Chain Venturer: Katie Talati of Arca

How a 9-figure fund navigates the bear market

Marco Manoppo
September 16, 2023

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Happy Weekend 🙋🏻‍♂️,

Welcome to Chain Venturer, a series of intriguing conversations with crypto investors. For this week’s issue, we have Katie Talati from Arca.

Katie is the Director of Research at Arca, a leading crypto investment firm with multiple products and fund vehicles. She joined Arca in 2018 as a VP of Research after previously working for Crowdfunder and running her own independent crypto consulting firm.

Now, Katie handles all things research in Arca.

If you would like to participate in a future episode, DM me here.

-Marco

Token2049 was an interesting event.

More than 10,000 attendees flocked into the city-state, primarily from other Asian and European countries, further showcasing that crypto is truly a global industry.

A few takeaways:

There’s less concern about regulation, given that the US SEC’s reach is fairly limited in Singapore, but there are also increasingly stringent KYC rules for centralized exchanges operating in the city-state.
Infrastructure projects are still the ones primarily getting funded, with multiple L1s and L2s raising 8 figure Seed Rounds.
Institutional market participants are more engaged but there were also numerous low quality projects that promote “we don’t do KYC” as a product differentiator (really bad idea.)
Lots of enthusiasm on RWA, but without nuanced consideration how to balance KYC and the liquidity velocity and a permisionless crypto ecosystem can provide.
Great parties (where’s the money coming from???)

Anyway, enjoy this week’s conversation!

Are aliens real?

someone get the alien a keyboard asap
— @intern (@intern)
8:12 PM • Sep 13, 2023

Katie Talati, Director of Research at Arca

Katie Talati is the Director of Research at Arca, an institutional-grade financial services firm building products utilizing and investing in digital assets.

Before joining Arca, Katie primarily worked at startups and small businesses. Her longest tenure was at Crowdfunder, a fintech company focused on raising funds for startups. She started there as an account executive in 2014 and eventually worked her way up to become the Director of Investor Relations during her last two years with the company.

After leaving Crowdfunder, she transitioned into independent consulting, serving startup businesses in the financial services and fintech sectors. Her clients included Crowdfunder, Blockchain Industries, Business Rockstars, ICO Advisors, and others. Her expertise covered cryptocurrency analysis, macroeconomic research, venture capital, and content creation for marketing presentations.

In 2018, she made the move to Arca as the Vice President of Research. Since 2021, she has held the position of Director of Research at Arca, where her responsibilities revolve around identifying and analyzing investment opportunities within the digital assets space.

Here’s my conversation with Katie Talati.

Quick takeaways:

Prediction: we’re going to be in a bear market for another year or more.
One of RWA projects hurdle is the absence of real-time economic data, especially for RWA projects that handle credits.
There are fewer liquid funds operating in crypto, which might present more opportunities due to lesser competition.
Arca is primarily looking at RWAs, decentralized identity, and infrastructure projects.
One of Arca’s known edge is in fostering constructive dialogues and presents ideas that can evolve into governance proposals.

The following paragraphs are not verbatim quotes. These are paraphrases of our conversations optimized for written media format. Some context and nuances might have not been conveyed properly in the process.

The author of this issue is not responsible for any misconstrued statements made in the issue.

All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.

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What Was the Defining Moment That Propelled You Into the Crypto Space?

During her tenure at Crowdfunder, Katie became well-versed in various aspects of the tech industry, with a particular focus on fintech, including cryptocurrencies. However, it's worth noting that in the years 2014-2015, the cryptocurrency startup landscape was rather limited, offering little room for exploration.

Fast forward to 2017, amidst the ICO frenzy, Katie had an epiphany: Token sales could serve as a viable means to bootstrap a company and secure funding beyond the conventional equity financing route. This realization prompted her to dive deeper into the world of cryptocurrencies. She actively sought out projects that were using blockchain and tokenization for practical and legitimate purposes.

The Turning Point: As Katie discovered and learned more about such projects, Katie's interest in the space grew, motivating her to transition into a full-time role in the cryptocurrency sector.

Background about Arca

Arca is pursuing a unique path in the world of asset management. Their goal is to bridge the gap between digital assets and institutional investors by offering a more traditional approach. This approach involves providing digital assets in formats and under regulations that institutional investors are already familiar with.

Arca has been steadfast in its commitment to collaboration with regulatory bodies, seeking to operate squarely within the boundaries of the law while also trying to innovate. It provides exposure to digital tokens and the equity of blockchain companies.

Arca, through its private fund adviser Arca Investment Management, operates an asset management division that houses a family of funds. At the forefront of their investment offerings is the main hedge fund, which employs a liquid token strategy that has been in operation for approximately five years. This fund exclusively caters to ultra-high-net-worth individuals and institutional investors.

Arca's investment approach is research-intensive and thematic. Arca also takes a top-down approach to their research.

Arca introduced two additional private funds towards the end of 2021. The first is a venture capital fund tailored exclusively for investing in Seed and Series A deals. It's important to note that this venture fund operates differently from the hedge fund. The venture capital fund is a closed-end fund.

Arca’s third fund is called the NFT fund where it invests in NFTs and NFT-related assets. It includes equity in NFT companies, the assets themselves and, tokens. Arca is not just looking at the PFP side of the NFT market but also into gaming, real estate, music, infrastructure, and all kinds of stuff related. The NFT fund is also a closed-end fund.

Arca's three private funds provide extensive coverage across various market segments, allowing them to accommodate companies of interest within their investment portfolio. This flexibility enables Arca to allocate investments to the most suitable fund based on the company's profile. In certain instances, Arca may even have investments in the same company across multiple funds.

In addition to its private investment funds, Arca operates an innovation division known as Arca Labs. Arca Labs is dedicated to developing integrated financial solutions that utilize cryptocurrency assets and blockchain technology, aiming for developing innovations that could be applicable in the regulated financial services sector. Arca Lab's approach is centred on working within existing regulatory frameworks and developing passive blockchain-based vehicles, thus ushering in a new era of financial solutions.

Arca Labs developed a product called Arcoin, a tokenized US Treasury bond fund on Ethereum, called the “Arca US Treasury Fund,” it is the first registered (public) fund to issue shares as digital asset securities. The Fund is advised by Arca Capital Management, LLC, a registered investment adviser. The units of the Fund are called ArCoin, and are issued on the Ethereum Blockchain.

Arca is a pioneer with ArCoin. What are your thoughts on RWAs and the challenges that need to be solved to reach scale?

Arca's approach with ArCoin appears relatively straightforward when compared to projects involving Real World Assets (RWAs). Management of the Arca US Treasury Fund involves purchasing US Treasuries as collateral for its underlying shares in ArCoin. The Fund is not involved with lending.

However, dealing with under-collateralized lending, as Maple used to do, or when acting as an intermediary for counterparties in need of underwriting can present complex challenges. Notably, Goldfinch focuses on emerging markets where the underwriting process can be challenging due to geographical disparities or issues related to on-chain data updates.

Katie emphasizes that one of the major hurdles faced by many RWA projects is the absence of real-time data regarding the creditworthiness of these projects. A prime example of this challenge was witnessed in the case of Maple last year. Katie acknowledges that while RWAs hold immense potential and represent an exciting avenue for attracting capital, the intricacies involved mean that these challenges won't likely be fully resolved within the next six months or even a year.

Do you think that the best fund structure in crypto is a fund that has both private and public market exposure? or do you think that liquid-only funds can still outperform in this market? / What is the best fund structure in crypto?

Katie thinks that there is no right answer to the question because it depends on each individual asset manager. In Arca's case, the additional fund strategies that it added were a result of feedback from its current investors and prospective investors. But, it depends on how funds want to account for things. She highlighted that there is no one-size-fits-all in the fund structure.

Katie pointed out that the liquid space presents a plethora of opportunities primarily because there are fewer liquid funds operating in this domain, resulting in less competition. Conversely, when examining the venture landscape, there is a significant influx of venture capital, which intensifies the competition for investment deals.

What sectors or projects are you interested in right now?

On the VC side, Arca has been looking at a ton of security, RWAs, decentralized identity, and infrastructure projects. On the liquid side, basically the same as the VC side but Arca also looking for any kind of new DeFi, infrastructure, or primitives that are building on what exists today.

Arca is really into infrastructure, it has a lot of thoughts on the L2 space and on a lot of different L1s. More recently, Arca also had its eyes on the AI space but approaching it more cautiously as a lot of AI projects can be super overhyped. Arca also pays attention to gaming and infrastructure for NFTs.

On activist investor play

Katie has a preference against the term "activist", she uses the term “constructivist” to define Arca. Arca's approach is not about taking a domineering stance and dictating to projects that they are proceeding incorrectly. Rather, Arca fosters constructive dialogues and presents ideas that can evolve into governance proposals.

On Aragon:

Upon a close examination of Aragon's tech stack and their current project portfolio, Arca identified an opportunity to collaborate with them and explore monetization avenues. One strategic consideration was the implementation of a token buyback program, which would alleviate the pressure often exerted by investors who frequently advocate for full liquidation.

The rationale behind this approach was that, by repurchasing some of the tokens, Aragon could effectively reduce their treasury size while concurrently increasing the market capitalization. It's worth noting that, at the time, Aragon had not yet completed the transfer of their treasury assets into a multi-signature contract governed by the community. Arca was patiently awaiting this transfer to materialize before presenting a proposal for the implementation of a token buyback program.

Rapid Fire Questions

What’s one book that any aspiring investment professional should read?
- The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze - Laura Shin.
What’s your biggest investment mistake?
- Hanging on to investments for too long.
What’s the most underrated use case of crypto?
- Decentralized infrastructure.
What’s your most contrarian view in crypto right now?
- We are going to be in a bear market for another year or more.
What’s the biggest risk that the crypto space is facing?
- Regulation.

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.