In-depth analysis of Multicoin Capital: How to become a contrarian investor?

特邀专栏作者

2022-04-06 02:34

This article is about 10392 words, reading the full article takes about 15 minutes

The author of this article disassembled and analyzed Multicoin Capital's investment theory and its internal processes in detail.

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The author of this article disassembled and analyzed Multicoin Capital's investment theory and its internal processes in detail.

See the success of Multicoin Capital from four major bets

Original title: "Multicoin Capital: How to be a Contrarian》

Compilation of the original text: Lynch, Chain Catcher

Step 1: Form an Investment Thesis

Of the various ways you can compare VCs, one of the most illustrative is to place them between "opportunistic" and "theory-driven."

Opportunists believe that fundamental innovations cannot be predicted. The best way to recognize this ignorance is to find visionary entrepreneurs. The most basic gesture is one of reactivity and receptivity: you are keen to be surprised by ingenuity and to evaluate what comes before you. As Multicoin co-founder Tushar Jain described it, it’s no different than “swiping on Tinder.”

Theory-driven investors take a different approach.By researching a particular market or trend, this type of investor works on a particular point of view that they consider predictive.Once formed, theory-driven capitalists look for investments that match their mental models. Investors hope that by developing a point of view, they will better understand where to start and which factors to prioritize.

There is a huge gray area between these two poles: opportunistic financiers may prioritize certain areas, while even the most theoretically oriented capitalists must have some flexibility.

Multicoin is at one end of the spectrum. As Jain puts it, “We started with theory first. A lot of investors said that, but we took an extreme form.” Indeed, Jain emphasized,The company's first task is to develop an investment plan, not to find investment objects:

"I often joke with our investment team that it's not their job to find good investments. I don't care if they have good investments. I want them to find good investment theories. It's just that we happen to invest in their views Monetization."

Jain sees this framing as fundamentally pragmatic: "The person who forms the theory is more valuable than the person who finds the investment, because you may get multiple investment opportunities because of it, so it is more important to know what is what."

"What is really needed?" Multicoin's theory starts from here. It’s worth noting that, as is the case with both hedge funds and venture capital, businesses operate as a single team executing a consistent strategy across different divisions. During our conversation, Samani and Jain told me about how they built a new perspective for Multicoin.

First, they identify a promising market.This might start with a high-level perspective, for example, by first picking a track like The DAO, and then zooming out to refine the target. Once the target area is identified, Multicoin starts trying to understand the "hierarchies" and "design decisions" in this space. How will different teams approach related opportunities? Why would they use a particular tech stack and not another? What choices and compromises do they need to make? According to Jain, the trade-offs are particularly important:

"It's helpful because when you're operating at the edge of what's possible, there's often no right answer, and that's a tradeoff."

Once planned, Multicoin will focus on the most exciting elements of the design space, looking for "big and targeted bets."While this may sound like a trivial addition, it is crucial to understanding Multicoin's strategy. The agency clearly does not want to make a fuss about a particular market or business model.

"We don't like to say, P2E is fun, so let's invest in P2E projects in India, the Philippines and Argentina," said co-founder Kyle Samani. "We have no problem being in a red ocean market," he added, "but if we're really going to enter a red ocean market, we need to be very clear why our investment team can take a unique approach to building a structural trench that ultimately produces scale. return."

This commitment to accuracy is one of the key strategic differences between a fund like Multicoin and one like Tiger. While both are theory-driven, Tiger focuses on macro trends; when it finds one that it thinks is working, it invests iteratively across the market. The investment type of Multicoin is more like a surgical operation.

For example, in late 2020, it released the article "Trade-offs in the Decentralized FTX Space". Written by Tushar Jain and Spencer Applebaum, it outlines the opportunity for a "decentralized FTX" and discusses the pros and cons of different approaches. Jain and Applebaum highlight ten characteristics needed for a decentralized derivatives exchange, including the ability to channel liquidity and enable "moderately high" leverage.

Four months after Multicoin published that article, the firm announced their investment in Perpetual Protocol because they believed Perpetual met several of the metrics outlined by the team, such as providing deep liquidity and high leverage.

In this regard, Multicoin seems to have perfected a kind of "venture showcase", using its blog as a vision board to call out the startups they want to see. Scanning the blog content, you will find that there is a very direct connection between the initial statement and the final investment. Discussions of decentralized storage turned into investments in Arweave, and thoughts of speed and scalability turned into investments in Solana.

The pattern shows that Multicoin's description of itself as theory-driven is definitely not empty talk and has been borne out by the portfolio it has built.

While the fund prefers to operate with this research-before-deploy approach, its partnerships say there is flexibility. Samani explains it this way:

"We're strongly inclined to invest with a theory of how the market will play out and why a certain team will win. But we also don't think there are certain markets where we can make that determination with firmness."

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Step 2: Find Opportunities

Once Multicoin has an investment thesis, it starts searching for suitable companies.

Since its inception, most of Multicoin's efforts have been focused on developing "interest marketing". From the beginning, Jain and Samani understood the power of building an audience and recognition, which has helped the company establish one of the best crypto-minded approaches in the space. Multicoin has continued this strategy and even expanded its reach.

In 2020, Mable Jiang created the company’s Mandarin-language podcast, noting that it has become the #1 crypto show in China. According to Jiang, the English version has also attracted many audiences in Vietnam, Thailand and Singapore.Project Galaxy CEO Harry Zhang said he discovered the fund through Multicoin’s media activities, “I read the research papers published by Multicoin and they are really good.” He added that Multicoin is an “obvious” Tier 1 player in the Chinese market.

The audience of Multicoin is not limited to traditional media. It is most active on Twitter, especially Samani. As mentioned in a previous post, Multicoin's somewhat hyperbolic claims may be misleading to some, but this seems to be a somewhat deliberate strategy.

A version of the agency's 2018 annual letter, released publicly, noted that Samani and Jain "regularly use Cunningham's Law,"Meaning the best way to get the right answer on the internet is not to ask a question, but to post a wrong answer.Samani reiterated his interpretation of the 2018 annual letter, saying: “A large part of my tweets is a fishing game, and it is very effective.” Samani and Multicoin also seem to have relatively moderated this behavior in the past two years.

A relatively new source of potential projects has emerged thanks to the company's close collaboration with Solana. In an excellent marketing move, the high-speed Layer 1 is building "hacker houses" around the world, and Multicoin exists almost everywhere it is located. As Solana's next generation of developers develop, many will naturally move to Multicoin.

As you might expect, a great deal of opportunity comes through traditional marketing efforts. This is both passive and active. On the one hand, everyone at Multicoin focuses on diverse reading, and Samani is also prolific. According to him, he starts reading at 6:00 a.m. for 4 hours every morning, filling his company Slack channel with content.

Samani subscribes to a large number of newsletters, reading as many as 30 a day. These often come from companies he has talked to and hopes to continue to observe, as well as the work of other investors and thinkers.

Samani pointed out that he spends no less than an hour a day on Twitter, which in his view is not a waste of time because the Twitter algorithm has been very effectively adapted to his taste.Analysts and colleagues at the firm also hang out on Discord or Reddit in search of opportunities. Additionally, the team at Multicoin iterates on its views by talking to other investors and builders.

In addition to these efforts, Multicoin is also doing business in the most primitive way: going out to solicit. Especially in the early days of the fund, both partners were traveling around, expanding their networks and meeting budding builders in the industry.first level title

Step 3: Evaluation

Once investors have had the opportunity to evaluate projects, the real work begins. Due to its theory-driven roots, Multicoin has a special lens for evaluating transactions.

In our discussion, Samani mentioned Marc Andreessen's classic article "The only thing that matters", in which the founder of a16z believes that between the team, product and market, investors should pay attention to the market. Multicoin agrees with this sentiment, but has some points of its own:The market is important, but even more important is understanding how the market will work.

For its evaluation, Multicoin looks at how well a project maps to its market perspective. Does it have the advantages that Multicoin considers to be the most important? As the market space evolves, how will it evolve? Samani talks about the importance of answering these questions:

"We spend a lot of time talking about how we think the market is going to work. What do we believe, what are the probabilities?"

Our goal is to ensure that Multicoin fully takes into account the maturity process of the investment, as well as the possible second and third order effects of initial success or failure. Most importantly, this assessment appears to be at the heart of the fund's evaluation and, as we will discuss later, it is a focus of investment committee meetings.

Samani said,“Multicoin spends surprisingly little time on the team and product compared to market evaluation”. In part, that's because great entrepreneurs often have a hard time explaining the novelty of their projects.Samani said: “I find that most of the time, entrepreneurs can’t express their views clearly.” As mentioned in the previous article, Solana founder Anatoly Yakovenko is an example.

In addition to these factors, the team also evaluates the systemic advantages that the business may have.Samani and Jain present network effects and psychological arbitrage as interesting lenses for evaluation.

“I think most people misunderstand them,” Samani said of network effects. “Most of the time, when people mention network effects, it’s overstated. Then there are a couple of times when people dramatically underestimate it.” Portfolio company Helium is one example, and its network effects may still be underestimated. As nodes enter the system, the performance and functionality of the decentralized wireless network increases.

Although not a Multicoin investment project, Samani pointed to PoolTogether as an example of psychological arbitrage. The protocol offers a gamified savings product: users have the opportunity to earn bigger rewards by depositing money. Since this reward is generated through DeFi staking, even those who did not win can get their money back and get the native token POOL to participate. The longer you deposit in PoolTogether, the more POOLs you earn.

If a potential Multicoin investment project has a gross negligence, it will be considered a "first order error". In short, the team decided that the product in question didn't make sense and was fundamentally flawed in some way. Multicoin takes this assessment seriously, with Jain describing himself and Samani as people who value “first-order principles.”

The rigor with which Multicoin made this decision led to missing out on quality projects including Uniswap and Yearn Finance. Both have entered the top 100 projects by market capitalization from relative obscurity.

While it might be sad to miss out on a groundbreaking project, Multicoin doesn't mind. To Samani and Jain, both projects still had a first-order error.In Uniswap’s case, Multicoin argued that the protocol was an invalid price fix and that the fundamental mechanics of the system meant it could never increase transaction fees.

“All other things being equal, if Uniswap increases fees, the system stops working,” Samani said. “If this happens, token holders will likely be heavily parasitic on market makers and buyers.” Jain added: “There can be no parasites in open source systems, they are forked out.”

There is a similar logic to Multicoin’s skepticism towards Yearn, but it’s also different. Yearn explicitly charges fees, though Jain doesn't believe the revenue is sustainable. “Today, people are willing to pay YFI fees,” he said, referring to the Yearn token, “but it’s irrational. The market always tends to be rational in the long run.”

A corollary of disciplined investing is that you must accept missing out on opportunities that do not align with your views.first level title

Step 4: Debate

If an investment is deemed promising, it eventually goes to Multicoin's investment committee. While many VCs hold similar conferences, it is essential to the way Multicoin works. In pursuit of deeply researched, conviction-forward investing, Samani and Jain put new positions in a challenge designed to expose risks and blind spots.

According to Mable Jiang, everything will start with the content, which is “the most important thing for Multicoin”. First, team members produce a memo outlining their views, especially concerns about the market and its development. Anyone can come up with their investment ideas, whether they are investors or not. "Our hierarchy is very flat," says partner Matt Shapiro.

Once the document is in place, other members of the team are encouraged to read it, comment on it, and offer different perspectives. From asynchronous debates to intense synchronous meetings. Partner and Head of Communications John Roberts (JR) Reed spoke about this, saying:

“Decisions are made with friction. Sometimes there are heated arguments. Sometimes people need to leave the meeting or change the way they communicate—from verbal to written to verbal. But through all the heated discussions you come to the strongest idea."

For Jain, the key to having a productive conversation is to "disagree often and get dissented well." You might be wondering how to go against it nicely. For Multicoin, it boils down to two main factors. First, "You need to fundamentally respect others" and believe that they have valuable perspectives to share; second, "You must be curious." Specifically, Jain noted, "you have to be willing to keep asking, what am I missing? Until you get to the root of the problem. You just keep peeling it back layer by layer."

Not every debate can be resolved. In these cases, Multicoin seeks a solution of belief, not consensus.

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Step 5: Win

Arguably, there is no venture capital market hotter than cryptocurrencies right now. Sector-specific funds like Paradigm, Electric Capital, and a16z are all scaling up; new entrants like Haun Ventures have entered the race with deep pockets; and traditional players like Bessemer and Bain have decided to enter the fray.

How is Multicoin deployed to win compared to a fund with a bigger team and more capital? In part, it does so by cherry-picking lesser-known arguments and identifying promising projects that other funds have already passed on. As mentioned in previous articles, Solana, Helium, and The Graph all went through difficult financing processes before becoming big hits.

When Multicoin does play a role in the "red ocean market", it relies on a few weapons. The first is its real interest and expertise, especially in the circuit where the project is located. Samani:

"One of the things that you'll probably hear a lot about us is whether we end up investing in it or not, we're usually asking some of the toughest, nuanced questions about how the market is going to go. We're really going to Put pressure on them. It may be the most effective tool to win investment contracts. Its founders will realize that these issues force them to think about the market in a way that they never had before.”

Multicoin also recognizes that venture capital is a service business. "Entrepreneurs want investors to move at their speed," Jain said. To accommodate this speed, the Multicoin team has made itself widely available for all investment projects and aims to be as responsive as possible.

Multicoin is reluctant to pull one lever to win deals: valuation.In order to maximize the potential of the Grand Slam, Multicoin wishes to maintain pricing principles. Of course, every rule has exceptions. “It’s very clear to me and the team that there will be a time or a place where valuation insensitivity exists,” Samani said. Such incidents happen rarely, about once a year by his estimate, but when they do come, the team throws the rules away.

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Step 6: Scale

In order to counter the high valuation of the benchmark Serum, Samani pointed out that the fund has "proactively" adjusted their positions. This involves another critical step in the Multicoin process: deciding how much to invest in a transaction.

Part of the reason Multicoin has been so successful is that it had the guts to make concentrated investments. According to Jain, the confidence to take these positions can be traced back to the research on Step 1: "An understanding of the market space involved and the trade-offs involved gave us the confidence to go big.", when its managing partners were bullish Multicoin tends to make the largest investments when .

Jain said about him and Samani."That's why we're confident in sizing our positions aggressively. I don't think we've had any big wins without scale."

Another oddity is that hedge funds allow Multicoin to be shorted, even though the fund is shorting them less and less often. Considering that there are so many hyped scam projects in the crypto space, you might wonder why. In fact, Samani mentioned the value of shorting in exposing bad projects, especially those that rely on unsustainable economic models.

“Shorting is a very interesting way to beat a Ponzi scheme,” he said, citing the recent project Olympus as an example.Multicoin’s short selling isn’t limited to potential Ponzi schemes. In the past, it has successfully shorted Zcash, Monero and Ripple.

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Step Seven: Actively Support

Multicoin is not a lazy investor. It is constantly and proactively looking for ways to help its investment projects think and execute better. Efforts in this area are varied, but it starts with putting portfolio companies first. Samani said:

"We're always going to share ideas or news events with them. It's not like 'Oh my god, this is a competitor, they're going to kill you' kind of thing. What’s more, we’d send a text message to our portfolio companies saying, “Hey, I saw this article and it reminded me of something you’re working on. This is something you might want to consider.”

Entrepreneurs spontaneously support this statement. “They’re always thinking about how they can help without you asking,” says Harry Zhang, Project Galaxy CEO. Samani adds that although about 80% of his messages are likely to be “everywhere Don't go," but that doesn't matter."I want them to know that I'm watching them. In 20% of the cases, the news is still useful."A 20% success rate is pretty high, considering Samani estimates he sends about 20-plus messages like this to portfolio founders a day.

While Multicoin uses percentages when providing advice, it also provides more tangible support. In particular, Reed, a partner at the fund, provided strong marketing and PR help. LP Adam Mastrelli called Reed's addition in 2018 "a milestone" because he brought new value. The founder of Multicoin confirmed this statement.

The Graph's Tegan Kline called Reed an "incredibly smart guy," while Solana co-founder Raj Gokal said he shared "everything we know about PR, marketing, product launches, and community management." In the often confusing crypto world, having someone who understands the technology and can create a compelling message is extremely valuable.

Another way Multicoin provides support is by helping the project expand to China.Since hiring Mable Jiang in 2019, the company has established itself in China's crypto ecosystem. For example, during Solana's 2020 Asia tour, Mable Jiang used WeChat and Chinese social media platforms to help it develop a "hyperlocal" articulation strategy. It also includes business development introduction to help Solana recruit Chinese talents. Eighteen months later, Mable Jiang pointed out that "Solana's popularity in China has increased a lot". Additionally, Mable Jiang provided similar value to Helium and The Graph, helping both projects recruit regional staff.

Multicoin's ability to offer support across continents is a rare advantage. No other U.S. cryptocurrency fund has such an established base in China. Samani commented on Multicoin’s approach:

“The crypto capital market is inherently global. We realized this early on and tried to help all the companies we invest in by integrating the primary culture within our team.”

In addition to PR and China market expertise, Multicoin seems keen to generate value in other ways, depending on the circumstances. For example, as mentioned in a previous post, the team was instrumental in helping Helium define its token structure.

Finally, Multicoin seeks to advance the company by advocating for progressive crypto regulation. Last year, former Chapman and Cutler partner Greg Xethalis joined Multicoin to run the in-house legal function and direct the firm’s Washington-based efforts. Xethalis was previously involved in the first Bitcoin ETF proposal and has represented several prominent crypto operators in the space for over 9 years.

During our conversation, he noted that Multicoin “wants to be involved in relevant policy decisions in Washington.” In particular, he outlined two priorities. The first is determining how bitcoin and other digital assets should be treated from a tax perspective. The second is to create a framework for network startups and DeFi to help the industry grow, although there will be "certain guardrails (referring to regulation)".

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Step 8: Actively Follow Up

Some decisions you have to learn the hard way. In 2019, Multicoin bought Binance’s native token BNB early on. Given that BNB rallied more than 6,300% over the next three years, this was a huge deal. However, Multicoin misses some benefits. “We adjusted our positions so fast that it kept going up,” Jain recalls with a sigh, “and some more, but we could have made more money and it made a huge market. We Learned, you need to let your winners run free."

Fortunately, this appears to have been an isolated lapse in judgment. Overall, Multicoin tends to hold its winners rather than lighten up. As mentioned earlier, Multicoin purchased Solana’s tokens from other investors early in the project, when many had lost faith in it.

Summarize

Multicoin Capital has earned one of the rarest honors in venture capital: bucking the trend. It has a history of picking non-consensus investments and being proven right. It will take more than a blatant Twitter presence, funky marketing or provocative meetings to make it happen, but an agency that adheres to the most fundamental principle — thinking for itself.

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