Author: James Ho, Joyce
When it comes to Animoca Brands, it is believed that many people in the industry are not unfamiliar with it. It is the first investor in GameFi leader project Axie and the early acquisition of The Sandbox has also become a leading project in the metaverse. In fact, Animoca Ventures, the venture capital fund under Animoca Brands, currently invests not only in GameFi, but also in a number of star projects such as Opensea, Polygon, The Sandbox, LayerZero, Aptos, Consensys, etc.
So, what are the primary considerations for Animoca Ventures when choosing investment projects? How do they view the current market environment and the prospects of GameFi? How do they see the combination of encryption technology and the current popular AI?
In this issue, the founder of the blockchain, 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.
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1. As the head of Animoca Ventures, could you briefly introduce your background and experience in the field of encryption? What inspired you to become a practitioner of encrypted venture capital?
James Ho: I joined Animoca Brands in 2018, and Animoca Ventures is the venture capital fund under Animoca Brands. At the beginning, Animoca Brands made a key investment in the encryption field, that is, investing in Dapper Labs. Dapper Labs is one of the earliest encryption companies. When Dapper Labs launched Cryptokitties in the Greater China region, it marked a very important milestone in the history of encryption because it caused the Ethereum network to crash and laid the foundation for subsequent development.
What impressed us at that time was not the popularity of Cryptokitties, but what we saw: the combination of real digital ownership and games (such as in Dapper Labs), which will be the future of the next generation of the Internet and games. Looking back now, 2018 was indeed the right time. This made us determined that we would follow a simple investment philosophy: invest in industries that we believe are inevitable and 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 real founders—the builders of early beliefs, rather than just being tied to financial returns. Therefore, we wrote the first batch of checks to open up this blue ocean and make it one of the key markets to drive the landing of blockchain technology. For example, we were the first investor of Mevis (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 continuous construction of founders is one of our key goals.
2. Now we can see that the entire encryption market is indeed very cold, including GameFi. How do you think the development of encrypted games will be in the future?
James Ho: We are confident in navigating the bear market. During the last bear market in 2018, Animoca accumulated rich experience and achieved success. Even though the entire crypto market is cold now, we still firmly believe that the development of crypto games will continue to rise and grow in the future.
In the Web3 gaming field, tokenization of games, token economy, and gaming experience are the three key elements for industry breakthroughs. We have already seen that more and more game companies are maturing in the market.
I believe that Web 3 games have started to be IP-driven. Since 2000, new industry giants have been entering the market. Previously, I had discussions with display companies like Sega and Sony in Tokyo, and some of our partners are also in talks with Nintendo in the gaming industry. These giants are exploring and researching Web3. They are global gaming industry giants 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 have confidence in participating in it.
Currently, the Web3 gaming industry is still significantly limited by distribution channels, mainly Apple and Google, these two important markets. 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 to leverage existing channels for distribution. These games achieve integration of the underlying Web3 infrastructure in terms of technology. We believe that investing in these companies will attract millions of users to gradually open up and understand Web 3 games and true digital ownership. We believe that the Web3 gaming industry will inevitably experience accelerated development in the near future.
4. As we all know, Animoca Ventures is a venture capital company focused on the crypto field, and currently, investments in the gaming sector account for 35% of the total investments. What are the considerations behind such investments?
James Ho: As I mentioned at the beginning, Animoca Ventures is the fund management company under Animoca Brands. Fund I has a scale of 100 million US dollars, consisting of internal and external investments. Animoca Brands and Animoca Ventures have slightly different investment perspectives. Simply put, Animoca Ventures focuses more on early-stage investments in startup projects.
We believe that games are the largest channel for entering Web3. Therefore, we started by investing in a free-to-play mobile game development company in 2018, and then we began investing in Web3. These investments have achieved tremendous results and validated our investment theory. Thanks to Animoca Brands’ investment and operational experience in the gaming industry, Animoca Ventures’ professional investment team has an advantage in Web3 game operations.
A recent good example we have is the investment in Open Campus and their team behind Tiny Tap. Tiny Tap was launched in 2016, focusing on Web3 education. Currently, about 250,000 educators create their own no-code educational courses and assignments on Open Campus and earn revenue.
We are using blockchain technology to explore all new things, so it’s not just about encryption technology, but understanding the benefits 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 very popular now, what is your view?
James Ho: Artificial intelligence is an area we are deeply researching. In 2018, we acquired an artificial intelligence incubator called Zeroth and have since incubated about 60 companies. We believe that the combination of blockchain and artificial intelligence is perfect. Despite the slow growth of blockchain and crypto assets, 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 gaming. Although we are still in the early stages, we have been studying stability, scalability, open artificial intelligence, and will continue to focus on these areas. We hope that the funds after Animoca Ventures will also focus on investments in AI artificial intelligence.
There is a saying that encryption tends to be decentralized, but AI is more centralized, and the combination of the two may bring some conflicting points. What do you think of this view?
James Ho: Currently, one of the challenges facing artificial intelligence is the limitations of knowledge bases and databases. Even with the use of ChatGPT4, there are limitations in its ability to extract data. To address this issue, we have hired companies such as KIPLEY.ai and Immersion_ to build knowledge base foundations to track the progress of the approximately 101 companies we invest in. Through artificial intelligence, we can clearly display relevant data, make predictions, and analyze trends, allowing us to see subtle changes and trends that the human eye cannot perceive.
When discussing artificial intelligence with encryption or blockchain technology, our ultimate goal is to achieve decentralization. Artificial intelligence is just a tool in this process and may present a hybrid model in the future, with both centralized and decentralized capabilities. This hybrid model will allow artificial intelligence to extract information from pure data sources. Fully decentralized games have not yet emerged, but whether fully on-chain games are needed is still worth considering. The hybrid model 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 cryptocurrency field is constantly 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 great question. In this fair market, we are most concerned about the integrity and ability of the founders. We rigorously screen the founders’ entrepreneurial history, how they build projects, and their confidence in their own vision. Typically, the best choices for investment are projects with a value of $2-2.5 million. We also like to share risks with other investors because different investment firms and individuals have different advantages in helping startups.
We believe that the companies we invest in need to have certain attractiveness, be able to solve real problems, have practical abilities and experience, or come from verified and highly recognized fields. For example, we recently invested in a company whose founder is a veteran producer and has worked at Tencent for 21 years. He 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 that integrates Web 3. If they can attract 10% of their users, it will bring us a tremendous driving force of 4 million users.
With Hong Kong and Shenzhen only 45 minutes apart, our geographical advantage allows us to easily go to Shenzhen to explore the gaming industry and provide strategic and token guidance to start-ups. We are also looking for successful talents in the Web 2 field with a good track record to help them grow together and work closely with them.
So, would you prefer talents with a background in traditional internet giants?
James Ho: When we made our first investment in The Sandbox, considering that it is not a big company, we would consider it together with other projects. However, in the current investment cycle, we are very interested in the emergence of large internet companies such as Alibaba, Tencent, Google, Facebook, etc. in the Web 3 field because they have recognized that some competitive models in the Web 2 field are weakening. Therefore, we are interested in those who have technical achievements, such as platforms that manage hundreds of millions of active users and have more operational experience, which makes sense for realizing the dream of Web 3. Assuming these giants successfully enter Web 3, even if only 1% of users use Web 3, it will still be a considerable volume. Therefore, we are looking for projects with the right integrity mindset, belief, vision, and the ability to build a strong team.
In addition, I also want to emphasize that Animoca Ventures is not just providing a check, we are an ecosystem. We have about 485 companies in our portfolio, and the real network effect is emerging. When I introduce us to people, I tell them not to just see us as an investment because it is definitely more valuable if we can provide them with 100,000 users 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 care about, and they are also very important for companies. We have rich market experience, security knowledge, and wallet resources. Our investment is just one aspect, and what we are more concerned about is how to help them succeed.
7. We know that the cryptocurrency market has been experiencing rapid changes and evolutions, so how do you stay highly sensitive to emerging technologies and trends?
James Ho: In the early history of Animoca Ventures, we held an agnostic view. Some companies may not initially accept this view, but we firmly believe that the future should be open. We invest openly, and we are very adaptable to the basic gaming field, but at the same time, we also collaborate with projects like Polygon. We hold an uncertain attitude towards early investments.
In terms of business operations, we adhere to agnostic views, which also influence our investment strategy. We are not certain who will succeed in this field, but we believe that a diversified approach should be viable. We place high importance on investments in LayerZero, a multi-chain messaging platform. Therefore, we believe that the future could be multi-chain, choosing to collaborate with Polygon, Solana, and others instead of being limited to building a single chain. Multi-chains allow us to explore different types of key markets, including OP, ZK, and more.
We will continue to hold agnostic views 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.
So, how can we maintain a high sensitivity to the rapid changes in technological transformation?
James Ho: Yes, in this regard, we must also hold agnostic views, as even during the industry’s peak, different projects may receive different financing, such as Polygon, which provides them with different resources and space for development and construction. However, we must be very sensitive to user liquidity, as some companies may provide large sums of money but lack real users. When choosing investment projects, we prefer companies that are compatible with the Ethereum Virtual Machine (EVM) because this allows for better interaction with users. Of course, we also collaborate with projects that are not compatible with EVM, such as Solana.
In short, the industry’s challenges mainly stem from a lack of user numbers. In terms of 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 free games in reality. In this emerging field, there is currently no clear method for acquiring users like SEO, SEM paid advertising. However, we have seen progress from Google and Apple in this regard, opening up the market. In terms of tokenization and user acquisition marketing, 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 two weeks ago, I was in Tokyo and Kyoto. My main task is to understand how participants enter this field, to guide and understand them, and to study the investment market because we are confident in fund innovation.
We have 100 projects in our investment portfolio, with about 60 in the bear market cycle. Many projects are working hard to find market-fit products. 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 transactions, it is challenging for us to evaluate how to reinvest, screen founders solely based on our regular metrics. We cannot view their future development from a single perspective. Therefore, it is crucial to focus on how they raise funds and how they achieve growth.
8. How do you balance short-term returns and long-term prospects when making investment decisions?
James Ho: I believe Animoca Ventures is a hybrid investment fund that includes both tokens and equity.
In our investment portfolio, 35% is in the gaming industry, while the remaining 65% consists of equity and tokens with potential and liquidity. We primarily hold equity for the long term and consider tokens with potential for the short term. At the same time, we have a digital asset team that can sell some tokens without affecting the project to manage investment risks. This strategy is beneficial for our financial and investment perspectives.
Yes, in fact, most projects do not want investors to sell their tokens.
James Ho: We are builders and long-term holders. We do not dump tokens. We have dozens of projects and continue to work on them. 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 when tokens decline by more than 90%, we use stable tokens to acquire three game studios.
We always adhere to the advantage of building utility and belief, creating better games and content for token and entity holders. We continue to build throughout the project network, even if the book value of these projects may decline by 90%, we are constantly developing behind the scenes.
You can see that our product portfolio covers various types of games such as tower defense, casual games, and fan circles. The Galaxy is a first attempt at a AAA 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 case that was the most challenging but ultimately very successful?
James Ho: Early on, Animoca Ventures made a significant investment in Yuga Labs, investing $5 million and acquiring 55 monkeys. This was an important investment decision. Although the valuation is currently quite high, whether the investment has been hugely successful still needs more time to prove. However, we believe that Yuga Labs’ game building 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 founder’s beliefs and technological foresight are crucial to 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 critical factor.
In addition, the founder’s motivation is also a key factor. Their ability to persevere and achieve goals is crucial to the development of the project. Yuga Labs initially had a strong investor base, raising approximately $200 million, which also demonstrates people’s trust and recognition in them.
We have noticed a common characteristic among great founders: they manage funds very cautiously. 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 that you mentioned, their team only consists of 55 people, but they are highly efficient. This cautious management and efficient operation enable them to continuously develop in the future.
Therefore, we believe in these founders and look forward to growing with them. Their beliefs, technological foresight, and astute utilization of resources make us confident in the future of the project, and we are willing to work together with them as partners.
10. We know that the crypto industry occasionally faces regulatory challenges, so what is your view on industry regulation?
James Ho: Our development road is still long. When we raise funds, we need to deal with banks. Currently, our funds are stored in banks, and we have clear guidelines for custodial services, but we have only deployed a small amount of custodial business in the fiat aspect.
We follow the best practices in regulation to ensure compliance at the group level in AML and KYC investments. It is worth mentioning that Animoca’s founder has been nominated as a member of the Hong Kong Digital Asset Discussion Working Group, which will give us the opportunity to collaborate with the government in shaping Hong Kong’s Web3 infrastructure and become one of the leaders in the Web3 field.
We are confident in the future of blockchain, and the best practices in regulation are taking shape. We will also actively participate in discussions and strive to be one of the leaders. As we promote Hong Kong to become a leader in token listing in China, we have the opportunity to play an important role in this vibrant field.
11. Next, for startups or projects that hope to receive investment support from Animoca Ventures, what advice and expectations do you have?
James Ho: I must first emphasize an important point: please thoroughly research our ecosystem and understand the problem you want to solve. We have 485 companies in our portfolio, and we provide investments and value mutual cooperation among the companies in our ecosystem, whether it is building collaborations or innovative projects.
For example, if you are in the infrastructure layer, you must clearly define the problem you want to solve. Can our existing product portfolio potentially become your partner? If your vision is still under construction, such as building a game, how do you want to leverage our user growth and user base? Therefore, I think it is important to get to know and study our venture capital fund, but more importantly, as a foundation and network ecosystem, how it can better support early-stage projects and teams.
12. How do you view the impact and change that encryption technology can bring to the world?
James Ho: Blockchain can change the world and realize decentralized business models, creating a fairer internet. I believe these will give rise to a more equitable environment for creators. True digital ownership and decentralization will change the way income is shared.
We firmly believe that there is a better way to distribute wealth. Through a decentralized model, every user can share the income instead of it being monopolized by a few. We firmly believe that this will create a more sustainable, fairer, and better model for the future.
13. Okay, one last question, have you encountered any particularly challenging situations in your career?
James Ho: In early investments during a bull market, we learned that creating tokens is easy, but the protection for investors is not enough. Some founders ultimately did not fulfill their promises, and we couldn’t force them to carry out the development. This was a significant challenge.
To change this situation, we reached a simple agreement for future tokens and made some changes to the fundamentals. We realized that we had to change the protection and expenditure methods for investments, so we instructed our partners to increase more protection measures in our funds. Although some project founders may be bad actors who take the money without creating anything, fortunately, this situation is not very common.
I think that during a bull market, some people may be too extravagant because money comes too easily. Now, with the bear market approaching, we must control team expenses and development methods, and invest to protect investors’ funds, which is crucial for future development.
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