built. So, that's really an important observation, because the existential risk associated with entrepreneurial and innovation and software development is much higher in the token markets than it is in the equity markets, which , if you think about it, means that over the long term, the failure rate of public liquid tokens should be much, much higher than the failure rate of public equities.
We haven't seen that yet because we haven't gone through that cycle. So, we've got vast numbers of tokens that are traded on exchanges, but they have no intrinsic value in the sense no software has been written. And in many cases, the teams never intended and never will write any software. So, our token investment strategy is still to get in early, but we put even more emphasis on the quality of the team and the reality of their desire to write software. So, Vitalik was very capable and was already writing software before he even thought about, you know, doing his ICO and raising some capital. But most token entrepreneurial teams actually have no plan to write software. They may write a white paper, but they're not going to deliver on it. So, the existential threat to an investor is much, much higher.
Lex Sokolin:
So let's switch tracks to investing in fund managers. And we've opened up the entrepreneurial journey and the journey through like an operating business or a crypto protocol. What are the learnings you have about the types of fund managers that are that are attractive to invest in? And I'd love to get an answer kind of across market cycles, because coming into Pantera at the beginning of the blockchain journey is probably quite different from coming into Pantera in 2025. And so, I'm curious as to what your criteria is there.
Matthew Le Merle:
The first thing I'm going to say to you, to everyone listening is I believe in efficient markets up to a point, but I don't believe that venture capital is an efficient market. And this is really important. Everything we know and that, you know about picking funds or fund managers or making investments in efficient markets no longer applies. If we're going to talk about early-stage venture information is not readily accessible. It is possible to get proprietary access and unique information, and the superior returns are clearly there, but they are very concentrated into the people that do have privileged access and proprietary information. Whereas in an efficient market, it's always going to be a little bit more of a random walk, because everyone sort of has the same information and sort of has the same access. And getting an edge is possible but very hard.
But in venture we're at certainly early-stage venture, whether it be tokens or equities. We're at the very extreme of an inefficient market. And so if you're going to pick people to give your money to who are going to focus on early-stage venture investing in in anything, to be honest, it could be life sciences. But certainly, when we're talking about blockchain and fintech and so on. You need to find the people that have this ability to get superior returns in an inefficient market. And what does that mean? It means they know the best entrepreneurs and they know how to know the best entrepreneurs. So, they've got to be able to do things like actually get under the hood and really understand, does this entrepreneur have the ability to do what they say they they're going to do? Do they really understand how to take the very best modules of code that have been written by others and put them together and hash them together into something really remarkable that can do something that no one else has done, you know, as an example.
But it's a lot more than just their software writing capability. You know, it's obviously can they form a great team? Are they persistent? Are they in this for the long term? Are they doing it for the right reasons. Can they motivate and excite other people? Can they build a community? You know, there's a lot that a modern day blockchain, fintech or AI entrepreneur needs to be able to bring to the table as a team. And the best of the VCs not only know where to look for those best entrepreneurs, but can actually help them assemble their team, assemble their capabilities, refine their vision, and so on. So, that's one thing. You know, we would never give venture capital money to a venture capital firm if we didn't really believe that they were very good at operating in inefficient markets with privileged and had privileged access and information. But in addition, they've got to be able to run a very good venture capital firm, which means they know the principle of diversification.
They know about placing their money ahead of strong tailwinds. They have an appreciation of the big opportunities, the addressable markets and the value that will be unlocked by bringing new solutions to different customer groups in different places in the world, etc. And then they run a good shop internally. So, running a venture firm for 10 or 12 years isn't easy. And there's a lot of fund administration and accounting and bookkeeping, and it all sounds very trivial, but it's actually very important, especially if you're an LP, you know. So as an LP, we want to know. We've got a great team of GPs. They have a really good investment thesis. They've got a strategy that gives them edge and the ability to operate in an inefficient market. Hopefully they've done it before. So, we know that they're not just telling us a story. They've got, you know, results to prove that they really can do what they say they're going to do. And then they run a very tight shop, and they have, you know, the back office really nailed down.
And there's other things as well. But those are examples. And then, you know, if we find a fund that's that sort of green lit on all of those dimensions. And then we have questions around, do we need an additional fund at all because we have a coverage model. And, and obviously there's more great funds than there are slots in our funder funds. So, we do have a little bit of an issue of, you know, abundance of choices in some parts of the world and, you know, maybe fewer options in against particular parts of our coverage model.
Lex Sokolin:
For your vehicle. Do you have external LPs as well? Do you go to allocators or is it capital that's It's proprietary.
Matthew Le Merle:
Sorry, I should have said that up front. No. We at blockchain coinvestors. We are a institutional fund of fund. So, we have about 450 of our own LPs. They tend to be single family offices, a few multifamily offices and wealth advisors, and then quite a lot of individuals.
And we set our minimums to enable the individuals to play. But we are an institutional platform. So, we're raising capital for each of our fund of funds. And then we're deploying that capital into VCs. And we do have an allocation for what we call direct co-investment in each of our funder funds. So, we can make direct investments. But they that only gets triggered by it having already passed through the screen of our own VCs. And, you know, maybe there's a follow-on round. Most of them are participating. They all agree the company is the emerging leader in its space and we can get an allocation. It's that sort of an equation. So, we're not we're not going out looking for entrepreneurs with great ideas. We let our VCs curate our ecosystem. But no, we are an institutional fund to fund, and we have a lot of employees of our own.
Lex Sokolin:
If you look back at the maybe the last three years, 2 to 3 years post FTX, there has been a dislocation on the allocator side, you know, especially as liquid markets went down.
And then a lot of institutional investors found themselves over indexed into venture just because of the book value of the assets. And then you simultaneously had the chilling effect until the markets recovered maybe 6 to 9 months ago, in part because of the regulatory relaxation of the new administration and in part because of the return of the risk on environment in different pockets. I'm curious as to your experience and view on other allocators. Aria wealth managers that you work with and you know, how did they perceive the markets of the last 2 to 3 years? And has there been a change in temperature towards being more active?
Matthew Le Merle:
So I was down at Stanford. I'm a Stanford alum, and I was at the business school last week, and I was speaking in front of a class led by a professor who have a lot of respect for who actually taught when I was at Stanford. So, he's been there a long time. And the reality is, the narrative you just described is the narrative, which is, you know, the largest pools of capital in the world have allocations to illiquid private asset classes.
And if the stock market goes down, or the bond market was to go down, they suddenly feel like they're over allocated to the illiquid, and the illiquid included in that is venture capital. So, they suddenly think oh I'm over allocated to venture capital. I should stop making more investments into venture capital. What's wrong with that narrative is that their entire thesis and all of their analysis is fundamentally flawed, because they think the whole world is efficient, and their optimum portfolio models only include the data from the efficient asset classes. So, they run their optimum portfolio analysis with public equities, fixed income, large cap real estate. And they don't have any data on things like early-stage venture. And so, they don't have any allocation to speak of to these new technologies. And that is something we've known for about 40 years. So back in my McKinsey days, I did projects as an analyst where we were helping people like Yale or Oxford or, you know, the Bechtel family or others try and figure out what the right allocation should be.
If you could gather the data for the inefficient markets like venture capital and real estate, early-stage real estate, small cap real estate, and put it into your optimum portfolio model. And what we found out every time was used to have it shouldn't be 60/30/10. It should be like 40/10/50. And no one believes it, right? They couldn't believe the result. So here we are in 2025 and Blackrock and Fidelity. And Alison was the former CFO as I told you of BGI Blackrock and Fidelity have finally start putting Bitcoin into their optimum portfolio models for their clients, and they're recommending everyone have whatever 2 to 4% or something in Bitcoin. And Bitcoin is just one of many, many, many new innovative digitally enabled assets. It happens to be one that is the highest performing for 15 years straight. Pretty much that's not quite true, but you know what I mean. It's over the last 15 years, it's because it has been the highest performing asset in the world.
And so, they don't have a choice, and they put it into the models. The models are now saying put more to it. Well, what should we take away from all of that? What we should take away from that is if you believe in efficient markets, then you're going to have most of your money in the efficient markets, because you're going to run your models and you're not going to have the inefficient markets included in them. If you believe in efficient, inefficient markets. Who are you and why? And I think, you know, you are a person that believes the future is going to be different from the past. If you believe the future is going to be different from the past, you're going to say, well, what's going to drive the future? And I think we all know intuitively that the future is going to be driven by digitalization and technology and innovation. We know that we've lived through that for 30 years, so we do all know it. It's just the efficient. The efficient market theorists still can't get their heads around it.
They still think that incumbent companies are going to continue to be big with high market caps, whereas the experience of our last 30 years is it's not true. Big companies can fail as well. And the digitalization and the innovation that's going to drive the future is increasingly in the hands of disruptors. And those disruptive companies don't begin in efficient markets. They begin in inefficient early-stage venture capital. And so coming all the way back to your question, the frustration I have is the world's biggest pools of capital deploy their capital into low returning asset categories. And they're underexposed massively to venture capital. And yet they tell themselves that they are overexposed. And just putting the nail in the coffin on this one. The reality is that every sovereign wealth fund no, I shouldn't say that. Every social security system, almost every pension fund, corporate or public, almost every retirement system is underfunded. Why is it Underfunded. It's underfunded because they made promises and then they invested into asset classes that on a risk adjusted basis of destroyed value.
So, CalPERS has had to lower its promises to its pensioners because its return is low. And Denmark just had to increase the retirement rate all the way up to 70, because they know they can't afford to pay their pensioners what they promised them. And here in America, we have the real risk that, you know, when you retire, there won't be any money for you in our Social Security system. And it all comes back to this same point. If you put your money into efficient markets, you shouldn't expect a superior return. The only place you should be able to get a superior return is in an inefficient market. But the good news is the future's being driven by technologies in innovations that are in inefficient markets. And that's why Alison and I pivoted and put all of our capital and run blockchain coinvestors and our blockchain and AI fund of funds. It's because we believe in what I just said. We're putting all of our money into early stage, inefficient markets because those have the highest return, not only today but certainly in the future.
And anyone who wants to argue that blockchain, AI, personalized medicine, sustainable energy, the internet of things are not the future. I'm happy to argue with them about that. You know even the combustion engine may not be around with us that much longer.
Lex Sokolin:
Yeah. I mean, a lot of what you say resonates, and I think it goes back to that human discomfort you feel that we talked about before of waiting and waiting and things not working. And then all of a sudden unlocking after many, many years. And that's the outcome of taking real risk. You know, the discomfort is the actual it's the measure and the symptom of the fact that you're out there in the frontier doing something difficult. Whereas if you're in the flip situation of I believe in a well-balanced 60/40 portfolio and want to get my mark to market every day, you're just not going to get to experience any of that asymmetric upside. So thank you for investing in people, doing the crazy stuff and emerging managers and doing the hard work. If our listeners want to learn more about you or about the fund, where should they go?
Matthew Le Merle:
Well blockchaincoinvestors.com is our website. We are very transparent. So, we have newsletters and podcasts and blogs and things that we give away for free because we're trying to help entrepreneurs and investors and this whole entrepreneurial ecosystem. So blockchain coinvestors is the answer. We you know, you and I today, Lex, we've obviously talked somewhat conceptually, and I know I've purposefully kept things at quite a high level. There's a lot of the devil's in the detail. And we're happy to share everything we know and have learned about how to cope with the detail, because this is not easy.
Lex Sokolin:
Thank you so much for joining me today.
Matthew Le Merle:
Thank you very much, Lex.
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