Olaf Carlson-Wee appears to have it all. He has a comfortable fortune, thanks to a payout from his cryptocurrency firm Polychain Capital that netted him $60 million. He also enjoys one of the finest views of San Francisco from his firm’s luxury office, which looks out over the ocean and the city far below. At just 30 years old, he has youth and good health—two attributes no amount of money can buy.
Yes, he has it all. Well, except for one thing: the respect that would normally go with running an industry leading fund worth hundreds of millions of dollars.
His industry is blockchain, which encompasses cryptocurrencies like Bitcoin, but also a wide variety of other services that rely on tamper-proof online ledgers run across multiple computers. Its boosters believe it as revolutionary as apps or the Internet.
Carlson-Wee has been a believer since the beginning, writing his 2012 college thesis on Bitcoin—despite his professor’s admonishment that Bitcoin was dead—and joining crypto giant Coinbase as its first employee. By the time he left Coinbase to start Polychain in 2016, he was a folk hero in crypto communities. Carlson-Wee’s stature only increased in 2017 when he appeared on the cover of Forbes magazine, resplendent in a black blazer and a mullet, tossing coins. The cover read “the craziest bubble ever.” Polychain was the first major crypto investment firm and immediately notched huge inflows—reaching $1 billion in assets under management in early 2018.
Then came the crash. Bitcoin soared to nearly $20,000 before it crashed over 80 percent, while a slew of other cryptocurrencies fell even more dramatically. It didn’t help that such currencies are widely (and correctly) associated with cyber shakedowns and other criminal activity. Meanwhile, doubts emerged about whether the underlying technology—blockchain and distributed ledgers—had been overhyped.
Even many venture capitalists, who are wont to cheer on even the silliest tech fads, have become bearish. In a recent tweet, the founder of Haystack Ventures, Semil Shah, likened recent blockchain investments to Silicon Valley’s ill-fated rush into clean-tech a decade ago. Shah’s analogy, which claimed that both blockchain and clean-tech adoption depend on a widespread—and improbable—shift in business behavior, was echoed by other VCs on Twitter.
Indeed, despite a gusher of money going into crypto companies, the blockchain future in some ways can seem as distant as it did when it became a buzzword four years ago. This has led tech watchers to look at the performance of investment funds, notably Polychain, to assess whether crypto is for real, and to point to the fund’s price swoons, including a 40% drop in the value of assets under management in 2018, to suggest it is not.
To those inside the world of crypto, this makes little sense. Says Chris Dixon, a partner at the VC firm Andreessen Horowitz, which is invested in Polychain and runs a crypto fund of its own, “The short term price movements are inevitable. Imagine if you had assets that correlated to AI or mobile phones,” he says. “That’s how these things play out—in a wild, volatile cycle. The only difference is crypto technologies have a specific price attached.”
As for Carlson-Wee It would not be unfair to say the financial establishment regards Carlson-Wee like Shakespeare’s Prince Hal: a charismatic but wayward figure who struggles to overcome youthful frivolity.
Kind of like the industry itself.
“We could have pivoted into VR or something”
In August of 2018, near the trough of the crypto bear market, the Wall Street Journalpublished a profile of Carlson-Wee and his company. It was not flattering. The piece called attention not only to Polychain’s dramatic drop in returns, but to the fund’s aggressive fee policies, which saw it collect $150 million on paper gains and allowed Carlson-Wee to cash out $60 million.
The Journal story also implied Polychain’s founder is a dilettante who is in over his head. It described members of his entourage at a resort where they skipped an iPhone across a pool to see if it would float. (It didn’t). The piece concluded with Carlson-Wee remarking, “Like, if this whole thing collapsed, that would be crazy, you know?”
The piece stung Carlson-Wee and has made him wary of the media. His frustration stemmed in part from the implication that his age and his fund’s focus on crypto make Polychain less serious than other funds. There is something to this. It’s unlikely the Journalwould have given a similar treatment to other fund managers, many of whom have also paid themselves handsomely during good times, and who have engaged in acts of extravagance that cost far more than a drowned iPhone.
The Journal article also made much of Carlson-Wee’s bohemian background, implicitly casting doubt on his aptitude as a big league fund manager. That background, which includes a stint as a lumberjack in a Washington state utopian community, had always been an asset for Carlson-Wee in the cliquey world of cryptocurrency, which is full of Falstaff-type characters. But in the pages of America’s preeminent business newspaper, which published several photos of a younger, ragamuffin Carlson-Wee, it came across as a liability, underscoring the story’s unspoken premise of “people gave this guy hundreds of millions of dollars?”
The drubbing by the Journal may have also come as a jolt given the often fawning coverage of the cryptocurrency trade press. It did not, however, shake Carlson-Wee’s faith in the transformative power of blockchain. Nor has the prolonged slump in the crypto market, which enjoyed a mild rally in the spring and summer of 2019, but is currently confronting another nose dive. After brushing $13,000 in July, Bitcoin has been trading closer to $7,000 in December.
Carlson-Wee’s unflagging optimism may come from his being in the crypto game for nearly a decade, and having seen far more harrowing downturns, including in 2011 when Bitcoin tumbled from $30 to $2. Both then and now, his response has been to pounce on what he sees as a buying opportunity.
“As the market has come down, I actually think it’s a much better environment to be a venture investor because now we can invest in more experienced entrepreneurs that are further along with their company at a better valuation,” he says, adding that the best entrepreneurs shine during downturns.
Polychain’s most high profile investments to date include bets on Dfinity, a so-called “world computer” that aspire to challenge the likes of Amazon Web Services, and Polkadot, which is building links between disparate blockchains.
Carlson-Wee adds that he’s not one to overhaul his investing philosophy but rather to periodically recalibrate it by 5 or 10 percent increments. Those who go in for what Silicon Valley calls “pivots,” he says, lack any fundamental convictions in what they’re investing in.
“You can get spooked and say, “Wait a second. Why am I seeding crypto companies if crypto’s not going to work, right? And we could have pivoted into VR or something like that,” says Carlson-Wee.
Even as Polychain bets on new long-term opportunities, the fund is also pursuing more short term returns in the form of investments in “staking”—a crypto term that is roughly analogous to the custody and proxy voting services found in the world of conventional finance. Such investments, which include a $10 million bet on a startup called Celo, reflect a belief in crypto circles that the industry is maturing, and that people will pay for institutional services like the ones Wall Street has offered for decades. For these to succeed, however, will require crypto to succeed—and many investors doubt it ever will. Still, the fledgling success of startups like Compound, which specializes in crypto loans and interest rates, suggest Polychain’s dreams of a future where crypto becomes part of mainstream finance are not entirely far-fetched.
An Upswing in 2019
In recent months, Carlson-Wee has been striving to make Polychain project an image of financial sophistication. This has included ditching a string of makeshift offices in San Francisco garages for the power address of 1 Market Street, a locale where even the most buttoned up banker can feel at ease. The new digs, which house the fund’s 25 employees, convey a generic Restoration Hardware vibe, but also contain nooks reflecting the personal passion of Polychain’s founder. These include small rooms that exalt his favorite writer, David Foster Wallace, and director, David Lynch.
Despite the wealthy trappings, Carlson-Wee doesn’t evince the sharp-elbows of fictional hedge fund manager Bobby Axelrod of Showtime’s Billions (or Axelrod’s real life inspiration, Steve Cohen). Nor does he want to. Carlson-Wee is congenitally polite and amiable, which may reflect his upbringing as the child of idealistic Lutheran pastors, and having two poets as brothers. He is also well-liked by everyone in the often-fractious world of crypto. Current and former employees of Coinbase, a company sometimes beset by corporate infighting, universally speak of Carlson-Wee with fondness.
All of this may help explain why Carlson-Wee prefers to describe himself as a venture capitalist rather than a hedge fund manager, even though SEC filings list Polychain’s corporate entities as hedge funds.
“We’re really a venture group. I think well known venture people like Fred Wilson are actually quite well-liked because venture is a relationship-based business, and it’s very long-term oriented. You have to be investing for a future that is 10 years away,” he says.
Carlson-Wee adds that Polychain’s performance should not be evaluated by periodic reports on the value of its assets. Instead, he argues it’s more appropriate to judge Polychain like a venture fund where one or two successful startups account for the bulk of the returns, while dozens of other projects fizzle or die. Likewise, he says Polychain should be assessed on a VC-like horizon of seven years rather than the current value of its assets.
Assessing Polychain’s performance is tricky, however, given how it differs from other funds. The bulk of its assets consist of cryptocurrency, whose value can be measured by the price in the market on any given day, which makes it easy to overstate the significance of short terms swings. This is in contrast to funds that hold private company shares, whose valuation is based on what investors assigned to them months or years before. In any case, Polychain’s numbers have gone up significantly since its abysmal 2018.
An October performance letter shared by a Polychain investor shows year-to-date results for the firm’s main fund up by 53% while its so-called side pocket funds are up 82%. The latter are temporary special vehicles to hold newer digital coins for which there is no liquid market. (When a liquid market emerges, the coins are moved into the main fund).
Meanwhile, a person familiar with Polychain’s operations said the firm’s total assets under management as of November amounted to $825 million. This figure reflects capital raised for a new $175 million venture capital fund that has made 40 investments and, unlike the main $600 million “liquid fund”—which consists of approximately 20 cryptocurrencies—takes equity in the form of traditional shares rather than in digital tokens.
Investors appear mollified by Polychain’s 2019 performance this year, which is reflected by the fact that only 3% have sought to redeem their investments this year. Some are still deciding, however, whether Carlson-Wee is good or just lucky.
“Olaf is smart but he’s young and hasn’t seen very many cycles. Also the fees are too high,” said a representative of one big institutional investor in Polychain who spoke on the condition of anonymity.
The issue of fees has been a sore spot in the past but Polychain notes that its cut—2% a year plus 20% of any profits—is typical for the industry, and is only collected annually on the liquid portion of the fund.
The institutional investor who groused about Polychain’s fees also acknowledged part of his frustration stems from the lack of a clear performance benchmark for the crypto industry. In the investor’s view, that benchmark for now should be the price of Bitcoin (which is up around 100% for 2019).
Ryan Selkis, a respected figure in the cryptocurrency world who runs research site Messari, speaks highly of Carlson-Wee but also questions some of the fund’s valuation metrics.
“Polychain is still regarded as one of the very top crypto funds. With respect to performance though, it’s likely their marks on private assets are generously marked. The market has turned, but there’s little transparency with how they’ve marked large private investments such as Polkadot and Dfinity. Only time will tell how those pan out.”
Polychain notes, however, that the fund’s metrics for such assets are consistent with the rest of the venture industry, and are marked at either their initial price or whatever value any subsequent investment rounds assign them. Dixon of Andreessen Horowitz, meanwhile, says Carlson-Wee has evolved considerably since launching the fund in mid-2016.
“He’s a visionary. Polychain is the first fund to build a whole institution around crypto. He’s learning the business, particularly the venture side of things, but he’s very smart and level-headed,” says Dixon.
More than a subculture
Gazing at freighters anchored in San Francisco Bay, Carlson-Wee says the ocean vista is grounding to him as he works to build Polychain. He says his favorite part of running the fund is the lively discussions with his colleagues about building what they regard as the next era of American finance.
The office vibe is professional and Carlson-Wee has acquired a more understated mien that what he evinced in 2017. He is still far from corporate, though, in his garish tee-shirt as he presses a book of his brother Kai’s poetry in a visitor’s hands. The poems depict a world of modern day hobos who lurk in train yards, and roam the underbelly of secondary cities like Moorhead and Bellingham. It’s a world far from Carlson-Wee’s present day reality but one with which he seems anxious to maintain an affinity.
Likewise, as he works to cast off the last of his Prince Hal persona, he frets over how to bring crypto into the mainstream. Even as the likes of Peter Thiel and Mark Zuckerberg embrace blockchain technology, headlines about the industry continue to play up its lawless elements—such as the crypto developer arrested this month for busting sanctions in North Korea. Carlson-Wee believes Polychain can help overcome the perception that crypto is little more than a collection of amateurs and outlaws. But first it must grow up.
“I think that the tribalism in cryptocurrency is probably the most disheartening thing to me. My worry is that people in the cryptocurrency world today are content with it becoming a subculture. That is my number one concern.”
If the crypto world is to transcend tribalism, it will need figures like Carlson-Wee to act like leaders. In Shakespeare’s Henry V plays, Prince Hal does just that—ditching the demi-mondes of taverns and riff-raff to become a respected king. For now, Carlson-Wee says he is progressing. He just needs investors to give him a few more acts.
