In brief
The fund plans to invest in projects like ENS that make Web3 more human.
Chapter One is focused on design and provides hands-on, practical advice to crypto founders.
The crypto industry is exploding but, for many people, using common crypto tools like DeFi wallets and NFTs is a daunting and unfriendly experience. That’s why an investment firm called Chapter One, which just raised a $50 million fund, is worth watching.
The fund is led by former executives from Tinder, Stripe, and Instagram—three companies known for excellent design—and its goal is to help startups bridge the gap between so-called Web2 (which offers easy-to-use services like Google and Facebook) and the emerging world of Web3, whose applications are often clunky and hard to use.
The design challenge facing Web3 is evident in the fast-growing crypto wallet, Metamask, which has a rudimentary interface that frustrates many users. In an interview with Decrypt, Chapter One co-founder Jeff Morris Jr. diplomatically described the MetaMask experience as “not ideal” and suggested Web3 platforms in general need to become easier to use.
“There’s a lot of things that worked in Web2 that could be incorporated into Web3,” said Morris, who used to be VP of Product at Tinder.
Chapter One already has experience in the crypto world, using an earlier fund to invest in the seed rounds of more than a dozen startups, including Compound and Dapper Labs, which have evolved into industry giants. The firm also made successful bets on the Bitcoin rewards program Lolli and other firms that offer crypto features without any technical complexity.
Chapter One’s new fund is backed by venture capital firms like Sequoia and Lightspeed, and by prominent figures from the blockchain world including Chris Dixon, Marc Andreessen, and Reddit founder Alexis Ohanian. The fund will double down on the thesis of making crypto accessible.
In practice, this includes the firm dedicating $10 million for projects related to the Ethereum Name Service (ENS), which renders the long strings of characters used for wallet addresses into simple words such as “georgewashington.eth.” According to Morris, the next phase of crypto will be marked by the development of an “identity layer” that will humanize the technology and make it more personal.
Part of this process, says Morris, will entail funding projects that find ways to alleviate another major obstacle to making crypto accessible: the prohibitively high “gas” fees that accompany many transactions on the Ethereum blockchain.
“The average fee is $40. If you’re building any social or gaming applications, it’s not reasonable to ask users to pay those gas fees, especially non-crypto users. We’ve become numb as we mindlessly accept these fees,” said Morris.
One way that Chapter One hopes to solve the gas fee problem is by backing projects on the Solana blockchain where transactions are much cheaper. “Solana has a really interesting opportunity right now,” says Morris, but adds that the firm is not wedded to any particular blockchain.
A new type of VC firm
Launched in 2017 with Morris as sole investor, Chapter One has expanded to bring on James Marder, who served as the head of design at the digital payments giant Stripe, as well as a former investment manager for Texas Children’s Hospital, Doug Dyer. This summer it also added Menelaos Mazarakis who worked on Facebook’s crypto initiative known as Novi and on product experience at the company’s Instagram subsidiary.
Chapter One holds a view—reflected in part by the product background of its executives— that the emerging crypto industry requires a different type of venture capital firm than the traditional ones that helped define Silicon Valley’s last two decades.
In the traditional model, the biggest thing a VC firm can offer a startup in its portfolio (besides money) is access to a network of other companies and well-connected executives. Those connections often prove pivotal for a firm to gain exposure or find a customer base for its products.
In the emerging crypto industry, however, Morris says project founders are less interested in access to Silicon Valley networks than they are in receiving practical, hands-on guidance. He points to the example of crypto investing giant Paradigm, which has rapidly built out a suite of services for startups ranging from research to guidance on technical and legal issues.
Embracing this trend, Chapter One plans to hire people who can spend stints at the startups it backs, helping founders with issues like user experience and design.
Morris also believes that funding patterns are different when it comes to startups in the crypto world. Instead of five or six rounds in each, with VC firms vying to be the dominant investor, Morris says crypto firms prefer fewer rounds in which the money comes from a broad, diffuse group of investors.
This is partly because crypto companies typically issue tokens to investors that are far more liquid than the private shares at the center of traditional VC deals. But Morris says it’s also because of the decentralization ethos of crypto, which frowns on single entities obtaining outsize control.
“The cap table is structured very differently. Founders in crypto prefer more participants so if you get a large ownership share of a company, something’s gone wrong,” he says.
This is a big reason why Chapter One plans to focus on early-stage crypto firms, writing relatively modest checks of $500,000 to $2 million. “We’re starting from first principles for what would a VC fund look like if you were building for Web 3,” said Morris.
