- James McDowall is a founding partner of Arcanum Capital, which just closed a $12 million VC fund.
- McDowall explains why he is focusing the oversubscribed fund on blockchain projects in India.
- He also breaks down two early-stage crypto projects the Tim Draper-backed fund has bet on.
In a big leap from sports to crypto, James McDowall has parlayed his skills as a professional golf player-coach into helping early-stage blockchain projects build, raise, and deploy capital.
The former member of the British and Swiss Professional Golfers’ Association was looking for opportunities to invest his golf earnings when he became interested in wealth management. But stocks and bonds hardly excited McDowall, whose penchant for risk-taking and emerging technology soon led him to cryptocurrencies.
After buying his first bitcoin at around $1,800 in 2017, McDowall went down the crypto rabbit hole, devouring any research he could get his hands on. Then came the raging
bull market
of that year, during which bitcoin nearly touched $20,000.
Arcanum Capital
“I did well enough during that year to change my career. I didn’t need to give golf lessons anymore,” he said in an interview.
The 2018 crypto winter that ensued did not scare him away from the industry. Instead, he started co-investing in deeply discounted projects backed by solid technologies with Karthik Bupathi, Luchang Zheng, and Rahul Andra.
By 2020, the four partners had built a decent track record. They made their investing venture official by setting up Arcanum Capital, a seed-stage venture capital firm focused on decentralized protocols and applications. The firm recently closed its first fund — the $12 million Arcanum Emerging Technologies Fund I ISA, which was oversubscribed and exceeded the original target by $2 million.
The fund aims to provide Seed and Series A financing to blockchain technology companies in India and other emerging markets. It is backed by Polygon (MATIC) co-founder Sandeep Nailwal, billionaire Tim Draper via his Draper University Ventures, and Swiss asset manager Tavis Digital.
Leveraging blockchain to ‘bank the unbanked’ in India
While bitcoin has advanced to $43,500 after months of sharp declines, chatters of a crypto winter, in which prices stay depressed after an initial plunge, have not dissipated.
To McDowall and his team, it’s been business as usual. Despite the negative sentiment clouding over liquid traded cryptocurrencies, the venture capital market for digital assets has remained robust. In January, venture capital firms poured nearly $5 billion into crypto investments, according to The Block.
“Even if we have a contraction for another six to 12 months, we are not worried,” he said. “Bear markets are good for building. That is when you pick up the best deals, it’s where you find the best teams, and a lot of the euphoria in the speculation gets thrown out.”
Geographically, McDowall and his partners find the best deals in emerging markets, especially in India.
The reason for their focus on the country is multi-fold. With 1.38 billion people as of 2020, India is expected to grow on the back of positive demographic tailwinds and economic strength. Indian startups raised a record $39 billion from venture investors last year, with 44 of them joining the unicorn club reserved for those with valuations of more than $1 billion, according to TechCrunch.
At the same time, India is an emerging economy where about 190 million adults are unbanked. The lack of financial inclusion and infrastructure could pave the way for blockchain technology and decentralized finance to “bank the unbanked,” in McDowall’s view.
“When you have such a large population and such large population growth forecasts, you can really expect a hell of a lot of innovations,” he said. “But it’s an emerging economy where there are huge technology gaps to be filled. We believe that blockchain is going to fill a lot of those.”
2 early-stage projects to bet on
McDowall takes a thematic approach to pick investments for the fund, which spans non-fungible tokens, play-to-earn games, decentralized finance, and the metaverse.
The team also prefers to invest in projects via token purchases than acquiring traditional equity stakes. Only three out of the 24 investments Arcanum made are traditional investments, though the three equity investments also have a small token component, according to McDowall.
“We like the
liquidity
profile of tokens. If you invest in equity, you’ve got to wait for an IPO. The cycles are five to seven years,” he said. “Whereas with tokens, we can take a project from seed stage to publicly listed in one year sometimes, which is crazy.”
The firm recently invested in the seed round of Cross the Ages, a trading card game that merges themes around blockchain gaming, NFTs, and the metaverse. To McDowall, the most attractive attribute of the game is its community of 75 international artists, including those who have worked on Star Wars and Game of Thrones.
The game is supported by a supply of one billion governance CTA tokens, 25% of which are allocated for fundraising, according to its whitepaper.
“Imagine if these trading cards were NFTs, and you could buy them, sell them, swap them on a secondary market, and they can unlock different features in the game,” he said. “That’s quite a cool one purely because of the talent involved. We were just blown away by the caliber of artists and writers that are involved in creating this masterpiece.”
Another early-stage investment Arcanum made is India-based capx.fi, a decentralized finance protocol that seeks to bring liquidity to vested tokens.
When Angel and VC investors invest in early-stage projects, they receive tokens in exchange. However, those tokens are locked for a long period of time, making them essentially illiquid during the vesting period. During the 2018 to 2019
bear market
, a secondary market emerged for simple agreement for future tokens (SAFT), which is an investment contract dictating the eventual transfer of tokens from crypto developers to accredited investors.
Despite the rising demand for SAFT trading, the burgeoning market involved a lot of documentation and was archaic at best, according to McDowall.
Capx aims to tokenize the entire secondary market for vested tokens. For example, if a retail investor missed a private presale of a desired project, they can head to capx to buy a position in the project from venture capital investors that wish to net off their principal investment in the same project, McDowall explained.
“Rather than waiting for it to get listed on an exchange and their tokens to get unlocked, the VCs can actually lift some or all of their position on the secondary market,” he said.