On Nov 2, blockchain investment firm Sanctor Capital announced that it had raised $20 million for its inaugural fund. A couple of weeks later, the collapse of what was once the world’s second-largest cryptocurrency exchange, FTX, sent shockwaves throughout the industry.
Following that, venture capital firms like Sequoia had to write off its entire $150 million investment in FTX while Singapore’s state holdings company, Temasek, had to do the same with its $275 million investment in the now-defunct exchange.
As the crypto industry was reeling from the Terra ecosystem crash in April, investments in blockchain-based games and metaverse projects declined in Q3 ($1.3 billion), compared to $2.5 billion in Q2, according to BGA Games Report by DappRadar for Q3 2022. Despite the doom and gloom of the crypto winter exacerbated by FTX’s shocking collapse, Sanctor Capital’s founder, Han Kao, remains optimistic about the future of Web3 gaming.
Curious about how recent events have affected a newly launched investment company like Sanctor, we speak to its founder, Han Kao, who tells us why the company is still focusing on blockchain gaming and what they take into consideration when deploying capital.
Please tell us about yourself and the story behind Sanctor Capital.
I came into the space from a tech and media background and initially entered the space as an investor. Then in 2017, while I was spending time investing in and doing due diligence in various ICOs, I realized that so many of the projects that were running ICOs at the time had very little substance beneath a dreamy whitepaper. So myself and a few other friends in the space, who I met along the way, began publishing investment reports to help provide more transparency to investors. We wanted to highlight top builders and at the same time call out the cash grabs. Soon our reports became a bit of a signal in the early-stage private markets so we raised some funds to scale out an independent news and research company.
I then spent five years building Crypto Briefing and eventually stepped down from the CEO role at the end of 2020. In 2021 as many new blockchain funds entered the space I saw tons of capital flowing into early-stage investments but very little in the sense of founder support and mentorship. I wanted to build an investment company that was focused on helping missionary founders achieve their goals by lending active investor-side support. We then put together a roster of mentors composed of industry experts and founders and began our journey. So this was the starting point for Sanctor Capital.
What piqued your interest in the Web3 space and where did you first hear about it?
In 2015 I moved from NYC to SE Asia and I was working as Head of Product for an Indonesian user-based reviews and media platform. I was paid in Indonesian Rupiah, the local currency. And due to the instability of the Rupiah, whenever I received my salary I tried to convert it to USD. However, I had a lot of trouble with the local banking system and sending funds back to my US accounts.
Having worked in the US most of my professional career, this was my first real life experience with managing a volatile currency as income and also seeing the frustrations of the banking system. And at some point converting into Bitcoin made more sense than going through the banking system. However Bitcoin transactions were slow and fees were high at the time, so eventually, in 2017 I discovered Ethereum as an alternate option. After reading the whitepaper my imaginations on how big web3 could become just started to run wild.
Why is Sanctor’s first fund focusing on GameFi, DeFi and cross-chain infrastructure specifically?
So to clarify, we’re mostly focused on web3 gaming and gaming infrastructure. The blockchain space has grown so immensely wide since I first started investing in the space. And as an investment company it was important to us to have focus as it is near impossible for a startup firm like ours to cover it all. So when we began thinking about where the biggest opportunities for blockchain might be, we tried to think about all the potential paths to mass adoption.
When looking at the entire space, Infrastructure, DeFi, NFTs, Gaming, for example, we considered which sub-sector could see the highest usage and adoption of blockchain technologies. And the factors we considered for each industry can largely be reduced down to two main factors: 1) how much positive impact could blockchain and decentralization bring to that particular industry, in other words how big is the problem and 2) how big is that industry as a whole traditionally.
As a generous estimate, there are maybe a few hundred million owners/users of crypto today. However, there are over 3 billion gamers in the world. And within the traditional gaming industry issues surrounding ownership, player agency, governance, incentive alignment and game/platform persistence, all exemplify huge problems that blockchain technology could solve to some degree.
So our thesis lies in that games are at the application level and will likely drive the greatest usage of blockchain technology, and create value for the entire stack of technologies beneath the application layer. So that means, distribution and discovery platforms, digital goods and services, gaming infrastructure and tooling, decentralized CDN, indexing and graphs, etc.
What’s the current dealflow for Sanctor Capital given recent events surrounding the FTX fallout?
Well nothing really changed for us, except that there seems to be many more teams needing capital, and there are lots of investment opportunities out there right now. There are a lot of games looking to raise, there are lots of discovery platforms, and our deal team is carefully evaluating everything that comes to us. What we would love is to see more gaming infrastructure deals. That’s an area we haven’t seen saturation yet and would love to see more of.
Have the recent events changed the way Sanctor deploys capital going forward?
This isn’t my first experience of a major centralized exchange blowing up. The first big one was Mt. Gox and this certainly won’t be the last. So, it doesn’t really change much for Sanctor on a fundamental level. In fact it actually helped strengthen some core fundamental beliefs.
First, a harsh reminder of “not your keys not your coins,” centralized exchanges are not web3. Institutions operating in blockchain and crypto really need to move completely away from CeFi and manage all of our execution on DeFi where things are non-custodial. Even if DeFi is a bit slower and user experience is still less than ideal, taking risks on CeFi just isn’t worth it. It really does prove the long-term use case for DeFi.
Second, it’s a serious wake-up call that as an industry we need to stop glorifying top founders as superstars or idols. We need to focus on top projects and the code that powers them, and less on idolization.
Finally, it really reinforces how important it is what we do. As an investment company when we invest in something we really dig in and spend an ungodly amount of time doing due diligence on teams and founders. This slows the deal flow process down a lot and results in us missing opportunities at times, but in the end, it’s worth it. It just isn’t enough to know that other big-name investors have committed to a deal. The onus is on each and every investor to do the hard work and do their own research. Don’t just blindly follow what others are doing.
Where do you see the future of projects on the Solana blockchain given that FTX was one of the biggest backers of Solana?
Even before the FTX collapse Solana was having many issues of its own from a network perspective. Many developers building on Solana started becoming frustrated with the network downtime and the level of centralization behind the whole ecosystem. So many projects will surely see the current situation as a catalyst to start exploring other chains. However Solana has a strong ecosystem and a lot of core believers, and if they continue to grind it through and fix their fundamental issues, they may come out of it stronger than before.
Other than investing at a discount, why do you think VCs are still pouring capital into Web3 startups amid the crypto winter?
If anything the whole FTX collapse has all but proven that DeFi over CeFi is the way forward. So if you are a long-term investment firm, fund, or individual, and you have dodged this bullet, it just adds fuel to your conviction.
What other areas in the Web3 space is Sanctor Capital planning to invest in this year?
The main focus is still gaming and gaming infrastructure. This is a huge opportunity and provides a very broad range of investment opportunities. We likely won’t be deviating too much from this track anytime soon.
What’s the most challenging aspect of your role and how do you overcome those challenges?
Oh man. Well right this minute, I’d say the biggest challenge these few weeks is distraction. When a collapse this big happens we really have to shift a lot of resources to risk management and investigate where further contagion risk could come from. Everything from asset rebalancing, revaluations of custodian and trading venues, to intensive portfolio support. Every now and then there is a massive collapse like this and causes all sorts of domino effects.
Whenever things like this happen we need to go back to each of our 60-70 portfolio projects and see if they are ok, and assess where and how we can lend support. So during these times it causes us to shift focus more to portfolio support and will naturally pull resources away from new deployment a bit. But these things pass over time and then resources shift back on looking forward.
How do you ensure the firm gets a return on investment?
There really isn’t a silver bullet to this. In the end, we are primarily VCs. We just need to focus on investing in missionary founders solving big problems with precision execution. Over time we continue to validate or invalidate our thesis, learn from our mistakes and evolve our investment strategy. One foot in front of the other, one day at a time, one investment at a time.
Where could we see blockchain gaming in the near future?
Well much of our thesis is based on games driving the next major run of adoption. Many blockchain games have raised a great deal of capital over the last two years, and most games take two to four years to build. They have much longer development cycles. So over the next year or two, we expect to see several web3 titles come online and we do expect a few hit titles that will start driving users and players into web3. And it will be interesting to see which infrastructure and tech utilities matter most when that happens. Right now we can only speculate on what these players will need, but seeing actual usage numbers will be exciting.
On a longer time horizon we are big believers in the metaverse. With everyone spending more and more time in front of their screens and online we really do see alternate immersive realities becoming more important than physical reality. We think games will be the bridge to these immersive alternate realities. We believe there will be economically sustainable digital worlds where people can work, play, and socialize all without ever leaving the comfort of their homes. We are really not that far from that reality. But first, we need to make sure the infrastructure exists to allow that to be a reality.
Any other Web3-related industry issue you would like to talk about?
We’ve recently seen Elon Musk take over Twitter and he took no time making several big heavy-handed changes. It seems like he’s dropped over 75% of the workforce already, completely changed how verified blue check marks work, and also doing a great deal of engagement farming with polls on reinstating Donald Trump’s account.
For now, his motivations for these big moves seem to be mostly due to survival efforts and keeping the company alive for the moment but it will be interesting to see how he evolves Twitter over the next few years. It would be great if he can find ways to decentralize governance and decision-making for the platform and find ways to further integrate web3 beyond just profile pics. If he doesn’t this may represent a big opportunity for web3-based social media platforms.
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