Crypto Venture Capital: Investing through Booms & Busts - TOKEN2049 London 2022

hey everyone um today we're excited to be in London talking about something pretty topical booms and busts and investing in Venture Capital um I'm Kaden you guys want to start with intros Alex yeah hey everyone my name is Alex Adagio I'm part of the investment team at binance we're a very lean team have been investing since 2018 have over 300 Investments since then and it's great to be here and share some thoughts and Casper yeah hey everybody uh Casper Johansen co-founder of Spartan group uh we have three main businesses we have an investment bank that does mergers and Acquisitions and capital raising in the form of tokens and equity for crypto companies we have an investment management business where we have three funds a hedge fund and two Venture funds and we have a Spartan Labs which is a venture Builder where we build our own products great to see everybody here today um so I think given the events the last few days we can start with thinking about investing during busts um so want to kind of start by asking about how you guys think about pace of deployment um in a bus as well as you know thinking about pricing so I'll start with you Alex right so I think investing during bus offers both opportunities and also challenges in terms of opportunities we've seen valuations come down a lot there's still a lot of capital available for investors that still deploying so we are one of those we're looking to deploy we actually raise the fund earlier this year and we're actively looking at projects we're happy to talk to anyone who's excited about the industry I know it's a tough time to to be but and this time is actually um were the real Believers and the founders that are committed to the industry stay on and build some foundational protocols the infrastructure that will drive the next uh the next cycle and that that's what we've seen in the previous cycle too I know if you look back at 2018 for example the previous major crash happened uh we got D5 out of that so before 2018 there was no defy um I think we'll see something like that again in terms of challenges is that it is tough to you know to to make some um some excitement great case about um crypto when kind of the news is taken aback by um some of the events that we've seen but again like we go back to what we really believe in and that's kind of the blockchain technology um and enabling uh the freedom of money which uh which is what we are working to do at binance Jasper yeah I mean from from our perspective part of being a fund manager is you know investing through Cycles like you a typical Venture Fund in Trad fire is a 10-year fund where you will typically invest for five six years and then Harvest for three four years so it's like eight to ten years so so obviously over a period of time I think we've had a bull market running pretty much since the GFC so so maybe there are some mintages of venture funds have never really seen a downturn but generally in a venture fund you're going to be investing through the cycle um now so that's where the Vintage Adventure fund becomes really important where a big part of venture Fund performance is of course just like any other startup basically the the quality of the management team but it's also timing and to a degree look so the Vintage of venture fund matters a lot whether you launch it in a bowl or a bear Market because if you launch in a bull market and and I know there are some Venture funds out there both in Trad Phi and in crypto that launched maybe in call it late 20 early 21 and maybe have invested the bulk of their their funds and called them really quickly because everybody was excited invested through 21. that's going to be a difficult fun because obviously they're going to invest when valuations are high the you know typically as a in a venture fund you call Capital over the investment period in kind of a quarters or a third the idea being that you know you say you're going to invest over four years that's what you should be doing no matter how excited you are about things ideally you should Pace your investment so it hits that period because then you should get a good mix of things that maybe were a bit too expensive but other things that are a bit are in the middle and the things that are cheap and then if you are a good investor you get the Best in Class of all of those and you make overall a good return um but it's it's not it's not an easy thing to do because there's a lot of emotion involved where when the market is booming you really want to deploy and you know if there's very hot deals and you're not in them you feel almost like a fool when you know you don't go in it goes up 510x and then maybe ultimately it doesn't end up there but there's a long period of time where you know you feel like you you've missed out so there's a lot of psychology involved too Alex you mentioned 2018 2019 um I'm curious if you guys can think of any lessons or specific examples of companies coming out of you know that bus that are a great example for for how to invest going forward you know in the next couple years Alex yeah so I think the kind of the main example um I I'd like to share is uni swap um you know before 2018 as you know Trading crypto assets was made mainly enabled by um uh well firstly peer-to-peer but mostly centralized exchanges then uni swap came around it was pretty much the if not the bottom somewhere close to the bottom of of the previous cycle and they built this new beautiful thing which enable people to exchange value in a decentralized completely decentralized fashion so that's how we got dexes and then from there on we got even you know better protocols that allowed that new price Discovery mechanism so you know constant product was the initial thing and then we have a stable Swap and then we have even more now so I think D5 with the events of this week has a lot of room to grow and um um the the learnings out of that is uh we should you know back and enable great Founders that um are really using the core ethos of what blockchain offers which is decentralization and we'll back but defy um even more actively right Casper you know I think the main theme probably is also defy that that came out of that I mean we were also quite early Define investors um just like finance and dragonfly and we saw a lot of iteration back then there's a lot of interesting ideas that just people weren't able to execute on but you know some core Primitives like like uniswap Ave compound were all created back back in the day when nobody really believed in it I think also companies like animoka where you know they've been around for a long time they've only really been in the in the public light for maybe the last year or two because of the nft boom um and gaming boom but but they've been around for a long time too and I think in in they they survived that period of time and I think the you know when when we're kind of at War so to speak which is what we are now um the wartime CEOs um you you see who they are and they're the ones who scrap by and survive and come out stronger so these kind of um situations or Market you know dynamics that we have now really that like the next the next group of stars the next group of Builders are are out there right now and building and and time will then tell who who perseveres but they're like this kind of environment um will ultimately let them thrive I think wartime CEO is a great description um Casper you mentioned earlier kind of thinking about you know shifting over to booms now thinking about fomo thinking about how to kind of slow down during a boom curious to hear how you think about diligence when you have less time yeah it's very difficult like when um when the markets are booming there is usually a lot less time to do diligence like in this current market we have all the time we need to assess the potential Investments ask for more information assess the valuation and say look it doesn't work for us but at this level we like you guys and we'd want to invest um and then most of the time people come back and say okay let's talk um as you say in the bull markets when it's booming sometimes you have a day to make a decision because there's just so much Capital chasing these deals and chasing the best teams that there's not very much time to do due diligence and I think there's a couple ways to mitigate that one is obviously to to try to get be aware of these opportunities as early as possible so that you do have a bit more time while another other investors are kind of catching up on it another is just to accept the risk and go in with less diligence and then maybe just do more bets and and spread your bets a bit more and then a third way I think that people mitigate is also through co-investing I mean obviously you should do your own research but there are for example some funds that we often see ourselves in deals with and you you can in that way maybe pool resources or share notes where you know maybe you don't have much time due diligence not everyone else does but if you just have a week but everybody else has a week between you you've kind of done four or five weeks of diligence effectively and you can you can just share notes and to make sure that you know you're comfortable but yeah it is it's difficult it's difficult Alex if you also want to touch on diligence and maybe collaboration which Casper just mentioned yeah so we share the same experience I mean last year you know a year back was going exactly through that um I think one way that we try to kind of get ahead of the curve was to do a lot of research thematic research come up with high conviction areas and then we can go and identify could the right team to back is and um you know talking to to these Founders early is very helpful it's it's tough in the bull market because everyone wants to talk to them but um I think we're in a privileged position that we have a pretty strong brand and Founders typically want to talk to us um now in terms of valuations it's it is hard because um funding grounds in boom markets get oversubscribed very quickly there's a lot of fomo involved and it's very important that if you have a kind of strong conviction that um you know you can back that valuation up with with the level of conviction that you have so in fact all of our investments that we've historically done are strong High conviction bets we do less of a kind of distributed uh we don't really do spray and pray approach through diversifying we like really backing the opportunities that we have a strong conviction in and during blue markets that's could turn quite challenging but um you know we we compensate that through just waiting and making sure that what we believe in is is something that we also deliver in terms of Investments just want to pick up one thing Alex said is um um I do think that another factor is uh brand and just value-adge portfolio companies so that the stronger a brand you have the more value at your portfolio companies in effect the more time that you'll be given because people do want you in the round and I think if dragonfly benefits from that we benefit from that to an extent and binance also hugely benefits from that because you know it's about the binance become a strong brand but there's also a whole platform you know although I think when binance invest you make no guarantees about listing or anything like that but there is still a platform an ecosystem that that people really want in there which which gives you you know I think significant leverage and and more time and so I think as a as a investor keep kind of building the brand and keep adding value to your Port codes will ultimately also get you the the better deals and get you more time on the deals you want to be in because people want you in their in their cap table yeah that's that's exactly right so binance Labs is the investment armor binance but we're quite independent from the other parts so we do not guarantee any listing we do however support our portfolio companies plugging in plugging them into the wider binance ecosystem so you know if they need some support on or advice on the tokenomic side we could bring in some research experts that have done a lot of work on that and shared their thoughts on you know how should tokenomics look like from kind of listing perspective from an investment perspective from Community Building perspective so there's multifaceted approach to support as well and we have a very great platform to offer to Founders but again we don't guarantee any of um any of the outcomes other than you know as an investor we try to help them as much as we can but ultimately listing for example is has its own merits and they're being assessed on that by an independent team Within binance they have portfolio support excuse me portfolio support is definitely important for for dragonfly as well and it's interesting you make the point about how it ties into diligence time um Casper I mean kind of following up on this portfolio support idea given the theme of the talk like how do you think about differences in supporting your portfolio companies when when it's booming versus you know in a bear market and what that looks like yeah it's a good question there's definitely a difference in the kind of support portfolio companies need in in full and fair markets um yeah we also have a lot of portfolio companies like like binding says and like like you guys too so um obviously there's a lot of uh competition for internal resources in terms of of how much time we spend on it um a lot of times in in Bull markets portfolio support is connecting the founders with other Founders you know to create Partnerships synergies like hey you know you're doing this they're doing this you guys should talk um connect them into lawyers in different regions if they want to do something there now what's a good PR Company for Korea like just helping with all these these questions right they know that we've we've worked with a lot of different service providers for example so we can help them not make mistakes here and just narrow down and make intros and also make sure they get a good rate and all that that kind of more growth level support in the bull markets in the bear markets is totally different right now we're working with you know Founders to um first of all figure out like how long is your Runway are they managing their cost structure the right way do they need to extend the runway either through a raise be it a Down Round or not or can they cut costs looking at you know if they got a listed token how's it trading are they doing the right things around it in terms of you know Market making in terms of messaging in terms of creating liquidity looking at treasury management for example there's a lot of I mean not necessarily our portfolio company specifically but just a lot of Founders I've spoken to the last 24 48 Hours who have a significant portion of their treasury on FTX right so that again is uh it becomes crisis management to a to an extent too and just working through all those issues with them so so definitely the the portfolio company support changes drastically depending on on on the market environment we're operating in Alex did you want to add anything to that yeah likewise I think there's there's a difference in the needs that Founders see during a boom and a bus but I think ultimately what we encourage them is to really you know keep building just focus on on building delivering the best product and if you enable people enable mass adoption of this technology than with a great product then ultimately everything will um will fall in its place so you know that's kind of on top of what Casper mentioned I think in in bus also you're as an investor you also want to give some level of confidence to to the to the whole kind of Builder and developer ecosystem um yeah in in any ecosystem any layer one and up so we try to as an investor we try to be out there and tell them there is still Capital available um to to back your um your projects and we'll we'll still be actively deploying capital in this market I know some funds probably no are are slightly taken aback for now but um on our end we want to deliver the message that um if you're building great products for the future we'll be there and we'll have the capital to to back you up I definitely agree there um shifting over the topic of of product Market fit a little bit um thinking about product Market fit and kind of evaluating it during a bull market when everything is exploding there's token incentives like um how do you think about how your evaluation of that and support for product Market fit has changed you know during Bull and Bear Cycles um start with you Casper oh yeah um I think it also depends on what stage you're investing at because um when we invest we invest across anything from a few hundred thousand up to kind of five million dollar checks so it can be fairly late stage but but the vast majority are early stage and can be quite early so some of them don't even have product Market fit yet they're they have an idea for something that where we can see where it's going that will have product Market fit if they execute on it uh and then there's there's others that are at that stage where they have product Market fit or they think their product Market fit but maybe we don't think they have yet it's maybe like a bit of a false positive um or maybe the market that they're targeting is not attractive enough but um I think probably a good example there is during um over the course of 2021 um you know we were investing actively and we still are in the kind of the gaming and metaverse space and and there um during the the bull market product Market fit was generally just building something in the space like and then people got investment all you had to do is drop a number of keywords and that they would you get investment not necessarily from from from us and maybe sometimes from from the group of us but there was Capital out there to get so you know you could you could work through the capital stack and if you don't get these funds and you keep going and ultimately you'll you'll raise um so there's definitely going to be a lot of and there was less scrutiny around product Market fit at the time there's going to be a lot of uh that vintage of projects that just don't make it or gonna have to Pivot hard and that that's where I think the um that's where the the true test of the the founders is is it's it's rare that you have any company that's founded and doesn't pivot at least once over the course of its lifetime it's just very unusual that you nail it from day one one because if you're not building it in the market it's hard to know exactly what the need is and second it generally takes time to build things and by the time you've built it things might have changed a bit so I think how you will really judge these Founders is right now is how they manage their their cost structure in a way they keep building and then also keeping an eye on product Market fit and not being too emotional about you know if they if they need to Pivot Alex yeah it's a good uh good question so I think product Market fit is absolutely important you know no one actually canceled the idea of having a sustainable business even if it's a web 3 native business so for us it's very important that there is a there's a strong fit with what the market wants so gaming is a great example because you know gaming is an entertainment so industry has been around for ages and the core concept was that it offers fun like you play games for fun not not to earn rewards so when um web3 gaming is going to started really focusing on the rewards part more so than on the fun part I think that's when you start kind of veering away from the product Market fit and what it turned out to be is that it created a space that really did I would describe as kind of yield farming with extra steps so there's no there's no loyalty to to the fun part at all and you have the users coming in really to to farm out the the rewards and then they move to the next project and the next project so um I think we'll hopefully see a complete reshape of the web3 gaming and what it means where you don't kind of play to earn but you actually play and the earn is the secondary bit which is enabled by web3 so that's that's one part where we think that product Market fit needs to going to be rethought in terms of you know other verticals I think there's a clear demand for D5 and more you know sophisticated but at the same time protocols that abstract away a lot of the complexity of using web3 native tools so when you have people that just come into the industry and you try to explain them what it means to connect a metamask quality especially to a chain that is not in the drop down and you have to go and point to RPC nodes you know all of this what I just mentioned should not be the case you should be able to use every kind of the same user flow same ux UI in terms of accessing web3 protocols that you see in your pretty much all of the web 2 tools so there's a lot of product Market fit that should come alongside kinetic Decor product itself which is defy in this case we want to see a lot of the abstraction from using the complexity that would probably extend the the the product Market fail a lot more so that's what we're we're looking for abstracting away complexity will probably enable the next wave hopefully of of you know web 3 adoption Alex you mentioned defy and gaming and Casper I know Spartan has some thematic Venture funds um kind of wondering what themes you guys are excited about right now and looking forward to the next boom um Casper I'll start with you yeah sure um I think we we have our two Venture funds one is focused on defy and one is which is was launched uh almost two years ago and then the gaming in metaverse one was launched earlier this year and is doing its final close this month so those are the two main strategies for investing so unlike a lot of other crypto Venture funds who have a more General Pool of capital they can invest those two are actually siled in the sense of the the investment strategy of each and then we have a hedge fund that's more agnostic but but they have to be liquid tokens so so we invest you know if we find things we're excited about our team Works across these funds then we have different pockets of capital where we where we can put them that's just kind of how we how we think about things in terms of what we're excited about um we right now um we're focusing on of course on defy on gaming and metaverse I think in the D5 space we do think that with the India's current markets where defy protocols C4 Primitives are holding up we do think that there will be a Resurgence in in defy after this where um you know people a lot of people have personally been affected by the failures of C5 I don't need to throw the names out there you all know who they are um and you feel one just exposed but also betrayed by a lot of them whereas on the D5 protocols you know you kind of you control your fate yourself so I do think there'll be Resurgence in defy how much and to what extent will also be highly influenced by regulation which I think is also coming in faster and harder than we'd probably or some of us would want on the back of what's going on the market right now but it's just a it's just a reality so so definitely defy to the extent where for me especially on the consumer side I think there's a lot to do on the D5 side and then on the the gaming and metaverse side you know we our theory is still intact we still think that there's a lot of exciting developments to come using blockchain for metaverse and for gaming um it's a much longer build than D5 a D5 Protocols are not easy to build but they're relatively quicker like to build a proper functioning metaverse takes a long time to build a good game takes a long time so we we do while we do invest in individual meta versus and games we do tend to focus a little bit more on platforms like a gaming studio instead of one game uh that has more of a portfolio or a services provider to gaming Studios or um to to metaverses um and then one one area we're also quite excited about in that fund is uh is Sports in terms of how uh nfts and web3 can tie into a Sports Experience both both in terms of existing um sports leagues but also um you know we have investments in some new sports leagues that are being created that are um kind of web 3 out of the box so to speak but still live sports like we think that there's a lot that can be done in the live entertainment space which is one of the few areas that you know the networks are still actually have viewers for everything else is on demand content so it's there's very little good live content and we think that there's a lot of sports and can kind of be almost reinvented um and and then have have very interesting live streaming with a lot of interactive web 3 elements into it so that's what we're both investing and Advising on on some of these things Alex said the same question to you before we do some q a yeah yeah totally so um on our end we so we have two main sort of approaches to investment we actually run an incubator as well for a super early stage projects it could be just a you know team of two Founders and and an idea and uh in fact we're um we're running that four times a year one every quarter and we have two tracks one is slightly more focused on um a chain that we helped launch two years ago which is BNB chain and the other one is more blockchain agnostic um and we we announced this every quarter and that's what we'll keep doing even throughout um you know this Market cycle and then we also have the traditional early stage Venture investing arm um which is where I focus a lot of my time and we invested pre-seed seed seriously sometimes series b as well and where blockchain agnostic and sector agnostic and really like we want to see every the entire space we are excited about projects that will enable the mass adoption of crypto technology and whether they're in the gaming business defy or maybe they're building a new infrastructure layer maybe a new layer one or Layer Two we are there to to find those Founders and back them so what we're excited about if if anyone is building great gaming projects a new take on GameFly and and how the tokenomics should look like we're there to to talk to those Founders and and back them if it if we see a great fit same applies to more infrastructure projects so I think by the nature of of of the bust I think we see a bit more infrastructure related projects maybe middleware and slightly less metaverse and game five projects which were the case um which was the case last year but generally our appetite is hasn't changed and we have the the capital to back our conviction as well awesome thanks so much guys um in the last few minutes here we'll open it up to questions from the audience so if you have a question yeah higher um so in light of recent events um how do you think due diligence is going to change from a venture capital point just in light of what's happening with FDX yeah um Casper you want to start yeah I think the um in terms of what so just for those who didn't hear the question was in later recent events how house due diligence going to change um just based on what's Happening for Venture funds based on what's happening with FTX I think that it obviously depends on the stage of the Venture fund but um we um for example FTX like certainly our fund wouldn't invest in that in the last few rounds not not because we don't like FTX just because it's it's too late stage but you know we may have looked at it a few years ago and and we did um and and at that time when it's early stage where Venture typically focused you do just have a lot less information like best case you might have have a business model like a financial model but you might not even have anything in Excel it's more like a PowerPoint idea and maybe the a rudimentary you know outline of what what one what they want to be launched so I think you know diligence for for Venture is still um very much on the team um and the people and then of course on the idea that they have and and the potential size of the market but it's rare that there's you know very specific things you can you can see and touch in in Venture um but I I do think that in this current market um just given that capital is harder to get deals move slower there is more time to do that um at diligence which to a large degree is not only on the company itself but just understanding the market opportunity and really making sure that we think the market opportunity is there and then and then we can go back and assess like is this the right group of people to to execute on that Alex yeah maybe I'll add a bit um in terms of due diligence if there is any core component that this kind of Technology heavy we actually get access to the GitHub repository of those projects hopefully it's actually already open to the public to see so you know you could make a case about authorization for security purposes um but I think web3 is kind of the general ethos is that everything should be open source you could diligence everything independently whether you want to invest or not if you're a user of the product you should be able to diligence everything as well so for crypto native projects I think the idea would be even more reinforced so that everything is Unchained that the code is Unchained a lot of these projects actually build on testnet as well so this kind of the pre-step before launching mainnet you should be able to see all of that as well so when it comes to more centralized projects I agree to most of what Casper said the team is actually the core especially at the very super early stage we like to talk to them quite a bit to understand their motivation their experience why do you think they they're in the best place to to make a great product and be the winners and in that specific area great thanks guys we have another question hi hi uh I know it's a tough question but given what's going on with liquidity how much LP follow-on money do you think is a risk currently and how are you thinking about secondary positions and their valuations so the question was how are you thinking about secondary positions and evaluations um guys uh Casper yeah I mean in terms of uh the the book that we have in a venture fund we you know it's different fund by fun but we issue a quarter do a quarterly nav every uh well every quarter with with a fund administrator based on um not our subjective view on it but just bet that if there's been new funding rounds or if it's a project that has a token if the token's listed for example um and then one thing that um you know I think we we have a lot of dry powder we're going to be actively investing um through this cycle um and you know we we are of course it's a difficult time at the same time for venture capitalist if you've been able to raise money ahead of this cycle it's a good time to have have dry powder um and we're going to look at both we look at both primary Investments but we also look at secondaries where there are some um investors or funds that are are distressed or semi-distressed or need liquidity um and are willing to sell their existing positions at a discount we would look at that likewise we talked to a lot of you know projects that we really like that might have of treasuries of tokens for example that they haven't you know they've kept in reserve for funding the business in the future we have conversations with them around you know investing um at a discount but then we are willing to take a long unlock on that to make sure you know we don't you know put a lot of tokens into the market if you need to exit at some point but it is a quite being a a a venture firm in crypto is a bit unique in the sense that if your fund can do both Equity or tokens or Equity where you get token warrants and later get tokens you kind of the first few years you might be more of a venture fund because you're investing a liquid private deals but over time as you start to get tokenji almost convert into a public fund where you need to start taking views on your positions and you can actually start to trade in and out which is very unusual for Venture because normally you invest you support the company and then later either they get bought or the IPO but it's much much later so crypto Venture is um quite unique in that sense Alex yeah right so I think from our end um that's a very good point about how the Dynamics shape up once you have a listed token um you're going to a lot of different discussions around kind of the the macro aspect which you don't typically um do when you invest as early but I think from our from our end we try to when we come into Iran we try to set the some kind of minimum standards in terms of vesting schedule so our suggestion is to have at least like four years maybe more actually I had some some projects that we're discussing a 10-year investing schedule so not every fund can do that but we are there for the long term and I think the the market the fluctuations in the short term or even the near term would not be as impactful for those types of Investments that we've done that have at the minimum like a four-year vesting schedule on the token side and and the equity side it's more of a traditional kind of venture holding period that it could last a lot longer and I think what we've seen in the previous cycle is that companies decided to stay private for longer so in effect if you manager as a fund if you manage to raise a lot of capital and you still have the dry powder you're in a good position to to deploy and now that kind of the terms are a lot more attractive and you can also take more time to to due diligence opportunities you should be in a good position and you know while LPS there'll definitely blps that will take a be a setback for them to to support crypto native funds I I think generally we we're in a good position to make investments so um hopefully we go through this turbulence and we come up to a view that you know crypto still has a very bright future and um we're there to support it and on that positive note I think we'll wrap this up thanks so much Casper and Alex and thank you everyone thank you