From Wall Street to Web3: Lessons in Capital Formation | Beto Aparicio - Off Chain

Let me try this. Hello. And we're back. Okay. I don't know if someone can hear me here.

There was someone here was asking me where's the VC stage. So the next one, no, I'm good to go. Okay. So the next talk that we have is about capital markets and it's led by Betto from Offchain Labs. Um, BTO, if you could come around.

And he's doing it without the slides, so pay attention, folks.

Everyone. Yeah, we're doing this live. So, yeah, thank you for that introduction. My name is Beto. I do strategic finance at offchain labs.

Uh, we are a technology infrastructure provider. Uh, and the creators of arbitum. And, uh, as part of my role, I also lead the investment arm of chain. we uh we go by tandem. So we are active participants in the capital formation process and what we're seeing as investors is that now the bar is being raised and that's probably why a lot of you probably felt that it's harder now to raise capital than it was a couple of years ago.

And in my opinion, this is not just a crisis. It is just capital markets in action because this is not the end of funding, of course, but we believe it's the end of easy funding, which is a different thing because let's be honest, uh, back in the day, if you had a white paper, you know, a road map and some traction on your socials, you were good to raise. you know, you could go get a deal and it wasn't that that hard. And, you know, in my experience, I don't think this was completely irrational as you may think. This was more uh because the macro was there for that.

You know, interest rates were super low. Um, liquidity was everywhere and money in general was cheap. So investors tend to relax when that happens and we saw this happening multiple times in the past with Wall Street, with the tech industry and also of course with crypto. How did Wall Street responded to that? Well, they took immense uh levels of risk when capital was super cheap.

What happened with the tech industry? Well, they, you know, over uh or prioritize growth uh instead of uh profits. And what happened with crypto? Well, we decided that we wanted to accelerate everything and we dump a lot of money on it. And again, you know, when capital is abundant, discipline relaxes.

um narratives get rewarded, speed gets rewarded, but fundamentals get deferred. And I think that is the critical portion of this is that when money is easy to get, fundamentals are hidden. Like people don't pay attention, nobody double checks, nobody, you know, ask the next question. Um and you know in my opinion that era is over because you know macro is here again and you know capital has cost again. We've seen that there is uh you know steady higher interest rates.

We see that there is uh you know presumably tighter you know uh monetary policy. We see that you know with institutional adoption definitely a great theme but that also meant higher correlation with other assets and you know this all translates into the risk being repriced and I don't think crypto was singled out in this new paradigm because we've seen similar situation in other growth asset classes and you know it just happens that there's a reset when you know the geopolitical influence and dynamics turn the other way uh and capital becomes more selective. So what I expect to see I expect to see investors making fewer bets. I expect to see longer due diligence uh processes and I just expect to see higher standards and as an investors that is what we are are actually doing. We're taking up time we are speaking with more teams.

for you know filtering most of them and it's not that is an anti-c crypto perspective or stance this is just making sure that the healthy capital markets are correcting and that we are ready for that um and the way I kind of see this translating into the fundraising process and capital formation is that narratives are not longer enough, right? So, um, for a long time, I believe that narratives were driving capital formation and funding. You know, everybody was talking about like the centralization community, the future of finance and all that, which are great ideas, but people were not thinking about how to turn that into an actual product that people actually perceive value and well obtain value in the end and will use. So in my mind, ideas now are not sufficient. Narratives are seat tools but not underwriting tools.

And this is an underwriting market. I think like incentives definitely can create um you know a first adoption and attention and activity but they won't create retention and attention doesn't mean demand and community definitely powerful but that doesn't mean customers and customers in the end are the ones who pay. Um so you know it's interesting because what I've seen from talking with other uh you know investors in the industry uh is you know what are you guys thinking about now? What are you what questions are you trying to solve? And the main one is does anyone use this product?

Is are people going to stay after the first round? Um because I feel like overall the view has changed from how big could this be to how fragile is this? What's going to happen when incentives are not there anymore? Because it might be a field that narratives will definitely get you the meetings and open a lot of doors but in the end numbers will get you the checks. Um so what does this mean in uh you know the current process for founders and investors?

It means that you know PMF is back and is back in a big time. It is not a milestone anymore. It is not something that is nice to have and that people were you know paying some attention but actually not double checking. Now is the ticket of admission to the game. If you want to come and you know have a serious conversation you need to have strong evidence of PMF of of PMF and I don't mean you know perfection or guaranteeing scalability or having the most like optimal tokconomic structure.

I'm talking more about being able to prove that real users will stay after they stop being subsidized by the protocols. Uh because as investors we don't see PMF as upsite anymore. We actually see it as downside protection. What is going to happen after everybody who was farming these, everybody who was just here for the short-term invest incentives are not longer. And you know in this market capital doesn't reward the possibility of something happening.

Capital will reward evidence. And in this marketing retention that survives incentives is the evidence. And in my in my opinion that shift is one to is going to shape the next cycle for uh capital formation. Okay. So that was a lot of you know like bad news in general and you know like really hard things that are you know in the horizon but here are the good news.

The good news is that we are evolving as an industry and I've been you know as an investor for over 10 years now and I'm sure a lot of you have gone through multiple cycles you know because macro will be easy money again there's going to be a bonanza again so these things will repeat so in my mind this is not that we are doom and you know let's close and let's go this is more about It's going to be harder for founders if you're looking to raise money. They're going to be more questions, but at the same time, it's going to be more equitable. You are going to not need to be the loudest person in the room, have the, you know, highest hype uh or, you know, biggest numbers in, you know, like gross numbers. This is going to be more about do you have something that actually works? Because for investors this means discipline.

This means back inferior projects for sure but with stronger fundamentals and with long-term alignment. And that is the view that we have uh at tandem uh at offchain labs because what we try to do here is we support our partners all the way from you know purely writing a check to them to deploying uh resources, engineering, research and all that. And we definitely try to find those projects that align with our long vision of the whole ecosystem. People that can contribute to the ROMA, not only the Roma that we have as a company, but the Roma that we think we have at a higher level as an industry. And in my view, this is how durable ecosystems are built because easy money is gone now, but serious money like us are still here are still looking for good opportunities and serious money builds serious companies.

And in my opinion, that is the path that we're going to take in this next cycle. So yeah, again uh apologies for not having, you know, the beautiful slides, but it's been my pleasure. Thank you very much, and I'll be around if you have any additional questions. Thank you.