Defecting from the Web3 Revolution? The Challenges and Circumstances of Paradigm

Authors: Nianqing, Gu Yu, ChainCatcher

Today, The Block reported that the cryptocurrency venture capital firm Paradigm has changed the wording on its website since the beginning of this month, updating the description from "Paradigm supports disruptive crypto/Web3 companies and protocols with funding as low as $1 million and as high as over $100 million" to "Paradigm is a research-oriented technology investment firm."

In addition, sources indicate that Paradigm is shifting its focus from solely cryptocurrency to also include "cutting-edge" technologies such as artificial intelligence. Of course, Paradigm has not fundamentally changed its mission and will continue to focus on cryptocurrency and Web3; the updated website copy simply aims to emphasize "technology research." Paradigm has long been exploring companies developing new technologies, such as AI Arena.

Even with a relatively reasonable explanation, Paradigm's "rebranding" still brings a significant shock to crypto users. Some have criticized that Paradigm, which focuses on the crypto space, should not divert the billions of dollars intended for Web3/crypto investments to other technology sectors, questioning whether this move has the consent of other LPs. Others have criticized that a firm that has consistently proclaimed "we believe cryptocurrency will define the coming decades" suddenly erasing its Web3 positioning is tantamount to "betraying the crypto revolution."

Just over a month ago, the co-founder of Meituan, Wang Huiwen, also sparked a wave of discussion when his signature changed from "learning Crypto" to "learning artificial intelligence." Those who once shouted "All in Crypto" have turned to AI, making it hard not to be criticized for riding the wave and chasing trends. However, the negative emotions stemming from such minor changes as signature updates and website description alterations also indirectly reflect that the current crypto market is facing a serious lack of confidence.

That said, is it a bit excessive to criticize "Paradigm's defection from the Web3 revolution"? This article will analyze why Paradigm needs to reposition itself from a realistic perspective and based on its existing investment portfolio.

1. Starting from a Realistic Perspective

For a rapidly growing fund, concentrating on a specific field during the startup phase to achieve high returns and then expanding the investment scope and diversifying risks in maturity is a classic and sustainable strategy for venture capital firms. Moreover, Paradigm's change in positioning does not mean an announcement of exiting crypto investments. Earlier today, its co-founder Matt Huang expressed on his personal Twitter account: "Never been more excited about crypto," attempting to respond to the doubts regarding Paradigm's "paradigm shift."

The reality of the primary investment market is such that new narratives at the forefront can attract more market attention. We can compare the recent financing conditions in the AI field and the crypto field:

Two days ago, Anthropic, founded by former OpenAI executives, recently secured $450 million in funding; at the end of April, OpenAI completed a $10.3 billion funding round, with a valuation reaching $27 billion to $29 billion; and in March, it was reported that Inflection AI, a startup founded by the co-founder of DeepMind and the founder of LinkedIn, planned to raise as much as $675 million.

The financing amounts in the AI sector are enormous, and the number of financing rounds is increasing. Some startups in the Web3 field are also trying to hitch a ride on the AI wave. According to RootData, AI-concept Web3 projects have secured a total of 10 financing rounds in recent months. Recently, Worldcoin, which just completed a $115 million Series C funding round, is also related to OpenAI.

Additionally, according to RootData statistics, since April 2022, the overall financing amount and number of financing rounds in the crypto market have shown a downward trend. In April, the cumulative financing amount was only $815 million, which is not only far lower than the same period last year but also significantly below the AI sector's data during the same period.

Furthermore, venture capital firms in the crypto bear market are facing high investment risks, low returns, and even a lack of projects to invest in. A previous article in Deep Tide titled "Deleting cryptocurrency descriptions from the official website and entering AI, what is the reason behind Paradigm's paradigm shift?" also mentioned that as a VC, Paradigm needs to deploy capital, and when fundraising is too much, the options for investment may actually decrease, while still needing to achieve expected returns.

A more realistic reason is that Paradigm is still trying to shake off the shadow of the FTX collapse.

According to The Information's statistics based on Paradigm's website, since early October last year, at least eight employees have left, including two investment partners and four engineers. The departing personnel mainly come from Paradigm's engineering and investment departments. At the end of last year, Paradigm suffered a loss of $278 million from the FTX collapse.

In November 2021, before Paradigm announced the completion of a new $2.5 billion fundraising, it had already undergone a significant expansion, doubling its size to 31 people. In the following year, Paradigm continued to expand, with the number of employees reaching as high as 70.

In addition to considering the company's operations, the uncertain regulatory policies in the U.S. are also an important reason for Paradigm's rebranding.

After the collapse of FTX, the U.S. SEC began to review and prosecute some crypto projects that may involve violations of securities laws, including leading crypto companies like Binance, Coinbase, and Kraken, many of which are part of Paradigm's portfolio. Paradigm co-founder Fred Ehrsam has also repeatedly expressed concerns about U.S. regulation on his Twitter.

Moreover, under multiple factors such as regulation, U.S. limited partners have "strong opinions" or certain risk concerns regarding labels like "Crypto," especially among some traditional large funds.

2. The Paradigm Team's Essence Has Not Changed

"Paradigm is a research-oriented technology investment firm"—this description after the rebranding indeed does not contradict the essence of the Paradigm team.

Paradigm has always adhered to a research-first investment philosophy, with technology research being its core strength, allowing them to actively engage in the project development of startup teams.

Although four engineers left Paradigm in the first half of this year, there was also an important personnel change: in February, Paradigm appointed two general partners, Charlie Noyes and Dan Robinson, both of whom are research-driven figures in crypto technology, and this appointment has, to some extent, continued its research-oriented investment philosophy.

Related Reading: "What impact will Paradigm's new appointments of two general partners have on its investment strategy?"

Additionally, the two founders, Matt and Fred, have experienced multiple cycles of cryptocurrency, maintaining an idealistic commitment to crypto, but more importantly, they follow a rational and reality-based investment strategy. Paradigm initially made its mark by buying Bitcoin at the bottom, and during the 2018 bear market, they used most of the $400 million raised in their first fund to purchase Bitcoin and Ethereum. Just in May, Paradigm's entity Paradigm One LP purchased 810,000 shares of Coinbase stock at an average price of $61, totaling about $50 million, also participating in stock investments.

Therefore, crypto funds like Paradigm that have survived since the early days must be realistic and flexible in their investment strategies: if the primary market is sluggish, invest in the secondary market; if the crypto field is not doing well, expand into a broader range.

Moreover, from the team's essence perspective, Paradigm's tech-savvy nature makes it easily attracted to new technologies. Since the rise of ChatGPT, both Paradigm's founders and engineers have increased their focus on AI, and the team has launched ChatGPT-related tools at flux.paradigm.xyz. Perhaps, from the perspective of what investors themselves are paying attention to, investment in the AI field is a natural choice for the team.

3. Analysis of Paradigm's Investment Portfolio

The change in Paradigm's investment direction has largely been reflected in its recent investment activities. As one of the largest funds in the crypto industry, Paradigm has disclosed participation in only two financing rounds since the FTX incident in November last year (namely Conduit and Code4rena), which is a very low number among first- and second-tier crypto funds. In contrast, Paradigm used to invest in 1-3 projects almost every month.

Next, this section will provide a detailed analysis of Paradigm's past investment strategies and styles based on public reports and RootData data.

According to RootData, Paradigm has publicly disclosed 92 investment rounds, with 55 rounds being lead investments, giving it a lead investment rate of 59.8%, ranking second among all crypto venture funds with over 10 investment rounds, only behind a16z. Additionally, Paradigm ranks high in terms of large investment proportions and reinvestment rates, while maintaining a relatively low total number of investments, adhering to a "refined and bold" investment style.

In the NFT sector, typical investment projects by Paradigm include NFT marketplaces Opensea, Blur, Magic Eden, Zora, etc., with Blur being a project Paradigm led in March last year when it was still an unknown anonymous project; this year, Blur's explosion has brought substantial profits to Paradigm.

However, Paradigm's investment in Opensea cannot be deemed successful. This investment occurred in January 2022, when Paradigm led a $300 million financing round at a valuation of $13.3 billion, but given the current market conditions, this investment may also be suffering significant losses. Just in April this year, foreign media reported that Tiger Global had lowered OpenSea's valuation to $3 billion. Recently, Tessera, an NFT fragmentation protocol that Paradigm has repeatedly led investments in, also announced it would cease operations.

In the DeFi sector, Paradigm's typical investment projects include decentralized exchanges like Uniswap, liquid staking protocols like Lido, and decentralized derivatives protocols like dydx. However, most of these investments occurred in previous years, and since the beginning of 2022, there have been very few new DeFi project investments, with only Exponential and Ribbon Finance being the two projects.

In the CeFi sector, Paradigm has invested in a series of well-known projects such as FTX, FTX US, Amber Group, Matrixport, Bitso, and Rain, with the last investment made in January 2022, and several of these collapsed projects have caused significant economic and reputational damage to Paradigm.

In the infrastructure sector, Paradigm has invested in well-known projects such as Optimism, StarkWare, Mina, and Fireblocks, and recently invested in infrastructure Conduit for launching production-grade Rollups based on OP Stack, blockchain indexing and data infrastructure platform Nxyz, and enterprise-grade zero-knowledge proof acceleration platform Ulvetanna.

It is worth noting that Paradigm has maintained a very restrained stance during the "new public chain" craze over the past two years, not disclosing any related investments, which is quite rare among leading venture capital firms.

In sectors like gaming, social media, and DAOs, Paradigm's investment frequency is even lower, totaling only about 10 investments, with no particularly typical investment cases.

With setbacks in crypto sector investments and a sluggish market, new directions like AI may be the best way for Paradigm to provide performance and returns to its LPs. As for investments in the AI sector, Paradigm invested in the AI-based hedge fund project Numerai a few years ago, but has not disclosed any related investments recently.

Currently, institutions like Polychian and a16z are still committed to increasing their investments in crypto, while Paradigm has decided to slow down its investment pace and extend its reach into larger sectors like artificial intelligence. What future this new route will lead Paradigm to is perhaps a question only time can answer.