When ChatGPT launched in November of 2022, consumers marveled at the powerful artificial intelligence technology—and so did major venture capitalists. At a time when venture firms were struggling to deploy capital amid a market downturn, A.I. offered a dazzling new opportunity.
While generalist VCs, who invest across all sectors, quickly pounced on A.I., those who manage crypto-focused funds have had to tread more carefully. In the case of Paradigm, started by Coinbase cofounder Fred Ehrsam and former Sequoia Capital partner Matt Huang, the firm’s recent interest in A.I.—and lack of communication about its intentions—has ruffled the feathers of some of its investors and portfolio company founders.
In late May, crypto news site The Block spied changes to Paradigm’s website homepage that completely removed any mention of Web3 or crypto. This was news given how the firm had previously touted its focus on “disruptive crypto/Web3 companies and protocols,” and set off chatter about Paradigm’s new broader interest in “research-driven technology,” which included A.I. The changes sparked debate—and mockery—on Twitter, where the concept of “a pivot from Web3 to A.I.” has become meme fodder in recent months.
The changes at Paradigm also came as the firm faced ongoing headwinds from its investment in the toxic FTX empire, a decision over which Huang expressed “deep regret” in mid-November. The firm had to reportedly mark down its $290 million investment to zero.
Meanwhile, Paradigm is publicly playing down any shift to A.I., with COO Alana Palmedo telling Fortune: “The new website language emphasizes the research-driven approach Paradigm has always had, and doesn’t reflect a pivot away from crypto.” In a tweet from earlier this month, Huang wrote, “We haven’t dropped crypto…Some of our research team has been tinkering with A.I. and A.I. x crypto.”
Huang penned another lengthier tweet this week emphasizing that the firm has “never been more dedicated to crypto,” adding that “it seems trendy to frame crypto versus A.I. as a zero-sum competition. But we don’t buy it.”
Paradigm’s clarifications notwithstanding, the firm’s apparent dabbling in A.I.—and especially its communication strategy—has upset some of its limited partners. One LP, who spoke to Fortune on the condition of anonymity, said the public changes to its website—and any potential shift in investing focus—were not conveyed to them. Paradigm is “notoriously bad [at] LP relationships unfortunately,” they said.
Notably, the fund also does not have a dedicated investor relations employee, with Palmedo handling that responsibility. Meanwhile, a Paradigm portfolio company founder told Fortune that, to their knowledge, the firm didn’t communicate changes to the site to its companies.
Another founder of a Paradigm portfolio company, who requested anonymity to speak freely, said the decision felt “weird” to them.
“If a new founder asks me whether they should raise from [Paradigm], I would be like, ‘Maybe that’s not at the top of the list anymore,’” they said. “They’re just not focused on it, and it does feel a little like, ‘Hey, we invested in all this stuff, but actually we don’t care anymore,’ which is probably why they’re trying to say it’s a non-change.”
Other founders shrugged off the event: “I genuinely don’t know what the motivating reasons were, but I really don’t think there’s been brand contamination from within crypto,” said Tom Walton-Pocock, cofounder of Paradigm portfolio company Aztec, who now works at his other project, Geometry, an early-stage, crypto-focused venture firm and research lab.
Walton-Pocock argued that the bigger challenge for crypto funds will be repairing reputational damage they suffered last year in their push for fast liquidity from token sales—where they emphasized quick access to exits over holding long term—adding that “crypto does tend to be a bit of an island unto itself.”
As for A.I., given how many VCs are now chasing deals in the sector, it’s unclear whether crypto-native funds will be able to compete. Huang has argued the optimal strategy for such funds may be to go after projects that combine crypto and A.I. One such deal is Andreessen Horowitz’s recent $43 million investment in Gensyn, which a16z crypto partner Chris Dixon described as the “Airbnb for GPUs.”
Paradigm has not yet announced any investments in A.I. startups. The firm has had a slow 2023 so far, as have many VCs en masse. Paradigm has announced only a couple of deals, including a $15 million round in ZK proof startup Ulvetanna, which the firm co-led in January, and a $7 million round in crypto infrastructure startup Conduit, which the firm led in March. Still, Paradigm continues to publish crypto-related research on topics such as regulation and file “friend of the court” briefs supporting prominent court cases.
Other Paradigm founders whom Fortune spoke with still view the firm as a leader in the digital assets industry. “I don’t know if there’s a VC firm in the space that has a better overall purview of crypto than Paradigm,” Dee Goens, cofounder and COO of NFT creation platform Zora, told Fortune. “They are absolutely brilliant when it comes to protocol-level thinking.”
