Numerai and Polychain
USV recently made two investments in hedge fund managers. You might gather from that fact that we are moving away from venture capital. But that would be an incorrect assumption. What we are doing is finding new ways to invest in technologies that we think are interesting. These would be technologies like artificial intelligence, encryption, and blockchain.
Last week it was leaked, and then announced, that USV had led a round of financing for Polychain Capital, a new kind of fund that invests in digital tokens. We have discussed these digital tokens here at AVC and elsewhere. We do plan to directly invest in blockchain based protocols via tokens, but we won’t be able to invest in all of them in a venture capital model, so we are also betting that a fund vehicle focusing on these assets will make a good investment.
Yesterday, my partner Andy wrote a blog post on the USV blog about Numerai, a new kind of hedge fund that allows machine learning experts all over the world to crowdsource public market investments by building models and sharing the selections that come out of their models. The data they use to power these models is encrypted and so are their models. It is the “blind leading the blind” according to this piece in Wired. I like that description as the focus moves away from things like fundamental and technical stock analysis to true pattern recognition done by machines. Numerai uses cutting edge encryption technology (a variation on homomorphic encryption), machine learning, and pays out using the bitcoin blockchain. It’s a trifecta of things that are interesting to us, as recognized in this tweet by MIT’s Technology Review.
In both cases, USV invested in the “GP” of these funds. In Polychain, we also made a small investment in the fund itself. We did not do that in Numerai, although it is possible that we could choose to do that in the future. Our investments are largely in the companies that manage these funds and they are a bet that these new technologies will offer new ways to build fund management businesses that over time will be highly valuable. These are both startups and we think of these investments as classic early stage investments with all of the risk and return that comes along with them.