Ben Strack

Electric Capital executives told its limited partners Thursday that the crypto-focused venture capital firm is relatively unscathed from the FTX debacle — thanks to “yellow flags” Electric spotted when it comes to due diligence.&nbsp;



The contents of the investors-only call was obtained by Blockworks, and a source with knowledge of the matter provided additional details.&nbsp;



The “yellow flags” in question, Electric partners told investors, came to light as they probed the financing and token economics of a potential early-stage investment in the serum (SRM) token — heavily backed and marketed by former FTX CEO Sam Bankman-Fried.&nbsp;



Serum is a decentralized exchange software built on Solana. Bankman-Fried is a co-founder of Project Serum, which, according to its <a href="https://assets.website-files.com/61382d4555f82a75dc677b6f/61384a6d5c937269dbed185c_serum_white_paper.88d98f84.pdf" target="_blank" rel="noreferrer noopener">white paper</a> published in July 2020, was designed to have cross-chain support, stablecoins, wrapped coins, order books and the ability to create custom financial products. It was built to be interoperable with Ethereum.



Warning signs from interactions with <a href="https://blockworks.co/news/whats-next-for-ftx-and-its-customers-after-bankruptcy-filing/" target="_blank" rel="noreferrer noopener">now-bankrupt</a> FTX and Alameda Research — both founded by Bankman-Fried — kept the firm “outside of the blast radius” of FTX’s fall, Electric Capital co-founder Avichal Garg said on the call.&nbsp;



The financing round for serum, Garg said, followed a fast-and-loose playbook, a formula relying on a “spreadsheet” tracking incoming SRM allocations. The atypical setup meant the earlier an investor committed to write a check, the less they paid for tokens.



“So, it was a little bit of a yellow flag and kind of rubbed us the wrong way that this didn’t feel like a group of people that actually wanted to have true partners and true long-term relationships with the people giving them capital,” Garg said.&nbsp;



Electric questioned, too, SRM’s token economics, which called for a lack of liquidity for many of the tokens over a number of years.



Serum’s whitepaper said its circulating supply at launch would amount to roughly 10% of the digital asset’s total float. All presale, team and contributor tokens were set to unlock between one and seven years thereafter.



“When we probed about this, the team said the reason they were doing this was to be long-term aligned with the users of the protocol, which is the generous interpretation,” Garg said. “The less generous interpretation of this might be that what you’re going to do is have a very low float on the tokens…where the low float sort of constrains the supply such that it bids up the price.”



Spokespeople for Serum and FTX did not immediately return a request for comment.&nbsp;



SRM traded around $0.25 at 3 pm ET on Thursday, down 15% in the last 24 hours — contributing to a staggering 65% one-month drop.



Limited exposure to FTX’s collapse&nbsp;



Electric Capital thus passed on investing in SRM, and later on, decided not to invest in FTT.



“As a result of us sort of repeatedly passing on these investment opportunities, we never got really close to that ecosystem,” Garg said. “We were never very close to Sam. We were never sharing investment opportunities back and forth.”



The asset manager had no FTX equity stakes, nor exposure to the exchange’s underwater native token, FTT, SRM or Solana’s SOL token, the proof-of-stake blockchain which likewise has been <a href="https://blockworks.co/news/solana-tvl-defi-decline" target="_blank" rel="noreferrer noopener">hammered</a> by its <a href="https://blockworks.co/news/solana-community-remains-bullish-despite-ftx-fallout" target="_blank" rel="noreferrer noopener">association</a> with Bankman-Fried. And Electric never did business with Bankman-Fried’s Alameda Research.



The company had eight bitcoins — currently worth roughly $130,000 — custodied by FTX, he added. Two unnamed startups Electric Capital had invested in — exposure amounting to about $700,000 in one of its venture funds — had assets sitting on FTX. The company is looking to work with the founders to recover the frozen assets.



Garg declined to detail specific portfolio companies impacted.&nbsp;



Electric Capital’s focus moving forward



Electric Capital raised a notable — even toward the height of the bull market — <a href="https://blockworks.co/news/electric-capital-raises-1-billion-to-launch-crypto-venture-token-funds" target="_blank" rel="noreferrer noopener">$1 billion</a> in March it said it would use to deploy capital to Web3, NFT and DeFi projects.&nbsp;



The injection of capital was set to fund a $400 million venture fund and a $600 million token fund, bringing the firm’s total funds to four.



“Our [assets under management] is somewhere between 0 and $2 billion, depending on what you think crypto is worth,” Garg told Blockworks in a statement.



Executives said on the call that the firm is focused on early-stage projects that can replace “building blocks” potentially destroyed by FTX’s collapse, adding it has already made two unspecified investments in Solana-focused startups.



Otherwise, the firm is being patient when it comes to deploying cash, anticipating additional selling and choppy trading waters ahead.



“We think it’s very likely that, especially some of these liquid token networks, become forced liquidation events as creditors have to sell these assets off,” Garg told Electric investors. “[Assets] will likely overcorrect, and they start to present very interesting risk-reward opportunities.”



Michael Bodley contributed reporting.



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Electric Capital Partners: ‘Yellow Flags’ Kept Us Away From SBF

Jacquelyn Melinek

<div id="highlights-block_621e69adec374" class="highlights">
 <ul>
 <li>The firm will focus on DAOs, NFTs, DeFi, decentralized infrastructure and accessibility in Web3</li>
 <li>“The Web3 economy built on top of the programmable money stack will be one of the defining disruptions of the 2020s,” Avichal Garg, Electric Capital founder tweeted</li>
 </ul>
 
</div>



Crypto venture capital firm Electric Capital has raised $1 billion, its largest fundraise to date, to deploy capital to Web3, NFT and DeFi projects.&nbsp;



“The Web3 economy built on top of the programmable money stack will be one of the defining disruptions of the 2020s,” Avichal Garg, Electric Capital founder and managing partner, <a href="https://twitter.com/avichal/status/1498700492393746433" target="_blank" rel="noreferrer noopener">tweeted</a> Tuesday. 



The lofty $1 billion haul is earmarked for two funds: a $400 million venture fund and a $600 million token fund. The new vehicles mark the firm’s third and fourth funds, respectively.&nbsp;&nbsp;



Electric Capital’s second fund was $110 million in August 2020. At the time, it planned to focus on investing in startup equity, crypto tokens and hybrids of the two.



The firm will focus on five key trends within the new funds: DAOs, NFTs (non-fungible tokens), DeFi (decentralized finance), decentralized infrastructure and accessibility in Web3, which will define this decade, Garg said. The capital will be invested in $1 million to $25 million increments for companies and token-enabled networks.



The fundraise brings the firm into a bigger playing field alongside venture capitalists in the space with major crypto funds such as <a href="https://cms.blockworks.co/andreessen-horowitz-looking-to-raise-4-5b-for-new-crypto-funds/" target="_blank" rel="noreferrer noopener">Andreessen Horowitz</a>, <a href="https://cms.blockworks.co/paradigm-launches-2-5-billion-crypto-fund/" target="_blank" rel="noreferrer noopener">Paradigm</a> and <a href="https://cms.blockworks.co/10t-holdings-plans-to-launch-third-crypto-fund/" target="_blank" rel="noreferrer noopener">10T Holdings</a>.



As prominent firms deploy large funds, venture capitalists and investors alike seem to show no signs of slowing down. Last month, billions of dollars flowed into the crypto, including a notable amount from Luna Foundation Guard with its <a href="https://cms.blockworks.co/nonprofit-raises-1b-to-create-bitcoin-reserve-support-terra-ecosystem-growth/" target="_blank" rel="noreferrer noopener">$1 billion</a> private token sale. 



“We believe that crypto enables a parallel, programmable financial system,” Electric Capital wrote in a <a href="https://mirror.xyz/electriccap.eth/aYtipN_dEtB6ztBqGDspE0zfvck8DpVLDsrnrm2MluY">post</a>. “Now, a new economy is developing on top of the programmable money stack — DeFi enables permissionless access and innovation, NFTs are digital-native assets, DAOs create a way for communities to allocate resources, Decentralized Infrastructure provides alternatives to centralized tooling, and more.”



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Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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Electric Capital Raises $1 Billion To Launch Crypto Venture, Token Funds

In the latest episode of &#8220;<a href="https://youtu.be/akAFJBudGzU" target="_blank" rel="noreferrer noopener">Empire</a>,&#8221; Blockworks&#8217; co-founder Jason Yanowitz is joined by Haseeb Qureshi of Dragonfly Capital and Avichal Garg of Electric Capital.



Both are strong voices when it comes to tokenization, the metaverse and multichain futures. In this episode, Haseeb and Avichal debate the merits of the &#8220;blockchain as cities&#8221; philosophy, the future of crypto and what a multichain world will look like.



Plus, hear their thoughts on:



<ul class="wp-block-list"><li>Network effects in crypto</li><li>Narratives in crypto</li><li>and so much more!</li></ul>



Check out what they had to say in the video below.👇



<figure class="wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio"><div class="wp-block-embed__wrapper">
<iframe loading="lazy" title="Multichain Future Debate | Haseeb Qureshi &amp; Avichal Garg" width="1024" height="576" src="https://www.youtube.com/embed/akAFJBudGzU?feature=oembed" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe>
</div></figure>



<h3 class="wp-block-heading">About the show</h3>



&#8220;Empire&#8221; is a twice-a-week show. On Thursdays, Jason interviews crypto industry movers and shakers to talk about their struggles, bold moves and tough decisions. Friday&#8217;s weekly roundup episodes feature <meta charset="utf-8">co-host Santiago Roel Santos and cover the top news from the past week.



For any NPR or Guy Raz fans out there, you can think of &#8220;Empire&#8221; as a &#8220;How I Built This&#8221; for the bitcoin and crypto industry.



Subscribe to &#8220;Empire&#8221; today on&nbsp;<a href="https://podcasts.apple.com/us/podcast/empire/id1554930038" target="_blank" rel="noreferrer noopener">Apple</a>&nbsp;or&nbsp;<a href="https://open.spotify.com/show/4UTePv1CR3APdKOiosR3Iq" target="_blank" rel="noreferrer noopener">Spotify</a>. Watch episodes on&nbsp;<a href="https://www.youtube.com/playlist?list=PLvER9nHSRN3wPkrDGTT5_8VC4Hjcq0f9U" target="_blank" rel="noreferrer noopener">YouTube</a>.



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