What can we learn from the perspective of cryptocurrency investment in the third quarter of 2023?

Uncovering the Insights Exploring Cryptocurrency Investment in the Third Quarter of 2023

Insights from Sachi Kamiya from Polygon Ventures, Etiënne from TRGC, an anonymous angel investor, and Jaimin (founder of Caddi).

Original title: What Do Crypto VCs Know that You Don’t?

Original author: IGNAS

Original source: ignasdefi

Translation by: Kate

Take a look at the chart below.

There is indeed a fascinating correlation between the price of Bitcoin and the amount of funding in the crypto market. As the price of Bitcoin falls, the amount of funding also decreases.

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Interestingly, despite the prices of BTC and ETH being higher than the peak of the 2018 bull market, funding has returned to pre-2020 levels. While Bitcoin has actually recovered from its low point in 2022, the amount of funding has been steadily declining.

This got me thinking.

Venture capitalists are typically seen as market leaders, making wise and forward-thinking decisions. So why does it seem like VCs are following the overall market trend rather than setting it?

Even though the market is slightly recovering, the amount of funding has dropped to 2018-2019 levels. Do they know something that us mere retail investors don’t? Shouldn’t they be “buying the dip” and investing when valuations are lower? Especially since vesting periods prevent VC firms from immediately selling tokens, some VCs might be offloading tokens in the upcoming bear market.

To find answers, I reached out to several recently funded crypto VC firms and founders of DeFi projects. I’m happy to say that Sachi Kamiya from Polygon Ventures, Etiënne from TRGC, and an anonymous angel investor (referred to as Mr. Anon from now on) agreed to provide their insights.

Jaimin, the founder of Caddi, also offered valuable insights from the perspective of a DeFi builder. Caddi is a browser extension that saves funds on DeFi Swap and protects you from scams. He recently raised $650,000 in funding from VC firms like Outlier Ventures, OrangeDAO, and Psalion VC, as well as angel investors Bryan Pellegrino from Layer Zero, Alex Svanevik from Nansen, and Pentoshi.

How bad is the situation?

The following image from CoinCarp presents a different perspective. The financing scale this year is $18.6 billion with a total of 1053 transactions, indicating a better financing situation compared to 2020.

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However, this chart includes Web2 transactions, such as the $6.5 billion Series I financing raised by Stripe, which is not relevant to our retail funds.

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(Chart source: @CharlieXYZ_)

Now, speaking of my beloved DeFi, there have been 175 rounds of financing, with a total financing amount of $779 million and an average financing of $4.45 million per round. This is a significant drop compared to last year, which saw 341 rounds of financing totaling $3.56 billion, with an average of $10 million per round.

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Therefore, with funding tight, the average amount per round of financing has decreased by more than 55%.

Unfortunately, the DeFi sector is actually performing second-worst, just above NFTs. In the past 365 days, DeFi protocols only raised $1.14 billion, while CeFi start-ups raised $2 billion. Where is our decentralized future?

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Looking closely, exchanges dominate DeFi financing. They account for 38% of all financing in the third quarter of 2023.

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Messari Quarterly Financing Report

Overall, due to tight funding, several crypto companies are downsizing, Yuga Labs, Ledger, and Chainalysis announced significant layoffs last week.

Despite the market being in a bearish state, there are still some notable protocols that have successfully raised a significant amount of funds. This brings hope to investors, indicating that the market has not completely given up on cryptocurrencies and DeFi. In fact, Blockchain Capital recently raised $580 million for investment in DeFi, gaming, and infrastructure projects. So, I hope this blog can find the bottom of the funding amounts.

When asked about the current financing market from the perspective of DeFi builders, Jaimin commented, “The market is as bad as the past few years, which aligns with the macro environment.” Sachi from Polygon Ventures also shared a similar view, stating:

The general sentiment in the crypto venture capital is bearish. Due to the negative sentiment, financing for early-stage projects has decreased.

Anon, the angel investor, describes his trading volume as “probably only 10% of what I saw in the bull market.”

Etiënne noticed that compared to past bear markets, “the difference in 2019 is that there is real money on the sidelines. In 2019? None.”

That’s why the market still offers huge opportunities. Anon, Etiënne, and Sachi all believe that now is a good time to find trades without the need for crazy valuations. Sachi points out that investors “can take the time to do due diligence on each project, but venture capital focuses on user metrics and actual adoption.”

Interestingly, this is exactly what early-stage projects find most difficult. Jaimin says, “Investors want to see exponential growth, whether it’s revenue, users, TVL, or trading volume.”

The “sustainable” growth of this market is very challenging because there is little new influx, low volatility, low prices, and overall negative market sentiment. Just selling the vision is usually not enough.” – Jaimin

Sachi optimistically concludes, “Investing now makes sense because some of these projects will perform well in the next cycle.”

In fact, I am currently researching top protocols that recently raised funding and will share in future blog posts. Be sure to subscribe to my blog.

Why do we need crypto venture capital?

In the crypto space, there is a lot of distrust, hostility, and negativity towards crypto venture capital. The main reason is apparent – they often sell to retail investors.

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Title…

Algod wrote on Twitter that the best projects will be those that have a fair distribution without venture capital, as people realize they don’t want to be the liquidity exit. In another article, he also shared that compared to 2021, venture capital will become a catalyst for bearishness because “prioritizing the community will be key, and project sales will be driven by ordinary people rather than venture capital.”

This viewpoint is also endorsed by some non-crypto investors.

For example, in an interview with Bloomberg, Jason Calacanis, an angel investor in Robinhood, Uber, and Superhuman, warns about the risk of “scam” venture capital companies in crypto, selling tokens to retail investors which could have potential consequences.

Calacanis believes that many tokens are securities sold by venture capital companies to naive retail investors. He expects companies and venture capital firms deliberately selling “worthless” tokens to face major lawsuits and possibly criminal charges.

So, can we completely skip crypto venture capital? The biggest concern is the “fairness” of “fair distribution.”

According to Anon, “fair launches are not fair because the team and insiders know about them before they actually happen, and they can front-run the liquidity.” Jaimin also shares this skepticism, saying he doubts the current launches are truly “fair” because people can manipulate them in various ways, and “dumping on each other will always exist.”

On the other hand, Etiënne from TRGC agrees and says, “Regardless of whether the launches are fair or not, the motivation to make money is the same. Retail investors are not innocent either. They are the market gamblers with less capital.”

Sachi says that although that may be the case, fair launches may be “suitable for founders with experience running crypto companies.” All the interviewees seem to believe that fair launches are a challenging game, especially for first-time entrepreneurs and those without initial resources, particularly if the project is “not an easily attainable goal,” as Anon puts it.

Personally, I love the story of fair launches. The birth of YFI and INV, the anti-financial tokens, remains one of my fondest memories of the 2020 DeFi summer. I hope to see truly fair launches in future bull markets.

But I dare say that venture capital plays an important role in the crypto space, including initial capital injection, guidance, networking opportunities, and even raising the overall industry’s credibility.

So, what can we learn from crypto venture capital?

That’s the main question that prompted me to write this blog post.

As the Bitcoin and funding amount chart shows, it’s a little disappointing to see the funding amounts follow the overall price trend of Bitcoin instead of dictating it. One would expect savvy venture capitalists to be able to predict market trends and increase funding when the bear market ends, allowing them to cash out during the bull market.

Sachi offers valuable insights:

Not all venture capitalists follow market trends. Some, especially in the US, invest based on market trends. But that’s not the case for many Asian venture capital firms—in fact, they become more active during bear market cycles because there are great opportunities.

Angel investor Anon adds that projects raise funds during bear markets, but they “announce them when it makes more sense for them.”

In addition, venture capitalists also face token lock-up periods, which make cashing out strategies more complex. I believe that investing during bear markets would enable venture capital firms to sell rising tokens when the lock-up period expires. On the other hand, if venture capitalists invest during bull markets, they might need to sell during bear markets, further suppressing the already depressed prices of altcoins.

The timing seems delicate. Mr. Anon says:

There is some uncertainty around TGE (Token Generation Events) as typically it’s the time when the countdown timer for unlocking starts. I think the big products would at least wait for the best time to launch, and if there is a good lock-up structure, there’s still a chance of making money after the cliff expires.

Sachi told me that Polygon Ventures considers the quality of the projects when considering the unlocking time and tends to prefer shorter unlocking periods. However, they also take into account the team’s degree of encryption nativeness.

Managing tokens requires skills (e.g., listing on exchanges, market-making, etc.). The more encryption-native the team is, the more likely the project is to achieve long-term success.

So, what can we learn from venture capitalists?

Etienne is straightforward:

Haha, not much.

In fact, stop listening to venture capitalists. I’ve managed to silence 95% of them on all platforms. I highly recommend the likes of Howard Marks, Nassim Taleb, Warren Buffett, Stan Druckenmiller, Ed Thorp, Jim Simons, Mark Spitznagel, and other old foxes.

There’s one exception. I only listen to venture capitalists with 30 years of experience, like Mike Moritz or Doug Leone. Not the “I got lucky with token XYZ, now let me teach you how to invest” types, as they are the worst. There’s nothing to learn from them.

Anon’s advice is simple. Don’t put all your eggs in one basket. “Even some venture capital firms make this mistake and lose a lot.” As cryptocurrency users, “we should strive to educate people about these projects, share feedback and advice, etc. This is highly valuable for advanced users.”

Sachi provides practical advice. “Asking the right questions and conducting research is important. For example, are these real user metrics? Are the founders legitimate?”

Retail investors should understand that whenever a project (e.g., a collaboration with a large company or project) announces something, things are not as simple as they seem. In the process of completing transactions and incentives, there may be many hidden activities that are not mentioned in the announcement (e.g., token swaps, grants, incentives, etc.). Retail investors should always consider whether the attractiveness of the protocol is organic and invest accordingly. – Sachi Kamia, Polygon Ventures

Jaimin also emphasizes risk management, but his final advice resonates with me.

I would also advise people to enhance their skills, read, and never stop learning. DeFi is evolving rapidly, and having knowledge in your area of interest can be beneficial: you can reason and add value to projects!

Interestingly, as I was writing this blog post, Sachi just tweeted

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https://twitter.com/0xsachi/status/1711709476879847591

NFA, but it seems that we, retail investors, can do well in the cryptocurrency field. Just like in the retail industry, venture capitalists also have FOMO and invest in hot areas. My advice is to do your research, set the narrative first, instead of following the narrative. If you want to know my approach, refer to the post below.

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