How do you invest in Web3? Exclusive interview with Marguerite de Tavernost

The Big Whale: A year ago, investment funds like Cathay Ledger Capital were fighting to invest in Web3 start-ups, and now it's the start-ups that are fighting to get the funds in... Isn't this a perfect time for you?

Marguerite de Tavernost: We're certainly in a much better position than we were one or two years ago. The correction on the markets has totally rebalanced the relationship between investors and entrepreneurs, which is also a good thing: in 2020-2021, with the euphoria around cryptos, we were in a market where the fear of missing out on a deal drove investment funds to go after every deal without taking enough time to think things through.

Would it be fair to say that some funds were investing a bit haphazardly?

No, but too many deals were based on a project's reputation alone, and not on its economic fundamentals. We've seen investors rush into start-ups without looking at what was really under the bonnet.

Today, things are more reasonable, we have several meetings before making a term sheet (non-binding investment proposal) and company valuations have adjusted to more much more reasonable prices.

We also take more time to analyse companies properly, to look at the competition, in short to do our job as a fund that invests its clients' money.

You joined Cathay Innovation a year ago, and there you steer the Web3 fund that was launched in partnership with Ledger, which is a world leader in digital asset custody. Why this fund?

The Cathey-Ledger relationship is historic. It dates back to 2017 and Cathay Innovation's entry into Ledger's capital at the time of their €61 million Series B (the deal was made public in 2018). It was one of Cathay Innovation's first investments in Web3.

Cathay Innovation hasn't made many investments in this ecosystem, so we don't consider ourselves experts in the subject. On the other hand, Cathay Innovation was able to make bets like Ledger very early on.

We invested at a time when many were still reticent about anything hardware ("hardware", as opposed to software), but the gamble has paid off as Ledger has become the world leader in securing digital assets.

For its part, Ledger 🇫🇷 defines itself not just as a security company, but also as a player in its ecosystem, just like a giant like Apple in its own. Their mission is to advance Web3. They have a lot of links with start-ups, whether through partnerships with Ledger Live, hackathons or even events like Ledger Open.

They thought they had a role to play in the ecosystem, not by investing directly as Ledger, but by doing so with a dedicated venture capital fund. Ledger had the brand image and the technical knowledge; all they needed was the financial and regulatory expertise. That's why Ledger turned to us 🤝.

How does the tandem work? Is it Ledger that decides and Cathay Innovation that executes?

It's a bit more complicated than that. Ledger acts as an adviser, mainly technical, to the fund and Cathay makes the investment decision. Ledger contributes its expertise on Web3 and cryptos.

I'm a full-time employee of Cathay Innovation, but I spend a lot of time in Ledger's offices to benefit from their technical and product expertise.

What is your mission within the Cathay Ledger Capital fund?

My main mission is to identify good entrepreneurs and invest in their companies. After that, there's all the work of managing Cathay Ledger Capital's holdings. We have to help start-ups develop, enabling them to overcome all the obstacles, commercial, financial, legal...

How much do you fund start-ups for?

We write cheques for between €500,000 and €5 million 🤑.

At its launch a year ago, the Cathay Ledger Capital fund announced that it wanted to raise €100 million. How far have you got? We've already raised part of the funds, and we're now working on the rest with new investors. Our investors are Bpifrance and other companies and funds. They entrust us with their money so that we can invest it in the best Web3 projects.

How much have you raised to date?

It's confidential.

Are you close to €100 million?

Not far off.

Have you started to deploy this money? Is it complicated to invest at the moment?

We've already made five investments, and we're staying on the lookout for more. We're still seeing a lot of opportunities with very good entrepreneurs and very good Web3 projects, but we've slowed down the pace since the beginning of the year because all the dust from the FTX deal hasn't settled yet.

If there are so many good Web3 entrepreneurs and projects, then why slow down the investments?

To invest in projects, especially when you invest early as we do (seed and series A, editor's note), a lot of elements have to come together: the founding team, the valuation, the product and obviously the context...

We're going to invest when there are interesting figures, not necessarily sales figures, but figures that show there's commitment to a product, a need in the market. We have to be particularly vigilant, especially in the current climate.

How do we convince you to invest in a project?

There are two very important criteria for me. Firstly, the founding team: when we invest in a young company, we don't expect the founders to have all the answers, but we do want to have confidence in them, in their complementary skills and in their ability to make the right decisions, especially when it comes to turning the business around. I'd say that the founding team accounts for 90% of the investment decision.

Then there's the market. We want to be sure that the company has a unique and truly differentiating product in its market. One good example is NFTs, and in particular NFT platforms.

We were very interested in certain projects, but we realised that there was a race for volumes with a price war, which didn't give the players in the sector many prospects. The battle between Blur and OpenSea is a perfect example.

What are you seeing in the markets today?

Companies are more focused on having healthy finances rather than growth. The change is quite impressive.

Would the fact that the fund was co-created by Ledger prevent you from investing in a potential Ledger competitor? There are other technologies like secure multi-party computing (MPC) that are also interesting.

Yes, of course. In fact, we've spent some time looking at other technologies and other digital portfolios. We are an independent venture capital fund. Ledger brings its understanding of the market, but it doesn't determine investments.

How do you go about finding the right projects to invest in?

We have a global approach. We have companies in the United States, Asia and obviously Europe.

The Ledger brand is very strong in Web3, so we receive a lot of applications from start-ups that come from Ledger partners or even employees. On the Cathay Innovation side, it's the same thing, the brand allows us to receive a lot of projects.

Parallel to all these applications we receive, there's also the work of research in the field, networking, and here we rely heavily on business angels, i.e. individual investors, and on acceleration programmes and incubators which are also very valuable.

Coinbase Ventures is worth several billion dollars. There are other funds like z16z that are also worth billions. How do you compete with them?

Globally, there isn't that much competition. In tech, we talk a lot about "collaborative competition", and in Web3, it's even more collaborative. Our aim is to help each other, to find the best deals with other investors. We have relationships with Coinbase Ventures and a16z. They propose deals to us or we propose deals to them.

The difference between players like Coinbase Ventures and us is that they invest directly with their company's money, like Coinbase. These funds are not as independent as we are. Players like Coinbase Ventures invest in businesses that are complementary to that of their 'parent' company.

Coinbase Ventures, a16z, Variant... There are a lot of big American Web3 funds. Where are the big European players? Isn't this also a question of sovereignty?

There are regulatory issues that are still restrictive for investment funds. This is nothing new, the biggest funds go where the regulation is most favourable, and that's not today in the European Union 🇪🇺.

Once we've said that, we have to understand that the most positive dynamic on the Web3 still remains in the European Union. Thanks to the MiCA (Markets in Crypto-Assets) regulation, the ecosystem has a clear framework, which is not the case for everyone else, particularly the United States where the Web3 ecosystem is under heavy pressure.

You travel a lot in Europe. How do you perceive France and Paris?

Europe and especially France are very well positioned in Web3. Paris has succeeded in attracting a lot of foreign talent and capital. Thanks to NFT Paris, Paris Blockchain Week and EthCC, which kicks off in a few days' time, Paris has become the Web3 capital of Europe.

The European Union is undoubtedly the most dynamic area in Web3, but isn't there a risk that the best European projects will be snapped up by American funds?

It's a very good thing that Americans are taking an interest in Europe (a16z has just opened an office in London, editor's note). This shows that the ecosystem is developing and it also allows European politicians and regulators to see that there are things to be done and defended in the EU.

Talking about European regulators. What are the blocking points today for the development of a Web3 fund like Cathay Ledger Capital?

There are always things to improve, that's normal. For example, a fund should be able to invest in tokens. Things have taken a while, but they are progressing well.

As we revealed a few weeks ago, XAnge has obtained the right from the Autorité des marchés financiers (AMF) to invest in tokens. How far have you got?

It's progressing well.

Beyond France, how do you see the European ecosystem?

I'm going to say something a bit cliché, but Web3 has no borders, and we feel it very well, especially in Europe. There really is a global dynamic, even if each ecosystem has its own specificities.

In Berlin, there are entrepreneurs, but it's still limited (read our report). Germany is more decentralised so there are several ecosystems between Berlin, Munich and Frankfurt. In London (read our report), the ecosystem is dynamic, but less structured than in Paris.

What do you think would be the second hub in Europe behind Paris?

I think London, especially given the political ambition of the British government, as well as Switzerland, are very well positioned. In Geneva, Lugano and Zurich, there's a lot going on.

There are a few hot topics like Ethereum layers 2, Web3 gaming, decentralised social networks... Are these themes that you follow?

Gaming is very good territory for testing Web3 technologies because there are so many users. In France, we spent a lot of time with companies in the sector.

Did you go all the way, did you invest?

No, but it was each time for very specific reasons.

What made the operation fail?

Often, they are very good projects, but the potential isn't necessarily up to scratch. When we invest in a start-up it's with the prospect of it increasing in value.

If, from the outset, we have doubts about the valuation potential, that the company doesn't have the potential to become a unicorn 🦄 (unlisted company valued at more than a billion dollars, editor's note), it's more complicated to go for it. Others will do it and that's fine.

One of the other points that can cause a deal to fail is when we have doubts about scaling up a project. If a start-up adapts its product to each customer, it's hard to imagine that they'll succeed with 50 or 100 times as many customers.

Don't you run the risk of missing out on great opportunities with this "unicorn" logic?

Of course if a company has potential, we'll look at it, even if it doesn't become a unicorn. The point is that we have obligations in terms of return on investment. When we invest 1 euro, we want to get back X times more for our clients, and so our selection takes this constraint into account.

Some funds decide to make lots of small investments, others prefer to make only a few, but much larger ones. The aim is that, at the end of the day, you should be able to pay back the investors who have lent you their money.

As for Cathay Ledger Capital, we have decided to make few investments, but with larger tickets. This allows us to be on the board of directors, to invest in start-ups. We have a long-term vision. That's why I prefer to wait a few months and bet on the right horse.

Funds don't necessarily have a good reputation with start-ups, not least because you sometimes demand a lot from the founders. Do you understand this criticism?

I can't speak for everyone, but as far as Cathay Ledger Capital is concerned, we're not in the business of pressurising projects.

When we propose a deal to an entrepreneur, we always tell them to call other entrepreneurs we're working with to find out more. It's a good way of getting the ball rolling.

What's your priority over the next twelve months?

Making deals!