Investment Principles, Strategies, and Views on the Current Market Environment of Animoca Ventures

Author | Blockchain in Plain Language

When it comes to Animoca Brands, I believe many people in the industry are familiar with it. It is the first investor of Axie, the leading GameFi project, and its early acquisition of The SandBox has also become a leading project in the metaverse. In fact, the investment portfolio of Animoca Ventures, a venture capital fund under Animoca Brands, not only includes GameFi, but also various star projects such as Opensea, Polygon, The SandBox, LayerZero, Aptos, and Consensys.

So, what are the primary considerations for Animoca Ventures when choosing investment projects? How do they view the current market environment and the future prospects of GameFi? What is their perspective on the combination of encryption technology and the current hot trend of AI?

In this issue, the founder of Blockchain in Plain Language, Joyce, invited James Ho, the head of Animoca Ventures, to discuss the investment principles, strategies, and views on the current market environment of Animoca Ventures.

1. As the head of Animoca Ventures, could you briefly introduce your background and experience in the crypto field? What inspired you to become a practitioner in crypto venture capital?

James Ho: I joined Animoca Brands in 2018, and Animoca Ventures is the venture capital fund under Animoca Brands. Initially, Animoca Brands made a key investment in the crypto field, which was in Dapper Labs. Dapper Labs is one of the earliest crypto companies, and its issuance of CryptoKitties in the Greater China region marked a very important milestone in crypto history, as it caused the Ethereum network to crash, laying the foundation for subsequent developments.

What amazed us at that time was not the popularity of CryptoKitties, but the realization that the true combination of digital ownership and gaming (as seen in Dapper Labs) would be the future of the next generation of the internet and games.

Looking back now, 2018 was indeed the right time. This has made us firm in our belief that we will follow a simple investment philosophy: to invest in industries that we believe are inevitable, and to learn from the success of important Web1 and Web2 companies, including markets, games, wallets, security, etc.

In fact, there were not many companies worth investing in in 2018. We focused our investment perspective on the true founders—those early builders of belief, rather than just being tied to financial returns. Therefore, we wrote the first checks to open up this blue ocean and make it one of the key markets driving the implementation of blockchain technology. For example, we were the first investor in Mavis (the founder of Axie Infinity). And one of our best investments was the acquisition of The SandBox. However, we always remember that this industry is still in its early stages, so betting on the continued development of the founders is one of our key goals.

2. We can see that the entire crypto market is indeed very cold right now, including GameFi. How do you think the future development of crypto games will be?

James Ho: We are confident in navigating the bear market. During the last bear market (2018), Animoca accumulated rich experience and achieved success. Even though the entire crypto market is currently cold, we still firmly believe that the future development of crypto games will continue to rise and grow.

In the Web3 gaming field, tokenization of games, token economics, and gaming experience are the three basic elements of industry breakthrough. We have seen more and more mature development of gaming companies in the market.

I believe that Web3 games have already begun to be IP-ized. Since 2000, new industry giants have continued to enter. Previously, I had discussions with screen display companies Sega and Sony in Tokyo, and some of our partners are also in talks with Nintendo in the gaming field.

These giants are exploring and researching Web3. They are giants in the global gaming industry, with unparalleled experience in game design and architecture. When they fully understand technological innovation, they will take real action. We are very excited about what is about to happen and believe that the entry of giants into the Web3 gaming industry may create a new history. We are confident in participating in this.

Currently, the Web3 gaming industry is still significantly restricted by distribution channels, mainly Apple and Google. As I mentioned earlier, we are still in the early stages of industry development, and we respect the market. Therefore, our strategy is to build so-called "Web2.5" games, thereby leveraging existing channels for release. These games integrate the underlying infrastructure of Web3 on a technical level, and we believe that investing in these companies will attract millions of users to gradually open up and understand Web3 games and true digital ownership. We believe that in the near future, the Web3 gaming industry will inevitably experience accelerated development.

4. It is well known that Animoca Ventures is a risk investment company focused on the crypto field, with investments in the gaming sector accounting for 35% of the total investment. What are the considerations behind such investments?

James Ho: As I mentioned earlier, Animoca Ventures is the fund management company under Animoca Brands, and Fund I has a size of $100 million, composed of internal and external investments. The investment perspectives of Animoca Brands and Animoca Ventures are slightly different. In simple terms, Animoca Ventures focuses more on early-stage investments in startup projects.

We believe that gaming is the largest channel into Web3. Therefore, we started with an investment in a free-to-play mobile game development company in 2018, and then we began to invest in Web3, which has yielded tremendous results, validating our investment theory. Thanks to Animoca Brands' investment and operational experience in the gaming sector, the professional investment team of Animoca Ventures has an advantage in operating Web3 games.

A recent good example is our investment in Open Campus and their team behind Tiny Tap. Tiny Tap was launched in 2016, focusing on the Web3 education field. Currently, about 250,000 educators are creating their own no-code educational courses and assignments on Open Campus and earning revenue.

We are trying out all new things with blockchain technology, so it's not just about encryption technology, but understanding the advantages that blockchain and encryption technology bring to different ecosystems. We believe that true digital ownership will be the future of the gaming industry.

5. AI is currently very hot. What are your thoughts on this?

James Ho: Artificial intelligence is an area we deeply study. In 2018, we acquired a AI incubator called Zeroth, and have since incubated about 60 companies. We believe that the combination of blockchain and artificial intelligence is perfect. Although the growth of blockchain and crypto assets is relatively slow, data is still a key factor driving the development of artificial intelligence.

Blockchain provides clear and immutable data, which will greatly promote the development of artificial intelligence. It is a powerful tool that can be used for many trusted data applications, including games. Although we are still in the early stages, we have been studying stability, diffusion, and open artificial intelligence, and will continue to focus on these areas. We hope that future funds of Animoca Ventures will also focus on investments in AI and artificial intelligence.

There is a view that encryption tends to be decentralized, while AI is more centralized, and the combination of the two may bring some conflicting points. How do you view this perspective?

James Ho: Currently, one of the challenges facing artificial intelligence is the limitation of knowledge bases and databases. Even with the use of ChatGPT4, there are limitations to its data extraction capabilities. To address this issue, we have hired companies such as KIPLEY.ai and Immersion_ to build a knowledge base foundation to track the progress of about 101 companies we have invested in. By using artificial intelligence to clearly display relevant data and conduct predictions and trend analysis, we can see subtle changes and trends that are imperceptible to the human eye.

When discussing the combination of artificial intelligence and encryption or blockchain technology, our ultimate goal is to achieve decentralization. Artificial intelligence is just a tool in this process, and it may present a hybrid mode in the future, with the ability to be both centralized and decentralized. This hybrid mode will enable artificial intelligence to extract information from pure data sources. Fully decentralized games have not yet emerged, but it is still worth considering whether games need to be fully on-chain. The hybrid mode may become a catalyst for attracting millions of users, and in the future, they may also become part of artificial intelligence, extracting data from decentralized data sources.

6. The crypto field has been rapidly changing and developing. How do you balance short-term gains and long-term prospects when making investment decisions? Do you have any investment principles?

James Ho: This is a very good question. In this fair market, we are most concerned about the integrity and ability of the founders. We rigorously screen the entrepreneurial history of the founders, how they build projects, and their confidence in their own vision. Typically, the best choice for us to invest in is a project with a size of $2-2.5 million. We also like to share risks with other investors, as different investment companies and individuals have different strengths to help startups.

We believe that the invested companies need to have a certain appeal, be able to solve real problems, have practical abilities and experience, or come from a field that has been verified and highly recognized. For example, we recently invested in a company whose founder is a senior producer who worked at Tencent for 21 years and successfully led the development of a mobile game called "Call of Duty," which has about 40 million daily active users. Now, they are building a game integrated with Web3. If they can attract 10% of users, it will bring tremendous momentum with 4 million users.

With Hong Kong and Shenzhen only 45 minutes away, our geographical advantage allows us to easily visit Shenzhen, explore the gaming field, and provide strategic and token guidance to startups. We also look for successful talents in the Web 2 field with a good track record, and help them grow and work closely with them.

So, do you tend to prefer talents with a background in traditional internet giants?

James Ho: When we made our first investment in The Sandbox, we considered it in conjunction with other projects, as it was not a large company. However, in the current investment cycle, we are very interested in the emergence of large internet companies such as Alibaba, Tencent, Google, and Facebook in the Web 3 space, as they have realized that some of the competitive models in the Web 2 space are weakening. Therefore, we are interested in those with a track record in technology, such as platforms with experience managing hundreds of millions of active users, as this makes sense for realizing the dream of Web3.

If these giants successfully enter Web3, even if only 1% of users use Web3, it will still be a significant volume. Therefore, we are looking for projects with the right integrity, belief, vision, and the ability to build strong teams.

Additionally, I want to emphasize that Animoca Ventures is not just providing a check; we are an ecosystem. We have about 485 companies in our investment portfolio, and true network effects are emerging. When I introduce us to people, I tell them not to just see us as an investment, because if we can provide 100,000 users for them, that is definitely more valuable than our investment. If we have five different innovative technologies that can help their company grow, that is also more powerful than our check.

These are the things we are focused on, and for companies, these are also very important. We have rich market experience, security knowledge, and wallet resources. Our investment is just one aspect; we are more focused on how to help them succeed.

7. We know that the crypto market has been experiencing rapid changes and evolution. How do you maintain a high sensitivity to emerging technologies and trends?

James Ho: In the early history of Animoca Ventures, we held an agnostic view. Some companies may not have initially accepted this view, but we firmly believe that the future should be open. We invest openly, and we are very adaptable in the basic gaming field, but we also work with projects like Polygon, and we have an uncertain attitude towards early investments.

In terms of business operations, we adhere to an agnostic view, and this attitude also influences our investment strategy. We are not sure who will succeed in this field, but we believe that a diversified approach should be feasible. We place a high value on our investment in LayerZero, which is a multi-chain messaging platform. Therefore, we believe that the future may be multi-chain, choosing to work with projects like Polygon and Solana, rather than being limited to building a single chain. Multi-chain allows us to tap into different types of key markets, including OP, ZK, and others.

We will continue to hold an agnostic view and support companies with the right beliefs, building development teams to support their growth. We believe that games are becoming increasingly important for users of all ages, as we believe that games will be the first industry to drive rapid adoption of new technologies by users.

So, how do you maintain a high sensitivity to the rapid changes in technological innovation?

James Ho: Yes, on this point, we must also hold an agnostic view, as even in the peak of the industry, different projects may receive different financing, such as Polygon, which provides them with different resources and space for development. However, we must be very sensitive to user liquidity; some companies may receive large amounts of funding but lack real users. When choosing investment projects, we prefer those that are compatible with the Ethereum Virtual Machine (EVM), as this allows for better interaction with users. Of course, we also work with projects that are not compatible with EVM, such as Solana.

In short, the challenge for the industry mainly comes from the lack of user numbers. For how teams build projects, we must maintain an opportunistic and realistic attitude.

In the world of Web3, acquiring users and marketing is not as simple as in free games in the real world. In this emerging field, there is currently no clear method for user acquisition costs, such as SEO, SEM, or paid advertising. However, we have seen some progress in this area from Google and Apple, and the market is opening up. In terms of tokenization and marketing for user acquisition, we are also looking for clearer paths.

So, do you spend most of your time attending meetings or meeting with project personnel?

James Ho: Yes, I spend a lot of time visiting in person. I was in Paris last week, and in Tokyo and Kyoto two weeks ago. My main task is to understand how participants enter this field, to guide and understand them, and to study the investment market, as we are confident in the innovation of the fund.

We have 100 projects in our investment portfolio, and about 60 are currently in a bear market cycle. Many projects are working hard to find products that fit the market. We will fully support them, observe how they navigate, adjust, overcome difficulties, and achieve growth. Visiting in person allows us to gain a deeper understanding of the core situation of these projects. Even though we still receive many deals, it is difficult for us to evaluate how to reinvest and screen founders based solely on our regular metrics. We cannot view their future development from a single perspective. Therefore, focusing on how they raise funds and how they achieve growth is very important.

8. When making investment decisions, how do you balance short-term gains and long-term prospects?

James Ho: I believe that Animoca Ventures is a hybrid investment fund, including both tokens and equity.

In our investment portfolio, 35% is in the gaming industry, and the remaining 65% includes equity and tokens with potential and liquidity. We mainly hold equity for the long term, and in the short term, we consider tokens with potential. At the same time, we have a digital asset team that can sell some tokens without affecting the project, to address investment risks. This strategy is very advantageous for our financial and investment perspectives.

Yes, in fact, for most projects, they do not want investors to sell their tokens.

James Ho: We are builders and long-term holders. We do not dump tokens, and we have dozens of projects that we continue to work with. For example, even in a bull market, even if the token value exceeds $1 billion, we remain calm and do not rush to sell. On the contrary, during a bear market period when the token falls by more than 90%, we used stable tokens to purchase three game studios.

We always hold the advantage of building practicality and belief, creating better games and content for token and entity holders. We continue to build throughout the project network, even though the book value of these projects may have fallen by 90%.

You can see that our product portfolio covers various types of games, including tower defense, casual games, and fan circles. Galaxy is a first attempt at a 3A-level game, and more racing games are coming soon. We believe that different types of games will attract different users. Currently, we are looking for the first killer game and hope to be an active promoter and story builder in it.

9. Animoca Ventures has previously invested in many crypto projects. Can you share a particularly challenging but ultimately very successful case?

James Ho: In the early days, Animoca Ventures made a significant investment in Yuga Labs, investing $5 million and acquiring 55 monkeys, which was an important investment decision. Although it is currently highly valued, I think more time is needed to prove whether this investment has been hugely successful. However, we believe that the game building of Yuga Labs will drive its growth.

How did you find it? Why did you decide to invest in them at such an early stage?

James Ho: We believe that the beliefs and technological foresight of the founders are crucial for the success of a project. In terms of interoperability and blockchain encryption, we share the same long-term beliefs with the founders, which is an important basis for our cooperation and a very critical factor.

Additionally, the motivation of the founders is also a key factor. Their ability to persevere and achieve goals is crucial for the development of the project. Yuga Labs initially had a strong investor base and raised about $200 million, which also shows people's trust and recognition of them.

We have noticed a common characteristic of great founders: very careful management of funds. They do not build large teams but operate in an efficient and lean manner. For example, the CEO and co-founder of LayerZero in Paris, which you mentioned, their team has only 55 people, but they are highly efficient. This careful management and efficient operation allows them to continue to grow in the future.

Therefore, we believe in these founders and look forward to growing with them. Their beliefs, technological foresight, and savvy use of resources make us confident in the future of the project, and we are willing to work with them as partners.

10. How do you view industry regulation, given that the crypto industry occasionally faces regulatory challenges?

James Ho: Our journey is still long. When we raise funds, we need to deal with banks. Currently, our funds are held in banks, and we have clear guidelines for custody services, but we have only deployed a small amount of custody business in the Fiat aspect.

We follow the best path of regulation for AML and KYC compliance at the group level for our investments. It is worth mentioning that the founders of Animoca have been nominated as members of the Hong Kong Digital Asset Discussion Working Group, which will give us the opportunity to work with the government to shape Hong Kong's Web3 infrastructure and become one of the leaders in the Web3 space.

We are confident in the future of blockchain, and the best path of regulation is taking shape. We will also actively participate in discussions and strive to be one of the leaders. As we push Hong Kong to become a leader in token listings in China, we have the opportunity to play a significant role in this dynamic field.

11. Next, for those who hope to receive investment support from Animoca Ventures for their startup companies or projects, do you have any advice and expectations?

James Ho: I must first emphasize an important issue: be sure to thoroughly research our ecosystem and understand the problems you want to solve. We have 485 companies, and we provide investment and value the mutual cooperation of companies within the ecosystem, whether it is building partnerships or innovative projects.

For example, if you are at the infrastructure level, you must be clear about the problems you want to solve. Can our existing product portfolio potentially become your partner? If your vision is still under construction, such as if you are building a game, how do you hope to use our user growth and user base? Therefore, I think it is important to get to know and study our venture capital fund, and more as a foundation and network ecosystem, how it can better support startup projects and teams.

12. How do you view the impact and potential of encryption technology to influence and change the entire world?

James Ho: Blockchain can change the world, enabling decentralized business models and creating a fairer internet. I believe that these will foster a fairer creator environment. True digital ownership and decentralization will change the way income is shared.

We absolutely believe in a better way of wealth distribution. Through a decentralized model, every user can share income, rather than it being monopolized by a few. We believe this will create more sustainable, fairer, and better models for the future.

13. Alright, one last question, have you encountered any particularly challenging situations in your career?

James Ho: In the early investment of the bull market, we learned that creating tokens is very simple, but investor protection is not enough. Some founders ultimately did not fulfill their promises, and we could not force them to build, which was a significant challenge.

To change this situation, we reached simple agreements for future tokens and changed some basics. We realized that we had to change the protection and expenditure of investments, so we told partners to increase more protection measures in our funds. Although some project founders may be bad actors, taking the money and not creating, and there are no protection measures for this. But fortunately, this situation is not common.

I think in the bull market, some people may be too extravagant because money comes too easily. Now, with the arrival of the bear market, we must control team expenses and construction methods, and invest to protect investor funds, which is very crucial for future development.

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