Original Author: Berber Jin
Original title: "Benchmark's Approach to Crypto Takes a Page From Web 2.0"
Compilation of the original text: Haillsman, chain catcher
Well-known venture capital firm Benchmark is known for its early investments in startups such as eBay and Uber. In recent years, Benchmark has also begun to turn to the encryption market, investing in encryption projects such as Chainalysis and Sorare. However, Benchmark did not devote itself to the crypto investment frenzy like other venture capital firms such as a16z, but has its own set of investment methods and rhythms in the crypto market.
Recently, The Information interviewed Sarah Tavel, general partner of Benchmark. In the interview, Tavel elaborates on what it means to venture into the growing crypto market and how some early-stage major investors are adapting in a crowded environment of multi-billion dollar funds and specialist VC firms.
She also touched on topics such as the prospects for DAOs, how more traditional startup structures could work in Web3, Benchmark's take on tokens, and the VC Twitter debate, and more, with the full interview below.
The Information: There seems to be a divide among cryptocurrency investors, with some investors not only buying tokens but also assisting governance teams and protocols, and the other being traditional VC investors like Sequoia Capital and Benchmark. Do you think traditional VC will inevitably evolve into the former?
Tavel：I think that's a real divide. When you look at these crypto-native companies, you will find that very few of them are going to build long-term consumer relationships and cultivate long-term customers. This group of people is articulate and seems to have superpowers when explaining things. This is a very specialized field, very different from previous ideas of building persistent consumer networks.
I really believe that for the web that people are now calling Web3, still a consumer-owned web, the consumer-biased part of the crypto space, it still needs to be the same as the typical, persistent companies that are today (Web2.0) Same, same skills.
So you want to ask these web3 companies to have skills that are very similar to Web 2.0. However, in this very professional, smart contract-dominated world, you need to master more professional knowledge, with skills such as liquidity mining and governance. It's a very different field for me, and I admit I don't really like it here yet.
The Information: What are some areas of crypto that more traditional VCs like Benchmark are focusing on? What is beyond the scope of ability?
Tavel：Sorare and Chainalysis are two crypto companies we invest in that are a good representation of the types of investments we make. Also, I made an unannounced investment in a Web3-like gaming company. These projects are all investment types within our super territory.
This type of company will build a team that has a centralized aspect, either as a team or part of the infrastructure, but also participates in the decentralized infrastructure. As you can see, Sorare and the NFTs they sell, or in the case of Chainalysis as a major infrastructure player in the space.
Of course, we are also investing in companies with token components, and I just did a case. But if you want to ask me as a consumer, not me representing Benchmark, I personally don't tend to lean towards new DeFi protocols, this is not my world. As much as I don't look at lending startups, this is new territory for me.
Likewise, the company I just invested in will have a centralized team, at least in the short term. Parts of the infrastructure will be centralized. And I think we'll come across more companies like this in the future because it's a more practical way to build the consumer experience.
The Information: How has your experience as a consumer, investor, changed since last year’s cryptocurrency boom?
Tavel：For me, when I started working at Benchmark, I was already "suffered" by the "red pill", as they say. Starting with Benchmark, all I wanted to do was spend all my time on cryptocurrencies. So I read as many white papers as I could, joined white paper reading clubs, talked to really smart people, and unearthed early protocols. This actually led to my first investment in Benchmark, Chainalysis.
Then I realized that I was actually a consumer-oriented investor. I usually think about consumer use cases, it seems too early to make such an investment, the crypto world has to build the infrastructure. So I spent the next few years going back to the markets and the internet and doing some more traditional investing.
Then in the fourth quarter of 2020, I began to understand information about NFT, and also listened to more and more developments.
As an investor, this was a profound moment because it opened my imagination to new types of consumer experiences. These experiences can be realized in unprecedented ways and new economies through NFT, digital ownership, consumer ownership of the network, etc., even before blockchain and smart contracts. So, from there, I started to grasp the thread, then we invested in Sorare, and then I started spending more and more time in the crypto space until it became everything I did.
So, most of my current time on new projects is spent finding companies that have some kind of decentralized infrastructure that they use to create new consumer experiences.
The Information: What do you think of venture capital firms like Andreessen Horowitz or Spark Capital investing in DAOs? Would you consider investing in The DAO?
Tavel：We haven't made similar investments yet, but we don't object. DAO has some very profound things, but I think it is more appropriate to ask more questions about DAO, its limitations, and discuss the scenarios where DAO is most applicable, rather than DAO being a "panacea" as many people describe. I have looked at some DAO organizations, and I am also looking forward to and excited about the development prospects of this field.
The Information: The likes of Sequoia Capital and Lightspeed Venture Partners went on a deal spree last year to prove their commitment to crypto investing. What do you think about this?
Tavel：There is indeed a deal frenzy. But our structure is different, we have a total of five partners, each of whom makes one or two investments per year.
The Information: So you don't think Benchmark should raise more money or make more investments?
Tavel：No.
The Information: How do you see the looser ethos among crypto founders with decentralized operations, and are you skeptical of venture capitalists who want to take significant ownership in their companies? How do you see the evolution of VC-founder relationships, especially in the crypto space?
Tavel：It feels like this question is a little bit back to the "difference" mentioned at the beginning. I think there may be different cultures, crypto-native, protocol-level types of companies, founders, etc., the ethos there has its own culture. We can go back to the beginnings of cryptocurrencies, Bitcoin, which was created in the opposite way to what happened in mainstream centralized systems, i.e. banks were kicked out. It was created to contrast with the centralized way of doing things.
A lot of what's been happening on Twitter lately is... this kind of antithetical stuff. Twitter and social media often exaggerate the opposite because when you're limited to 280 characters for this type of conversation, misunderstandings happen naturally. There will always be those pockets. In regular, traditional companies, there are founders who are self-reliant and self-made. That's how they want to build their company. Of course, there will also be companies like Sorare, OpenSea and Axie Infinity. A large part of the valuation of this company comes from the board of directors and investment. Like all things, there is no single culture.
The Information: How do you think cryptocurrencies have changed venture capital?
Tavel：That's definitely changing. For example, crypto companies may need fewer funding rounds and raise less money, but they can get some early access through NFT pre-sales (purchasing NFTs for blockchain-based games or networks that are still in development) funds.
But there are also companies, like game companies, that do it for years before releasing a game. There has to be venture capital up front, they need to have a board, because before something can be sold, some foundation has to be built.
The Information: There is a lot of excitement about early-stage crypto investing, but there aren’t many examples of successful access to public markets. What does this signal?
Tavel：We can look at it separately. One, it takes a long time for these companies to mature to the point where they are ready to go public. For example, Coinbase was founded in June 2012, and some of the recognized companies that can go public are relatively recent. Take Chainalysis, for example, which was founded in 2014 and has been around for seven years now. Usually listing takes more time. Fireblocks is another, and they're relatively new.
One, it’s still early, and the second is that crypto companies have other financing mechanisms. If you are an on-chain crypto company, then there may not be a need to go public because there is already a liquid market. But I also suspect that in the next few years, we will see a large number of crypto ecosystem companies going public.
The Information: Do you think there will be a place for consumer startups that don’t use blockchain technology in a few years’ time?
Tavel：I don't know, many things are uncertain. However, I'd love to believe that the next wave of iconic consumer companies will have Web3, that is, their infrastructure will incorporate some aspect of decentralization that will enable consumers to take ownership of the Internet or these digital assets. Because that's what I focus on.
The Information: Is there anything else you would like to add?
Tavel：I also want to emphasize that we don't throw the baby out with the bathwater. Is the way to build things centrally perfect? Of course not, Web3 has a decentralized architecture and can give users network ownership or digital asset ownership, which is a profound change. But it's not perfect either.
The competition among start-ups should not be a competition to compete for decentralization, but a competition to create user value. Decentralized infrastructure must be a means to achieve this goal. If we think this way, we will start to realize that we should actually embrace the Web 2.0 world more, rather than blindly rejecting and resisting it.
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