As crypto markets creep up, buoyed by the approval of spot Bitcoin ETFs and expected Federal Reserve rate cuts, venture capital funding is flowing back into the volatile industry after a chilly 2023.
On Thursday, the VC firm RW3 Ventures plans to announce the successful close of its first fund, a $60 million war chest led by Raptor Group, the family office of billionaire Jim Pallotta, with significant support from Mubadala, one of the sovereign wealth funds of Abu Dhabi.
In an interview with Fortune, RW3 founder and managing partner Pete Najarian said that the firm’s name-brand backers and commitment to real-world blockchain use cases like music and health care will help it ride an anticipated bull market, despite the fund’s relatively small size when compared with the leviathans of the last cycle.
“We wanted to be nimble and have a first fund that crushed,” Najarian said. “I actually love our size right now.”
TradFi meets crypto
Before founding RW3, Najarian had deep roots in crypto, working on the institutional business at Xapo Bank, the early digital asset adopter led by Wences Casares, and later serving as chief revenue officer at BitGo after Xapo sold its custody and wallet business to Coinbase.
Najarian partnered with Pallotta to create RW3 in 2021. Before founding Raptor, Pallotta was vice chairman of Tudor Investment Corp. and held executive positions with AS Roma and the Boston Celtics.
While RW3 is a separate entity from Raptor, Najarian said that the fund benefits from the family office’s strong network connections, including in the hardware space: One of RW3’s investments is in a company working on a cryptographic technique called fully homomorphic encryption that could disrupt semiconductor manufacturing, although Najarian declined to share the name.
Najarian said RW3 began raising from limited partners for its first fund in the second quarter of 2022 and has deployed less than 50% of its capital. The participation of Mubadala reflects a new willingness among sovereign wealth funds to venture into crypto after the disastrous collapses of 2022, with FTX backed by groups including Singapore’s Temasek. As Abu Dhabi and Dubai seek to cement their status as crypto hubs, Mubadala has invested heavily in the industry.
Najarian said RW3 has more than 25 other limited partners in RW3’s first fund, although he declined to provide a specific figure.
Real-world use cases
According to a new report published by PitchBook on Thursday, the fourth quarter of 2023 saw a slight increase in crypto venture investments, the first quarter-over-quarter increase since the first quarter of 2022, with analyst Robert Le predicting an increase in venture funding in 2024.
RW3 has been an active player in the crypto venture space. While the buzzword in the digital asset industry has been real-world assets, or the tokenization of instruments like carbon credits and fiat currencies, RW3 partner Joe Bruzzesi told Fortune that the firm’s focus is on real-world use cases for blockchain. In other words, RW3 wants to support applications that move beyond speculation.
Early deals for RW3 include a lead investment in Rymedi, a health tech platform that uses blockchain to transfer medical records, and a co-lead of the seed round for CAT Labs, a cybersecurity and forensics startup founded by a former Department of Justice special agent. RW3 also invested in Web3 gaming studio Gunzilla and K-pop music label Titan Content.
Najarian said RW3 prefers to invest through a combination of traditional equity and token warrants, a common strategy among crypto venture funds, although the firm also does token-only deals. RW3 can invest in public market liquid tokens, although only up to 20% of its overall portfolio.
“We think there’s a limitation to the addressable market of much that is being built only to satisfy a crypto-native world,” Najarian told Fortune, adding that RW3’s target investments help bridge Web2 and Web3.
