Web3 VC Shima Capital Didn’t Slow Strategy for Crypto Winter

Shima Capital has backed more than 100 early-stage companies in the two years since its founding, and the venture-capital firm hasn't slowed down amid the recent industry turmoil.

“We see the trends today in a barbell layout,” said Shima Capital founder Yida Gao during an interview with CoinDesk.

The traditional finance veteran who started Shima Capital in 2021 outlined his firm’s view of the current, bear-market constrained crypto venture capital landscape.

“Infrastructure deals typically hold up well in crypto winter because they usually take longer to build the projects and also require much more talent, which is cheaper now,” said Gao. “On the other end of the barbell, we see that consumer apps, specifically gaming, continue to make up a large portion of our portfolio,” he continued. “People play more games in bear markets and, more importantly, tokenomics and digital assets fit nicely into a well-designed game.”

Shima Capital's investments have generally ranged between $500,000 to $2 million, Gao said. Last August, Shima announced its first venture capital fund withto backing Web3 projects. Investors in the fund included crypto-focused venture capital firm Dragonfly and hedge fund billionaire Bill Ackman.

Gao previously served as an investment banker at Morgan Stanley before becoming a technology investor at New Enterprise Associates, a venture capital firm with more than $25 billion in assets under management. Gao became personally interested in cryptocurrencies and came to recognize a vacancy in the venture capital space.

“We saw that established crypto funds had gotten so large they no longer funded the earliest stages of Web3 companies,” explained Gao. “And angels and smaller funds didn’t have the resources to provide full support to founders. We started Shima to fill that gap for Web3 founders at the earliest stages of their projects lives.”

Shima portfolio companies include analytics firm, blockchain game company Intuition and decentralized finance startup. The early-stage focus provides some insulation from market-driven valuation volatility since the valuations are already low. Shima mainly focuses on token investments. There’s typically a two- to four-year lockup for the tokens they invest into. The average hold period is around four years.

More than half of Shima’s team is devoted to operational support through a proprietary platform for portfolio customers who can receive assistance with talent acquisition, community building, tokenomics and more. The constrained venture capital landscape and the existence of the portfolio platform inspired Shima to move into even earlier stages of investments, incubating a select number of projects from the earliest stages.

The long crypto bear market had already made things difficult for venture capitalists and the implosion of centralized exchange FTX created an additional multibillion dollar turbulence in the market. As the industry tried to find footing, yet another blow hit when a trio of crypto-friendly banks (Silvergate, Signature and Silicon Valley) collapsed.

Shima Capital didn’t have material exposure to those banks, though a few portfolio companies were affected at “relatively small amounts,” said Gao. The firm has always tried to conduct deep due diligence both for investments and third-party partners like banks, but that strategy has strengthened this year.

“We probably have more banking relationships now than contemplated when first starting the fund in order to mitigate risks like these in the future,” noted Gao. “Although it’s harder for Web3 companies to acquire bank accounts these days, we also encourage our founders to take the time to diversify their funds across multisig wallets, bank accounts, and brokerage accounts if possible.”

Edited by Stephen Alpher.