0/ The current state of VCs in crypto is a confusing cesspool of pioneers, mercenary opportunists, populist rhetoric, and overinflated promises.
How did we get here?
1/ During the 2018 bear market when your favorite CT personalities left to play golf, VCs were the lifeline of crypto.
$100M funds were considered large.
Fundraising for both funds and projects was near impossible.
2/ The projects CT apes now shill on the daily looked like nuclear waste.
You could have infinite allocation for today's blue chips at 1/1000th the cost...
But no one wanted them - except some VCs who managed to survive, who in turn helped projects survive.
3/ People who weren't around then only see the massive wins when a historic bull market returned to bail everyone out.
They see the unbelievable returns VCs were getting and wanted a piece of the pie as well...
Open the floodgates!
4/ The bar for entry is low.
Anyone with a Twitter following could launch a fund.
Crypto VC is also perceived to be easier than trad VC - less competition, and guaranteed liquidity for tokens mean your investments rarely go to 0, unlike startups.
5/ In fact, for at least a while, your product doesn't even need to exist - let alone have traction - for a token to do well in secondary markets (at least on paper).
To make things even easier, SAFT OTC markets emerged so VCs can cash out before tokens are unlocked.
6/ In short, from 2019 up till now, crypto attracted a ton of opportunists to play this primary -> secondary arb.
In this new nihilistic paradigm, it was no longer about investing in founders or teams, but betting on *valuations*.
7/ New P2E game with 0 traction, no product and a team with 0 gaming experience, raising at $200M FDV?
No problem.
Since $AXS traded at $30B FDV, a $200M FDV is a "gOoD CalL oPtIon bRo".
8/ The amount of capital flowing into the space increased, but the quality of capital decreased sharply because of the opportunity and low barrier to entry.
i.e. If you get in early enough and the story sells, you'll probably make money.
9/ Because every bet is a lottery ticket, funds are optimized to spray and pray.
And because VCs subsist off of mgmt fees, raising large funds matter more than producing best-in-class returns.
Both imply bigger portfolios, ie less support per portco.
10/ As VCs get richer, good founders noticed the help they were promised by VCs is diminishing...
Retails noticed who they consider to be low-quality investors profiting massively just by virtue of being early...
11/ This fueled a massive rise in "ALL VCs bad" populist rhetoric - particularly in DeFi, where ease of forking is high.
Savvy founders took advantage of this to build cult-like communities around forked versions of VC-funded projects.
12/ Other savvy founders see this funding fervor and raise pre-product rounds from VCs at ludicrous valuations.
This often comes attached with predatory terms that new funds either don't care (since they assume they'll make money anyway) or don't understand.
13/ Quality of the average crypto startup falls with no decrease in enthusiasm from crypto VCs.
Meanwhile, sharp VCs ignore all of this and focus only on the top quartile founders.
As such, bad teams are raising at high prices, and good teams are now bid to *insane* prices.
15/ So where does this all end?
As secondary markets tumble, bad VCs sober up and realize the arb is closing. A market whereby the only skill needed was balls may not last.
The opportunists fail to raise subsequent funds and are washed out.
16/ Small VCs who only follow large VCs underperform and die out.
As with 2018+, the ones that are left will need to have disciplined fund size and true contrarian theses at the time of their investments so as not to compete in large VC price wars.
17/ Larger VCs realize IRRs are being crushed because of price war with other good VCs.
Those who secured institutional (sticky) LPs survive to perhaps see crypto fully play out its 100x thesis, those who didn't lose interest from LPs due to underperformance next 3-4 years.
18/ Low quality projects that raised capital sit comfy for a few years before the next thing.
Projects that are built around forks and position themselves to be anti-VC will need new ways to engage their community, who gets poorer by the day and have no mandate to stick around.
19/ Good founders feel disillusioned by their VC investors as they are increasingly stretched thin.
Founders start to raise from other founders, investment clubs start to emerge to fill the vacuum left by VCs that are washed out.
20/ As the market sobers up, ludicrous valuations and terms set by projects fail to excite investors anymore.
VCs become more selective, prices adjust and we begin to trend back to equilibrium.
21/ For a while, no one wants to be a crypto VC anymore as the game gets harder again.
Good VCs continue to stick around and support founders, until the next bull market, when it becomes popular to hate on them again and the cycle begins anew.
β’ β’ β’
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Here are some of the most embarrassing mistakes I made in my investing career.
Hopefully some can be cautionary tales.
1/ Confidence
Early in my career I placed much more emphasis on other people's views than my own analysis.
While triangulating views is useful, this leads to bad process and you end up being someone's exit liquidity, or missing fund-returning investments ( $FTT ).
2/ Hip firing
In 2020 I got carried away by the sheer euphoria of DeFi. I couldn't believe my thesis was finally playing out after a year.
I mistook beta for genius and started losing discipline. When things started unwinding I got hit bad.
Despite billions raised for crypto funds in the past 12 months, I donβt see it as particularly bullish $BTC
Short 4 am brain dump π€
1/ Managers in crypto are not paid to trade / long $BTC.
$BTC liquidity is high, accessibility to tradfi infra is massively improved since β17 - most allocators donβt need their GPs to charge 2/20 just to long corn
2/ Second 99.9% of new projects are building on $ETH, L1s, L2s - which can survive and thrive with or without the increasingly insular Bitcoin community.
$ETH functions better as beta for crypto funds thematically