Original title: What Do Crypto VCs Know that You Don't?
Original author: Ignas
Original compilation: Luffy, Foresght News
The relationship between the price of Bitcoin and the amount of project funding in the cryptocurrency market is fascinating. Typically, when the price of Bitcoin drops, so does the amount raised.
Interestingly, while Bitcoin and Ethereum prices are higher than at the peak of the 2018 bull run, funding levels have returned to pre-2020 levels. Bitcoin has actually recovered from its 2022 lows, but fundraising continues to decline.
Venture capitalists (VCs) are often seen as market leaders, capable of making informed and forward-looking decisions. So why do they seem to be following the overall trend of the market, rather than setting it?
Despite a slight improvement in the market, VC fundraising has fallen back to 2018-2019 levels. Do they know something that the rest of us don’t? Shouldn’t they be “buying the dip” when valuations are lower? Especially since lockups after investing prevent immediate sales, they may end up having to sell in a bear market.
To find out, I spoke to several crypto venture capitalists and recently funded DeFi project founders. I’m happy to report that Sachi Kamiya from Polygon Ventures, Etiënne from TRGC, and an anonymous angel investor (hereafter referred to as Anon) shared their perspectives.
Jaimin, founder of Caddi, a browser plugin that helps you save money and protect you from scams in DeFi transactions, also provided valuable insights from the perspective of a DeFi builder. He recently raised $650,000 in funding from venture capital firms such as Outlier Ventures, OrangeDAO, and Psalion VC, as well as angel investors such as Bryan Pellegrino, Alex Svanevik, and Pentoshi.
How bad is the situation?
CoinCarp’s chart provides a different perspective. With a total crypto market funding of $18.6 billion and a total of 1,053 financings in 2023, things look much better than in 2020.
However, the chart includes Web2 cases such as Stripe’s $6.5 billion raised.
Speaking of my beloved DeFi, this year there were 175 financings totaling $779 million, with an average of $4.45 million per financing. This is a significant drop compared to last year, when 341 financings totaled $3.56 billion, with an average of $10 million per financing.
As a result, funding is tighter this year, with the average amount raised per round down by more than 55%.
Unfortunately, the DeFi sector is actually the second worst performing sector, just above NFTs. DeFi protocols have raised only $1.14 billion in the past year, while CeFi startups have raised $2 billion.
Looking closely, DEX dominates DeFi financing. In Q3 2023, DEX financing accounted for 38% of all DeFi financing.
Source: Messari Q3 Funding Report
Several cryptocurrency companies are cutting jobs due to funding constraints, with Yuga Labs, Ledger and Chainaanalysis announcing large-scale layoffs last week.
Despite the bear market, there are still some notable protocols that have managed to raise a lot of money. This shows that investors have not completely given up on crypto and DeFi. In fact, Blockchain Capital recently raised $580 million to invest in DeFi, gaming, and infrastructure projects. So I hope this blog post can find the bottom of the market for these funds.
When asked about the current funding market from the perspective of a DeFi builder, Jaimin commented, “The market is as bad as it has been in the past few years, mainly due to the macroeconomic environment.” Polygon Ventures’ Sachi shared a similar sentiment, stating, “The overall sentiment in crypto venture capital is bearish. Due to the negative sentiment, fewer early-stage projects are raising funds.”
Anon gave a number, saying, "Maybe only 10% of the financing amount in the bull market."
Compared to past bear markets, Etiënne noted that “there is real money sitting on the sidelines, unlike in 2019, where there was almost no money sitting on the sidelines.”
That’s why there’s still a huge opportunity in the market. Anon, Etiënne, and Sachi all agree that now is a good time to look for opportunities because valuations are no longer as crazy as they were during the bull run. Sachi noted that investors “can take the time to do due diligence on each project, but VCs focus on user metrics and actual adoption.”
Interestingly, this is exactly the hardest thing to do for early-stage projects. Jaimin said, “Investors want to see exponential growth, whether it’s revenue, users, TVL, or transaction volume. ‘Sustainable’ growth in this market is very difficult because of low inflow of new population, low volatility, depressed prices, and poor sentiment. Simply selling a vision is usually not enough.”
Sachi concluded optimistically: “It makes sense to invest now because some of these projects will perform well in the next cycle.”
Why do we need VCs?
There is a lot of distrust, hostility, and negativity towards VCs in the crypto space. The main reason is obvious: institutional investors will dump on retail investors.
Algod tweeted that the best projects will be those that launch fairly without VC as people realize they don’t want to exit liquidity. In another post, he also said that VC will be a bearish factor compared to 2021 because “community is key and projects are starting to realize that scale is not driven by VC, but by regular people.”
Some non-cryptocurrency investors agree.
For example, in an interview with Bloomberg, Jason Calacanis, an angel investor in Robinhood, Uber, and Superhuman, warned of the potential impact of cryptocurrency “scammers” VCs dumping cryptocurrencies on retail investors.
Calacanis believes that many of these tokens are securities sold by VCs to unsuspecting retail investors. He expects that companies and VCs that intentionally sold "worthless" tokens will face major lawsuits and possibly criminal charges.
So, can we skip cryptocurrency venture capital altogether? The biggest concern is how “fair” a “fair launch” is.
Anon said that “fair launches are not so fair because the team and insiders know about them before the actual launch and can weaken liquidity.” Jaimin is similarly skeptical, questioning whether the current launch is truly “fair” because people can manipulate it in many ways and “dumping each other will always exist.”
Etiënne agreed, “Whether it’s a fair launch or not, the motivation to make money is still the same. Retail investors are not innocent, they are gamblers with less money.”
That being said, Sachi said a fair launch might “work for projects with founders who already have experience running cryptocurrency companies.” All respondents seemed to agree that a fair launch is a tough game for inexperienced founders and those without initial resources, especially if the project “is not a fork or low-hanging fruit,” as Anon said.
Personally, I love the story of fair launches. The birth of YFI remains my fondest memory of the DeFi summer of 2020. I hope we can see truly fair launches in the upcoming bull run.
But I would venture that VCs play an important role in the cryptocurrency space, including initial capital injection, mentoring, providing networking opportunities, and even bringing credibility to the entire project industry.
What can we learn from VCs?
This is the main reason that prompted me to write this blog post. As the Bitcoin price vs. crypto project fundraising chart shows, fundraising follows the Bitcoin price trend rather than setting it, which is a bit disappointing. People expect savvy VCs to predict market trends, add to their bets at the end of a bear market, and then cash out during a bull market.
Sachi provided valuable insight, “Not all VCs follow market trends. Some VCs, especially US VCs, tend to invest based on market trends. But this is not the case with many Asian VCs, and in fact, they become more active in bear markets because there are good opportunities.”
Anon added that projects are raising funds during the bear market, but they “will make announcements when it makes more sense for them.”
In addition, there is the token lock-up of venture capital, which complicates the monetization strategy. I believe that investing during a bear market will allow venture capitalists to sell during the token rally period after the lock-up period expires. On the other hand, if venture capital firms invest during a bull market, they may need to wait until a bear market to sell, further suppressing the already depressed altcoin prices.
The timing doesn’t seem easy. Anon shared, “There is some uncertainty with TGE (token generation) because this is usually when the unlocking timer is activated. I think at least for big products, as long as they wait for the best listing time and have a good lock-up structure, they may still make money after unlocking.”
Sachi told me that Polygon Ventures considers unlocking times based on the quality of the project, preferring shorter lock-up times, but they take into account the crypto-nativeness of the team. “It takes skill to manage tokens (e.g., listing on exchanges, market makers, etc.). The more crypto-native the team is, the more likely the project will be successful in the long term.”
So, what lessons can we learn from VCs?
Etienne is straightforward:
Haha, I can’t learn anything.
In fact, stop listening to VC bullshit. I recommend 95% of VCs to stay silent on all platforms. I highly recommend old foxes like Howard Marks, Nassim Taleb, Warren Buffett, Stan Druckenmiller, Ed Thorp, Jim Simons, Mark Spitznagel, etc.
I will only listen to venture capitalists with 30 year track records like Mike Moritz or Doug Leone. Not “I got lucky and got token XYZ, now let me teach you about investing”, these people are the worst, there is nothing worth learning from them.
Anon’s advice is simple. Don’t put all your eggs in one basket. “Even some VCs made this mistake and lost a lot of money.” As cryptocurrency users, “we should strive to introduce these projects to people, share feedback and suggestions, etc. This is very valuable for advanced users.”
Sachi gave practical advice, “It’s important to ask the right questions and do research. For example: Are these real user metrics? Is the founder legitimate?”
Retail investors should understand that whenever a project makes an announcement (e.g. a partnership with a large company or project), there is more to it than meets the eye. There are many parts to completing the deal and incentives that may not be part of the announcement (e.g. token swaps, grants, incentives, etc.). Retail investors should always consider whether the traction of a protocol is organic and invest accordingly. - Sachi Kamia, Polygon Ventures
Jaimin also stressed risk management, but his final advice also resonates with me. “I also advise people to improve their skills, read and never stop learning, DeFi is developing very fast, and understanding the field you are interested in can bring benefits: you can reason and add value to the whole project.”
Interestingly, as I was writing this blog post, Sachi just tweeted this
We retail investors can also do well in crypto. Like retail investors, VCs will invest in hot projects because of Fomo. My advice is to do your research and lead the narrative, not follow it.