$100M fund Cypher Capital looks for strong use case while investing in Web3 startups

Cypher Capital is a $100-million seed fund focused on investments in Web3 and blockchain technology startups in the Middle East. In May this year, the UAE-based VC firm announced that it had set up an ecosystem fund along with Ocean Protocol, according to which it has allocated $5 million to invest in Ocean Protocol projects. 

Ocean Protocol is a platform for data exchange and monetisation that builds on Ethereum and other EVM-compatible blockchains.

In an interview to YourStory Gulf Edition, Vineet Budki, Managing Partner and CEO of Cypher Capital, talks about the setting up of the fund and the plans for the firm. 

Vineet believes in understanding the use case of the startup and the strength of the startup’s model before making the investment plunge. The idea is important, and so is the founders’ ability to implement it, he says. 

Edited excerpts from the interview… 

YourStory Gulf (YS Gulf): Tell us about Cypher Capital and what led you to start the company?

Vineet Budki (VB): I’ve been doing startups for the last 15 years. Most of them are in India. I’ve also built Videocon d2h Online in India. We were the biggest online seller of Videocon d2h, a long time back. But the last startup, which was nearly valued at $8 million and had term sheets before COVID, was a travel startup known as Guiddoo; it collapsed overnight, because no funds were coming. 

I went into Bitcoin mining after the collapse of that company. Luckily it worked for me. I sold over 180 megawatts, which is a huge mining data centre number and, from there, whatever money I had, I invested it into the crypto space … ended up doing good. 

One of my clients was Bijan Alizadeh, now Co-Founder and Partner of Cypher Capital. He offered me $10 million in two months of me starting to invest; that was known as Fund I.

Cypher Capital has played an important role in the growth of successful crypto and blockchain startups, including Kilt Protocol, Sheesha Finance, PAID Network, Splinterlands, CasperLabs, Matterless Studios, Prasaga, AukiLabs, and Cross The Ages.

Cypher Capital is building a 10,000-sq ft hub for crypto startups, which is set to open in Q4 2022 in Jumeirah Beach Residence, Dubai. The hub reflects the company’s commitment to the blockchain community and its vision to provide mentorship and guidance to its members. By March 2023, Cypher Capital aims to invest in 40+ blockchain startups globally.

Most of the money we put in is personal wealth; we also work with Phoenix VC, a known VC fund in the Middle East. 

Phoenix also has a background that it is a Bitcoin mining company. They run over 200,000 miners under us, and we are building Abu Dhabi's $2-billion Bitcoin mining firm that will have the world’s 20% hashing. 

I personally run 1,500 miners: that means one Bitcoin is produced every three months in those 1500. So, 200,000 means like a Bitcoin being produced every probably two or three hours, this is actually the scale of operations at Phoenix. 

YS Gulf: From being an operator yourself to now being an investor, how has the shift been? 

VB: Bitcoin mining is more of a cash-flow business. While investing is more of exactly what I used to do as a founder, you know, you basically are evaluating what a model has strength in and, secondly, if the founders are capable enough to do it.Also investing in crypto startups is different. 

YS Gulf: What is so unique and different about Dubai and the Middle East?

VB: One of the advantages of Dubai is that policymaking is very fluid. They say that Dubai catches the trends early and adopts them quickly. So, when COVID came and the whole markets were down, they shifted their stance to being pro crypto. They welcomed people. Bahrain also did that but Dubai did it on a much grander scale. 

It's just about process simplification. In India, people still don't know whether it's (crypto) legal or not, they don't understand crypto regulations. While in Dubai, it becomes easier because you have two licences, which clearly say that you can be a prop trading firm or a crypto firm. So, things are easier here.  

Cypher Capital would be purely focused on crypto investing. This is a segment that we understand well. This is where we have the networks. So, we work with the top VCs in this space. 

YS Gulf: What kind of investments have you made so far and are looking to make from now? 

VB: So, in Fund I, we've done 100 plus investments. One of them is Casper; it was a project in which I think we raised over $70 billion. It was oversubscribed on the coin list as well. It is building a chain in itself. We invested in Fractal; it was a KYC AML solution that had raised money.

Today, it is used by a lot of people on the online space. Like when you have to do KYC for a project, Fractal is one of the easiest ones. We invested a lot on launch pads. So what happens is a lot of crypto funds are raised on crowdsource blockchain platforms. Paid networks and pools are part of what crypto and Web3 platforms are working against, as these don’t bring the decentralisation needed. So we invested in a lot of those. 

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YS Gulf: What do you look for when you invest in these crypto startups? 

VB: When someone is building a crypto blockchain startup, you really need to understand this: does the blockchain have any value to it? People basically take a F2 model and make it F3 and say that this is the new crypto setup. It doesn’t work like that. 

A lot of people don’t understand it, and a lot of education doesn’t exist. Today, we went to a bank, you deposit your money and I borrow a loan from there. Now this is a trust organisation. Imagine you replace that bank with a smart contract.

That is what Ethereum does; it is a platform of smart contracts that can do lending borrowing, that can do insurance, and a lot of things. There are startups that are looking to build up from the problems that an Ethereum might display. 

There are newer technologies; even Casper is trying to do that. I look at the use case first. I understand what they are trying to do. Are they trying to plant trees and say they are a blockchain startup? I had someone who said, ‘I want to do a plantation of some rubber or something like that and I want to raise money from blockchain.’ Why don't you go and raise money from traditional sources? This has nothing to do with blockchain. 

But when someone is trying to do a lending-borrowing platform, a stable platform, insurance online, then it becomes logical because blockchain actually adds value then. 

Secondly, if you have a house in India in today’s time and you need a loan, the bank will take six months to give you a loan. Imagine I take the title deed of that house, put it in a blockchain, which is verifiable and which can give the value of that house, and we tokenise this thing, and, within a click, you can get a loan. Just like all banking revolutions that come out. That is where blockchain adds value. 

The second thing is, from my running startups, I figured out that raising money and running a company are two different things. Do the founders have the capability to run a startup and make it into a $2-billion entity? So the idea is important, and do the founders have the capability to implement? Who is backing them up? 

If you have a $50-billion idea, and you need to raise 5, 6, 7 or $10 billion, the investors definitely come. A Sequoia backing you up or Andreessen coming up … it really helps, because it sees to it that you know you have that flow of investors, who keep coming with different raises. Also, the market conditions need to be kept in mind. 

YS Gulf: What advice would you give to founders in today’s environment, when crypto has seen a significant plunge?

VB: With the markets the way they are, it is important to keep the long term in mind. 

Market goes down and suddenly everyone forgets what a smart contract does and everyone forgets that it’s the same Bitcoin which is giving stability to all of Latin America and Africa where central banks don’t exist. Bitcoin is a store of value for those people. I don't see it that way. 

I see it as a long-term process. By 2030 there will be complete market adoption. If you look at numbers, 300 million crypto wallets exist and that is less than 3% of the world population and, out of this 300 million, I'm not joking, 90% are speculators. 

What would I advise these small businesses? Build projects, don’t go behind raising funds. Build something that can be valuably done on the crypto space. Don’t take the Web2 idea and just because the markets are hot, build up an idea. Do something that has a use case. If you can, take insurance on the blockchain space. Can you, sitting in India, verify a car’s value in Germany and insure it online? 

Tokenise something you know. Buying a house, a million-dollar house, is not easy for people but can you break this house into 1000 tokens and make people buy, say, five parts of that house? So, you’re basically tokenising real estate. 

There are a lot of use cases which can be done on blockchain and they (founders) need to find those out and build some products just like how one would do in a real-life case.