"Cryptocapitalism" Quartet Part 2 (Part 1): A battlefield without gunpowder—VC or token fund?
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Original source:Just Blockchain News
Foreword:
This series of articles mainly talks about my review, elaboration and thinking about the past, current situation and future of equity investment and financing and currency rights investment and financing from the dual perspectives of practitioners and scholars. This article is the second part of the series, see the first part for details"Encrypted Capital Theory" Quartet One: Token issuance, a new paradigm of financing。
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When I was starting a business, I often encountered two soul tortures that all entrepreneurs face:
(1) What should you do if a senior person from Alibaba or Tencent came out to do a project similar to yours?
(2) What should you do if Sequoia, IDG or Hillhouse invest in your competitor?
After entering web3, generally no one dares to ask me that.
The answer is simple.
For (1): It doesn't matter, just beat them. Web3 does not have Ali, Tencent, and even Facebook has not succeeded.
For (2): It doesn’t matter, users on the other side of the ocean will not start to fomo just because there is a well-known Chinese capital standing behind the project.
Here, I mean no offense to the names I mentioned above. However, compared with web2, web3 further erases the commercial moat brought by the geographical framework, and throws all projects directly into the undifferentiated international competitive market. After all, in web3, there is no such narrative logic as "Binance in the UK", "uniswap in China", or "opensea in South Korea" to describe the project.
So - when we mention the competition between VC and token fund, we have to think, who can get better deal sourcing and provide good post-investment services for web3 projects on a global scale? There is no standard answer to this, but I believe that, at least at this moment, VC friends who read this article, when competing with token fund for projects, at some point will appear to be not so smooth.
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Of course, what makes traditional VCs feel more pressured, or envied, is the astonishing annualized rate of return (IRR) of token funds, and the part of these book earnings that can be liquidized and distributed as dividends (DPI).
In a sense, 2022 is the first year for Chinese VCs to officially enter web3. I have had the honor to communicate with more than 90% of VCs in China who are responsible for web3 project Partners/VPs and token fund Partenr (Of course, I once Too). VCs, the most incomprehensible at the beginning, is that the Token fund looks at "investment" from a completely different perspective. This perspective focuses on three specific issues.
First, Ticket size (investment amount).
It can be said that the calculation method and expected logic of Token Fund and traditional VC are completely different. For traditional VCs, start-ups have to cross a single-plank bridge with thousands of horses and horses, and the mortality rate of angel round companies is too high, so they tend to invest in companies that have a high probability of passing the "fragile period" such as round A rounds. As far as token funds are concerned, 90% of the projects invested in the currency circle are in the "angel period", and the investment is in currency rights. The time window for trading from the primary market to the upper secondary market is very short. It doesn't matter whether they can stand out from the harsh competition, they just need to achieve liquidity on the exchanges during the "angel period", and most of the well-known token funds are more or less related to major exchanges. If you use the power of "post-investment service" to push it to the exchange, you will realize the benefits.
In the bull market, token funds will even make the following assumptions: we invest in a project, we need both long-term and short-term returns, your valuation should be low, and then we will build momentum together to help you quickly push the exchange , the release ratio of "TGE" (Token Generate Event) when you go to the exchange needs to be enough for us to pay back (for example, some application-type, especially common in Defi projects, the investor's partial unlocking method is TGE 20%, every three 20% per month, released in one year. Therefore, when TGE is listed on the exchange, as long as the price is raised to five times the price of private equity investors, they will complete the return). Of course, it is conceivable that such projects will fall into a long-term downward spiral after the first wave of fomo.
A more important assumption is implied here—in the currency circle, token funds are extremely aggressive, especially in a bull market, and the expected annualized rate of return for basic assets such as Bitcoin may be at least 300-500%, so for them In other words, investing in the "angel period" of the currency circle projects must be at least eight out of ten to make money, and at least one of them must be able to multiply dozens of times. Otherwise, in their expectations, why not buy Bitcoin and leave it?
Correspondingly, as long as a VC maintains an annualized rate of return of 20% for a long time, it is good enough. I have tracked well-known institutions all over the world. Of the VCs that have existed for at least 15 years, there are only a few that can achieve a long-term average return rate of 20% for each fund-this is enough to satisfy LPs.
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Changes in Coinone’s daily trading volume after cleansing in the past year (data source: CoinGecko)
From here, I have always believed that token funds generally have common structural defects-too many token funds only focus on pre-investment judgments, but do not have good selling strategies and management methods, resulting in "wasting" a lot of profits. Contrary to VC, most of the projects VC participated in will die, and only a very small part will involve listing, so the secondary market strategy can be said to be better than nothing, and the importance of post-investment management and timing exit is relatively less than pre-investment judgment . On the contrary, for a good token fund, how to realize the income at the most appropriate time point may be the root of improving performance. How to set up the selling strategy framework more macroscopically to ensure that you will not be in a hurry-faced with hundreds of Tokens in the fund portfolio that are still listed on multiple exchanges? How to better pass the latest project development information obtained by the first-level voting team to the second-level sales team and make decisions? How to give appropriate incentives to the secondary sales team? How to ensure the best risk control strategy in the 24*7 trading market?
In fact, the earnings of token funds are far less astonishing than those shown in the performance report—I believe that at the end of March, the one-year earnings performance reported by various token funds around the world to LPs, and the rest in mid-May, may be astonishing. difference of an order of magnitude.
If I have time, I will expand on the discussion below.
Second, project valuation.
VCs who have just entered the circle are often confused, why is a new crypto project worth 20 million, 40 million, or 80 million US dollars?
And more directly, they will compare the equity valuation of similar projects with currency rights—then, compared to equity, is the currency equity valuation high or low?
The answer is that it cannot be generalized.
In order to simplify the discussion, we divide the blockchain projects into three categories, and discuss the valuation range separately:
Public chain:
Seed round: 30 million-100 million
Strategic round: 60 million to 300 million
Private placement round: 150 million to 600 million
Public offering round: 500 million-1 billion
application:
Seed round: 10-40 million
Strategic round: 15 million-60 million
Private placement round: 20 million to 80 million
Public offering round: 10 million to 150 million
Equity:
Seed round: 5-15 million
A round: 20 million-100 million
Round B: 80 million to 500 million
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Comparison of different rounds of financing valuations of blockchain projects (unit: US dollars)
As can be seen from the figure above, there are three characteristics:
1. There is not much difference in valuation between different rounds of application-type currency rights projects, and basically the range shows a trend of equal-proportional growth. This is because multiple rounds of financing for currency rights are often completed within a few months or even a few weeks. During this period, the fundamentals of the project itself have changed very little, and some are only "influence premiums" and "resource premiums". , and even to distinguish investors with different priorities.
2. The valuation of public-chain currency rights projects is significantly higher than that of applications. Of course, from my personal point of view, there is no opportunity to belong to the public chain now, so I won’t elaborate further here. (For details, see "Re-discussion on Blockchain and Industrial Investment-Thirty Years of Gold"
3. The valuation range of the currency rights project throughout the financing cycle is much smaller than that of equity. In other words, the initial valuation of currency rights projects is significantly higher than that of equity projects, and the valuation of financing in the last round (before listing on the exchange) is significantly lower than that of equity projects in the later stage. So in layman's terms, currency rights projects are "expensive first and then cheap".
Regarding the third point, the currency rights project actually transfers the ability of the equity project to continue financing in the future, thus realizing the liquidity premium in advance. Low financing ratio in exchange for better room for growth in the secondary market. We will expand on this in detail below.
This is why, as an equity financing company, NFTGo is not very interested in domestic token funds.
Because—refer to the figure above, from the perspective of valuation range, it is basically impossible for token funds to understand projects with an upward price of 100 million US dollars, and it seems that they are not suitable and have no plans to issue coins.
But is this really the case? In the next article, maybe you can find some ulterior hidden ideas.
However, currency circle projects sometimes deliberately lower their primary market valuations in order to gain more traffic and room for hype, because only in this way can they create enough potential to ensure that the exchange recognizes its "hotness", more directly , which is equivalent to exchanging valuation for liquidity.
This is the ultimate strategy of some marketing-heavy currency rights projects to seize the market - to conduct early rounds of financing at a valuation significantly lower than the market average to attract more support. And this kind of project usually has dozens or even hundreds of "investors". For example, a project with a valuation of 20 million US dollars only finances 15%, but the amount is divided into 100, so that the global token funds and "community investors" can quickly understand that this will definitely make money in the shortest possible time. And there are rare goods to live in, so hurry up and participate. After all, the key to making those kols and communities deeply bond with you and continue to help you promote is not how much you pay them for marketing fees, but to let them skin in the game, and an easy game.
Also, the price of some projects’ public offering rounds may even be upside down from the prices of previous rounds of private placements. too much.
Even, for exchanges, they will basically have ecological funds, allowing them to participate in the investment, which will be more closely tied to the exchange, and it is not more happy to see the results.
Of course, this kind of project definitely does not have the role of VC. Token funds often fight to grab the "quota" of tens of thousands of dollars in this kind of project, and they will definitely not be able to get financial investment.
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Third, the number of participating institutions.
On the other hand, what is often despised by traditional entrepreneurs and VCs is why does the web3 project need a large list of names of investment institutions?
In fact, this is a necessary product of localization. When a project needs to expand the market as quickly as possible, increase the fan base of the community, and find funds with sufficient localization capabilities in various regions. Often, the strongest features of these funds are local connections, resources, and publicity capabilities.
For example, some names are very important in the core circle of the currency circle, such as coin98 in Vietnam and 4SV in South America, but even most people who work on web3 projects often only focus on A16Z and Paradigm. names while turning a blind eye to developments in other non-English-speaking countries.
In the same way, we look at it in reverse. Compared with the stock market, the most important exit path is IPO-the most important indicator of domestic A-share listing is profit, the most important indicator of Nasdaq listing is technology, and the currency exchange is the most important. What matters is flow.
So, nothing more than that, the names of some funds are piled up in a pile, and the signal to the outside world is very clear-this is a project that is widely welcomed by communities all over the world.
Please keep in mind that the core of a web3 project is not the size of the company, not profit, or even technology, but the community.
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In fact, for Lao Leek, from the financing valuation and methods disclosed by a project, it is basically possible to guess whether it is financing currency rights or equity, without looking at its financing institutions.
It's a gut feeling.
Therefore, thinking in reverse, when we do our own blockchain projects, should we choose currency rights or equity financing?
Or, to make it more complicated - first currency and then shares, or first shares and then currency?
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