Author & Big Red Ventures Fund Manager: Nicholas Moran
How did you find yourself in the venture capital industry?
My first job out of Cornell was on the private equity secondaries team at Blackstone. It was a super interesting seat to sit in as a 22-year-old the secondaries team as it gave me a top down view of the entire buy side. Our job was to go through these portfolios from investors seeking liquidity and try and value the LP interests. I ended up on the team that focused predominantly on venture capital LP stakes, so that way I got to learn a lot about the existing VC funds out there, the companies they invested in, the way these LP stakes are traded on the secondary market. After a while I decided that I wanted to move over into venture investing on the GP side, so after two years as an analyst at Blackstone I ended up interviewing for and then eventually landing an investment role at DCM Ventures in Menlo park – which is a 30+ year-old Silicon Valley venture firm with an early-stage cross-border focus. DCM would do seed through series B financings. When I was there they were investing out of their eighth fund which was $500 million. I started in January of 2016 which was an interesting time to be in the valley especially at a firm like DCM ventures. Their entire strategy was to kind of build a cross-border fund that would invest in the three largest tech economies of the US, Japan and China. Obviously there was a massive tech boom in China starting in the in the early-to-mid 2000s so DCM was a big beneficiary of that uplift. So it was a really interesting place to get my feet wet on the venture side. I worked directly for the founder of the firm, David Chao, who is a legendary Forbes Midas list venture capitalist. It was really great to work so closely with him in the small Menlo Park office. Come middle of 2016, as a new associate at DCM I was very quickly realizing that a significant part of being an early stage VC was to build out a network to source deals from. Given that I was coming from the East Coast and Wall Street, I decided that one of the ways that I could add value early on while I was building up that network was to focus on frontier technology, or these new emerging areas of technology that the existing partners and principals at DCM didn’t already have built out networks in given that they have been the Valley for decades already. So I spent a lot of time immersing myself in these newer emerging technologies at the time that included virtual reality, artificial intelligence, and then ultimately blockchain. I was kind of right place at the right time and ended up meeting a bunch of early blockchain founders and investors who red-pilled me on the crypto opportunity. Those experiences really kind of convinced me that there was an opportunity in blockchain technology and to do a deeper dive in the space. By mid-2016 I started making some Angel investments and some small LP investments personally and eventually I built up so much conviction around the space that I presented to DCM’s global partnership on the opportunity that there was to be had in crypto and blockchain. I felt DCM as a cross border US/Asia fund was really well positioned to be a top player in the space, and that presentation was well received by the founder of the firm, David Chao. David gave me a mandate to go out and find blockchain deals on behalf of the fund, so for the next few years I was the blockchain guy internally at DCM and ended up doing a number of deals that ended up doing well for the firm. Then in 2019, I came back to New York where I started New Form Capital. New Form is a seed fund that’s focused on this intersection of blockchain technology and capital markets, more specifically how the former can make the latter more efficient.
With a portfolio concentrated heavily in an emerging industry, how does New Form balance risk?
I would say the kind of the single biggest risk to our space is regulatory risk. It is a new technology, and just like with AI, the regulators are trying to wrap their heads around how to best regulate it and how to balance protecting the American retail investor along with providing space for innovation in the US which has traditionally been a great technology innovator. Tech innovation I would add that has led to a lot of the prosperity that the US has enjoyed since the end of World War II. It’s a hard job the regulators have, frankly I don’t really envy having to come up with these rules, but I would say that a large part of our underwriting process is to assess the regulatory risk of what we’re investing in, and to make sure that we’re investing in something that’s legal and that we think will continue to be legal in the US. We work with outside counsel and mitigate that risk but our thinking is that eventually the regulators are going to warm up to blockchain technology because if you think about what blockchain is as a distributed ledger, its really a great way for auditors or really anybody who wants to verify transactions and have a paper trail of the different behaviors that economic actors have taken, to do so super easily just through monitoring the public blockchain. There’s a well known firm called Chainanalysis that works with the US government to make sure that they weed out bad actors among other functions by simply looking at on-chain data. So longer term I think that the regulators will actually warm up to the space. With any new space where there are vast amounts of funds involved and not very well understood by the public, there can be bad actors as we saw with FTX last year, but we think a lot of those actors have been weeded out over the last year and a half and we’re still very bullish on the future of this technology. We are very focused on one area, and that’s the kind of the exposure that we sell to our investors. We are a sector-focused fund, we have built a blockchain expertise over the last almost-decade in a very nascent technology, so we’ve been doing this for a while, and our LP’s have signed up for that type of exposure and risk.
Given your portfolio companies’ unique needs in the blockchain space, how do you provide value & assist their growth?
One way we help our companies is by helping them think through market strategy by providing the perspective that comes with evaluating hundreds of companies over the course of the year. A lot of the time entrepreneurs don’t have that perspective because they’re so narrowly focused on making their specific company work, which is a hard enough task as it is, so we like to provide market intel what we’re seeing from a higher level. Another way we help portfolio companies is via a built out network of other investors and financial firms we work with which can either invest in, or use some of the financial tools and products that our portfolio companies create, helping them on the business development side early on, or to participate in follow on investments when our portcos are doing a later stage equity financing. We also help recruit talent for a lot of our portfolio companies given that these teams are scaling from two or three cofounders to 10 or 15 employees pretty quickly after an equity raise. These early co-founders are really heads down building the product, so we try and help them by tapping into our networks to source some great talent. Then there’s also our firm’s specific value-add which is that we seek to bridge more traditional Wall Street firms like macro hedge funds, private equity funds, growth equity funds, bankers, et cetera to what we’re pitching as the future of the financial services industry built on a blockchain tech stack. Some of our LP’s and stakeholders are more traditional finance guys who are looking to get more exposure to these types of innovative on-chain products, so a lot of times the value that we provide are connecting the dots between those two currently disparate areas of finance.
Are there any trends you are excited about in the blockchain space?
At first glance the blockchain space may seem like a very narrow space but there are several sub sectors within blockchain. The part of the industry that we’re focused on the most is the intersection of capital markets and blockchain. Most of the companies we invest in have some type of fintech/markets function. There’s a term in our industry called decentralized finance which is really an umbrella term that refers to these financial functions that currently in today’s financial paradigm require middlemen to complete. Blockchain technology can reduce the need for, or remove these middlemen while adding transparency to a lot of these transactions, so defi is a significant focus of ours. Another sub sector we focus on is infrastructure companies that help build the piping of this new financial system. Then lastly we’re really long on this theme of what’s called RWA or real world assets, which is referring to taking traditional financial assets and putting them on-chain so that market participants can easily transact globally with the ability to build granular composable financial products on blockchains that are composable, or can speak to each other. Versus today you have this paradigm where all these financial assets sit with centralized middle men who are comparatively very slow to transact, are expensive to use, and are closed on the weekends versus blockchain markets are 24/7 markets, they’re very transparent, and I can beam an asset to somebody in Asia in 10 seconds sitting where I am right now even if it’s midnight. To us it’s pretty obvious that this is the next evolution of global digital markets.
Are there particular portfolio companies that you are excited about?
Our most recent addition to the portfolio is called Test Machine, a Chicago-based company. They’re building an AI toolkit to audit blockchain smart contracts. Before a new team launches their blockchain product into the wild and people potentially lock hundreds of millions of dollars worth of crypto into these networks, the teams need to review the code base for bugs that might be exploited by hackers. Right now job is being done by third party code auditing firms that have human engineers going through lines and lines and lines of code to try and find potential vulnerabilities or bugs and mistakes in the code. That process is very expensive, very tedious, and very time intensive, so it’s our belief that AI is going to start eating into that business and become the new paradigm for auditing smart contracts. So we have recently backed Test Machine out of Chicago who built a really great product that’s doing exactly that. There’s another company called Spectral Finance. They are building a decentralized credit scoring protocol that will come up with a new type of credit score based on a combination of your on-chain and off-chain data. They can kind of look at your behavior in these markets and come up what they think is eventually a new, more accurate score versus the current paradigm which is being really only carried out by the three big credit agencies and it’s really something we believe is an outdated model, but it’s been going on for decades. That’s another company that we’re very excited about.
As a final question, what advice would you have for Cornell students who are interested in trying to establish a career in the venture capital space?
There is no typical path towards breaking into venture. I would definitely recommend aspiring VCs to work at a startup before they decide they want to do venture longer term. The tough part about venture is that the feedback loop is very long. It can be years before an investment actually pans out on the upside or the downside. So usually investors don’t find out if they are any good at venture for five or six years. So start with building companies from the early stages to make sure that that’s something that you want to be doing long term before you spend half a decade to figure out if you are a good VC investor or not. I’ve advised friends for a while now that one of the best risk-adjusted entry points into the tech world is to join a Series A or Series B company right after it has raised a fresh round of financing from a top VC fund. At that point you still have the ability to negotiate for an equity package to get real upside, but the company has significantly derisked itself. If you are really determined to break into VC, I would start by just being forward and trying to create value for any VCs you can get in touch with. Demonstrate your ingenuity, hustle, and ability to network to them and they’ll start paying attention. Best of luck to those looking to join the industry. It can be incredibly rewarding getting to work with super talented founders and to get to witness the takeoff of a rocketship trajectory company from the perpective of an investor.