Douglas Cumming

Crypto Funds (CFs) represent a novel investor type in entrepreneurial finance. CFs intermediate Decentralized Finance (DeFi) markets by pooling contributions from crowd-investors and investing in tokenized startups, combining sophisticated venture- and hedge-style investment strategies. We compile a unique dataset combining token-based crowdfunding (or Initial Coin Offerings, ICOs) data with proprietary performance data of CFs. CF-backed startup ventures obtain higher ICO valuations, outperform their peers in the long run, and benefit from token price appreciation around CF investment disclosure in the secondary market. Moreover, CFs beat the market by roughly 2.5% per month. Their outperformance is persistent, suggesting that CFs deliver abnormal returns because of skill, rather than luck. These performance effects for CFs and CF-backed startups are driven by a fund’s investor network centrality. Overall, our study paves the way for research on what some refer to as the “crypto fund revolution” in entrepreneurial finance.

Coordination frictions may prevent the efficient adoption and governance of digital platforms. We document that crypto funds (CFs) create value, inter alia, by smoothing such frictions on blockchain-based decentralized digital platforms (DDPs). CF-backed DDPs obtain higher valuations in the primary market (i.e., in initial coin offerings, ICOs), outperform their peers post ICO, and benefit from token price appreciation around CF investment disclosure in the secondary market. In line with our theory, primary transaction data from the Ethereum ledger shows that the valuations of DDPs with meager adoption and relative centralization benefit more from CF backing. Moreover, the positive valuation and performance effects for CF-backed DDPs are higher for CFs with more central investor networks.