Q&A: AirTree Ventures’ John Henderson
Q&A: AirTree Ventures’ John Henderson DECK Australia-based AirTree Ventures has established a crypto-focused vehicle alongside its latest fund. John Henderson, a partner at the firm, explained how they think about the Web3 opportunity
Q: To what extent were team members involved in crypto prior to the first investment last year?
A: Collectively, we were monitoring crypto and playing around with it personally, with differing levels of interest and depth. We didn’t have the mandate to do it with the fund. I think, especially with defi [decentralised finance], the only way to learn is to do. It’s a participation sport – you must be hands-on before you put institutional capital to work to make good investments
Q: In what way was the 2020 “defi summer” a watershed moment?
A: We think about technology adoption cycles in s-curves: there is a long installation phase – the bottom of the s – during which infrastructure is built out but there isn’t much to do; and then there’s a deployment phase, which is when everyone starts using the tools and apps that have been built. We were watching crypto, rather than investing in it because it was in the installation phase; there weren’t many use cases. For us, the defi summer was about an influx of new users into defi protocols – people using Compound and Aave for lending, Maker for stablecoin issuance, and Yearn for earning yield on assets.
Q: Were there Australia-specific developments at that time?
A: Synthetix [a derivatives liquidity protocol] came out of Australia. It’s fair to say that Australia and New Zealand have produced a lot of interesting defi and NFT [non-fungible token] projects relative to the size of their populations. Now, we see a lot of talent coming out of Singapore, in part because they have friendly regulations on DAOs [decentralised autonomous organisations] and tax. But one of the things that’s exciting about this space is teams can be remote and come from anywhere.
Q: The first two investments are Immutable, which focuses on NFTs, and Zeta Markets, a decentralised derivatives platform. What do they say about your strategy?
A: They demonstrate the breadth of our approach. We are focused on defi, NFTs and DAOs primarily (and the infrastructure and tooling associated with them). Immutable is a scaling solution for NFTs on Ethereum. Zeta is a decentralised options protocol on Solana. We will do everything in between as well.
Q: Are the LPs in AirTree Web3 the same as in the main fund?
A: Yes. We already have strong practices in fintech and web applications, and Web3 is a combination of both. A lot of investors were interested in our approach. Conversations generally went along the lines of ‘AirTree has a long history of investing in software and the internet. We think decentralisation and Web3 is a natural extension of disruption to existing internet businesses and financial services companies. Investing in the future of the internet is consistent with our historical approach and much more on mandate than doing something like pharma or biotech.’
Q: Is the fund any different in structure?
A: We run 10-year closed-end funds, which is more than enough time for crypto projects. If anything, they achieve liquidity faster than traditional software companies. We see time as a competitive advantage. Crypto has been traded since day zero, so a lot of the crypto-native investors come from trading and hedge fund backgrounds, and they tend to be much more short term than we are. The last thing early-stage projects want is investors selling tokens quickly; we are happy to sign up to four-year lock-ups.
Q: In what other ways do you add value?
A: Crypto-native investors from trading backgrounds bring a certain skillset to projects, especially in defi. But these are often venture-style projects, with a long road and a valley of death. Organisation building, team building and recruitment, setting up systems and processes, marketing, working with regulators, comms and PR support, governance participation, node operation – we had most of this set up already and have added to our capabilities in order to add additional value to our Web3 investments.
Q: How flexible must you be in terms of percentage ownership?
A: Traditional VC investors normally look for 10%-plus, which is antithetical to Web3 models where ownership and governance are decentralised. So, you have to be happy with much smaller stakes. Another difference is the community element – these projects tend to be community-run and community-governed, unlike traditional software companies. We must be active participants in those communities, taking part in governance votes and making governance proposals.
Q: Does it matter whether investments constitute equity in a company or tokens in a project?
A: We don’t mind; we are opportunity-driven. In the case of Immutable, there is a company behind the project. With Zeta, there is not. It is run by a DAO, and we invested in tokens governed by the DAO.
Q: What are the implications for exits?
A: We’re still figuring this out. For companies, my view is that the likes of OpenSea, Dapper Labs, and SuperRare’s public listings will be watershed moments for the industry. We’ve had Coinbase – an exchange – but it remains to be seen how the public markets will treat companies where tokens form the vast majority of their balance sheet and revenue flows. DAOs are actually simpler: they have tradable tokens, so the exits will be selling those.
Q: Would you say that crypto has now gone mainstream from a VC perspective?
A: We decided that it was institutionally investable because we saw so much uptake in usage of defi, and NFTs have accelerated it even more. I would say NFTs in particular have entered the public zeitgeist and taken Web3 mainstream.
Q: What role will traditional corporates play in the evolution of Web3?
A: If you are a big intellectual property owner, there is a logical extension from what you already do into NFTs and digital ownership of that IP. Similarly, game developers will introduce ownership into the games and have it transfer between games. It was interesting to see the proposal from Société Générale on MakerDAO a couple of months ago to securitise part of its loan book. In addition, several challenger banks are using defi as the backend to generate yield for some of their savings products, so they can offer competitive rates compared to incumbents.
Q: Are you getting many questions from other VCs looking to enter the space?
A: There is a lot of FOMO [fear of missing out]. Many investors have asked us how we set ourselves up to invest and how we got our LPs interested. VCs are wondering whether they should do this, but to get asymmetric outsize returns in venture, your investments need to be contrarian. If they are obvious to everyone, the outcomes won’t be big because they are priced in. To the extent this sector and some of our investments in it make people uncomfortable, that tells me they are classic venture investments and exactly what we should be doing.
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