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VeradiVerdict - Issue #235
I recently spoke to the Stanford Blockchain Club Accelerator (specifically Gil Rosen, who runs the accelerator) about a number of topics surrounding blockchain ventures, including fundraising, team formation, and how crypto ventures compare to non-crypto ventures. Listen to the full video:
Read the highlights here:
Gil: Regular ventures tend to have their own lifecycle of raising pre-seed and seed capital, as they look to identify options for product market fit and build out their product. Blockchain is a different beast and I’m sure you've seen it evolve over the last decade. What do you think is currently a sample lifecycle for a blockchain venture from ideation to launch?
Paul: Early applications around crypto revolved a lot around exchanges and brokerages, and if you look at that segment, it's the only one that's actually reached a growth stage. Coinbase, Binance, formerly FTX, Kraken – these are all ways to get fiat into crypto, and that's the first step to educating people on cryptocurrencies.
The strategy that we've taken is really to focus mostly on the early stage unless we see a clear breakout of a category that we believe is going to be here for the long term.
Less capital goes into token rounds, especially in a bear market. What we see is probably anywhere from two to three rounds for token projects. The first round is a product or a whitepaper, and the second round has some traction and then you might have a pre-launch round. The time to token launch has just been extended.
Folks have also been trying to get the community involved in these fundraises too in order to help make the product better – there's just a lot more alignment overall.
Gil: Can you describe a bit more what companies look like when you give them their first check or second check? What types of people are on the team and what stage are they at?
Paul: In terms of team, the pre-seed is usually a CEO and CTO. You're betting on him/her to be able to build a team and be able to make sure they successfully get to the seed round. A common team structure is having a business person and a technical person. If the project is consumer-focused, I think it's good to have a designer, either as an advisor or as part of the founding team, because designing a user experience is such a big deal.
For a token project, there should be a technical whitepaper or a litepaper, especially if there’s a moat around the technology. If there's not a moat around the technology, then just having a deck is fine. It's even helpful to have Figma and screenshots to give people a sense of what you're trying to create and some sort of tangibility there – that's probably enough for a pre-seed.
Gil: If you’re building a technical project that will have a token in it, do you generally expect the tokenomics to be solved at that point, or are you seeing that pushed off to a later stage?
Paul: I would say having the idea and having a sense of how value accrual will happen is more important than figuring out the exact tokenomics right away.
Gil: What do teams generally have to accomplish before the next round?
Paul: In the seed round there will generally be a bigger team – up to 5 to 6 people. Usually it’s composed mostly of developers, and the product will be a bit more built out and may have some early design partners if it's enterprise or maybe a beta where there is a whitelist or a waitlist. You really do have a product that you can play around with and test out and be able to get some early feedback on.
The project might actually have some significant traction by the seed round. We're seeing some seed rounds that are around a couple million, but we're also seeing some seed rounds that are 5 or 6 million.
Some folks can go straight to the seed round, but those ones are entrepreneurs that probably have a little bit more credibility and a track record where you feel comfortable with a higher valuation and letting them be stewards of a larger amount of capital.
Gil: What are some valuation ranges that you're seeing in pre-seed and seed now vs nine months to a year ago?
Paul: The later the round, the greater the discount right now. That discount lowers as you get earlier because there's more VCs that are focused on the earlier stages or can go earlier. Everyone can go earlier, but not many can go the other way around. I'd say the discounts shrink all the way down to maybe like 30% to seed or something like that. Right now, I'm starting to see pre-seeds going from around 6 to 13 million. I'm starting to see seeds go from 13 million all the way up to 40 million post. On the Series A, it can go from around 40 million to 200 million.
One way to think about it right now is when we were in more of a bull market, we would see companies diluting themselves in around between 5% to 10%, which is not that much compared to the norm, but in a bear market where investors have a little bit more leverage, we're starting to see dilution between 20% and 30%.
Crypto has also expanded beyond just crypto VCs – we now see a lot of traditional VCs that are looking to space. There's now an opportunity where if you are doing something that crosses between crypto and non-crypto, you can actually have co-lead scenarios where you can get two fairly prominent firms and still get them in for at least 10% each.
Gil: So post Series A, what kind of trends are you seeing?
Paul: Post Series A varies the most. You can have someone that previously sold a company for hundreds of millions of dollars who is launching a new company and you just jump straight to Series A.
The normal Series A would be companies that really demonstrated product market fit and you really can do things like look at different cohorts and really understand what the retention is and what the average customer value is and lifetime value is. You can actually just dive into the data a bit more and really understand if they are leading a certain category, what their competitors look like, and what the team looks like. Hiring is a bit less risky, technology has been battle-tested, and you feel like the team has a good shot at winning their category.
On the token side of things, it becomes a bit more of a gray area where it could still be very early and you would hope that they were able to test out their product with something like fake token testing or being able to get a certain list of beta customers. But again, you can't really go public until the token launch. Really some of these Series A's are to really just get the right strategic partners involved and those that can only invest into a private round or are highly likely to invest into a private round. A lot of these Series A's are done by either the larger funds that really want to double down into existing winners or feel like there's a lot of potential here and enough has been de-risked for them to put in quite a bit of capital.
Then you see how the community is taking the project and you really start to see where the token price is landing.
Gil: How do you think about product market fit in the current climate versus the bull market? How do you disentangle speculation frenzy and interest in just appreciating tokens versus utility of an actual platform?
Paul: If you are investing at the earliest of stages, then you can take a little bit more of a flyer on the space. But if you are investing into Series B or Series C, then you really have to think about how big this space could get based off of market size. And if you're going into the infrastructure side of things, then it's really a bet on the space and the team versus if you're betting on a specific application.
If the product is only enticing with the token, the team should really figure out product market fit before laying on a token, because the token should not be a reason why a product is being used.
Gil: We've got a bunch of teams that were building last year and folks that started six months ago that now are potentially considering pivots. What are some ideas that a year ago you would've been excited in investing into that now you're not? As people reassess the market, I think this will give them good insight into things that aren’t as viable in the current market.
Paul: Anything consumer related is pretty tough right now, especially in areas that haven't been proven out in terms of having some fairly large winners, at least from a revenue or evaluation perspective. Decentralized social is interesting though.
Gil: What's the typical runway between pre-seed and seed and also seed and Series A?
Paul: I think the runway probably decreases the earlier the stage. If you're doing a pre-seed, you probably don't need as much runway considering the milestone is not as large and the valuation is not as large. Versus if you start getting into Series A, then you might want a little bit more runway because it gets more competitive and you have to start spending on acquiring users and things like that. I'd probably say it ratchets up in terms of length of runway – the farther along you get, the expectations and the competition just kind of increases.
I'd say at least a year for pre-seed, 18 months for seed, at least 2 years for Series A at least a year. And if you're in a bear market, then just add an extra like 25%.
Gil: What are common failure points for blockchain ventures and things that you've seen that have killed a venture?
Paul: I think first is managing burn, which can be very difficult in crypto because the highs are highs and you can really think that you're having product market fit. You can just be spending just a ton of money on acquiring users and doing all of that – and then all of a sudden the lows are really low and fundraising becomes a lot harder. Everything just gets compounded when you have a token involved too, and so it can be really tough to just manage burn when the market comes down.
Another thing is regulations, that's something that’s really tough to control. If you know that it's an area that could be heavily regulated, it is about not being afraid to pivot away if things are not looking good.
The last thing is around timing: sometimes it's just too early for certain use cases. Sometimes it's too early for voting on the blockchain. In 2017 when we were betting on NFT companies, it was just too early – the awareness of crypto wasn't there, the brands weren't there, the influencers weren't there, the infrastructure wasn't there.
A great example is Circle. They started off in 2014 and they were competing with Coinbase and it looked pretty good but it was a little bit of an uphill battle since they started a little bit later. They decided to move away from crypto, and they luckily got back into crypto at the right time with the right idea. I think all those things that they did to figure out USDC was helpful and gave them the runway to finally get to USDC. It's those types of founders that can really quickly figure out if something's working, and if not, move on to something else and just keep being persistent.
Gil: If you are in a market that you think you are too early in, should you then pivot to something else completely, or should you try to vertically integrate to try and drive demand for this thing?
Paul: I think it depends on your runway and how confident you are that this market will pick up within a certain amount of time, and then you could at least build up a brand and build up the relationships and the infrastructure so that when it does pick up, you're ready to go. But some folks don't have years of runway when they raise capital, so if that's the case, then it's really just about surviving.
And again, there's multiple spaces that are going to be successful, so you may just move on to a space that is successful and maybe there's an opportunity to go back to that previous space.
Gil: Do you think that since we're moving into a more heavily regulated environment that people should spend more time on the regulatory side or really just build something that people love and figure that out after?
Paul: It depends. I'd say if you're doing something that is fairly similar to what has gotten scrutiny, then I think you better spend a bit more time on the regulatory side. For instance, if you’re investing into a stablecoin (that may or may not be algorithmic), you probably want to spend a bit more time educating investors and other folks that this will fly versus something there hasn't been a lot of guidance in, then you might have a little bit more of a leash. So I think it really depends on the sector and what's been done so far.
In general, I would say in this environment, the more validation you have on the regulatory side of things, the easier it's going to be, especially if you're in the US.
Gil: What are your thoughts on the biggest gaps or critical challenges that teams could work on? Is it infrastructure that just isn't performing or is too expensive? Is it dev tooling that is just really difficult to build anything viable? Is it the user experience or is it that we just haven't found a real world use case that really could operate at scale for value to push adoption?
Paul: I think it's twofold. I think we definitely have to continue to build and make it a lot easier for developers. What stems from that is better user experiences for both retail and institutions.
New technologies like zero knowledge will be interesting. I think the other piece is really on the education side. When there's something that is picking up traction, it's really about being able to educate folks on why blockchain is necessary and being able to flesh out different use cases so that it's understandable for people.
Part of it is hopefully going to be non speculative use cases, but once we do hit some of those, then it's really just education on the market so we can improve upon the brand since the space has a brand problem right now.
Pantera Capital Puerto Rico Management, LP and its affiliates (“Pantera”) makes investments in crypto assets and in blockchain-related companies. Pantera and/or its affiliates or personnel may be an investor in, or have relationships or other business arrangements related to, certain instruments, companies and/or projects discussed herein. This document does not contain any advertisement for Pantera’s investment advisory services, or any other services or products, whether provided by Pantera or otherwise. The information and opinions presented in this document are solely those of Paul Veradittakit; they do not represent, and should not be interpreted as representative of, the views of Pantera or any other individual working for Pantera, and do not represent investment, legal, tax, financial, or any other form of, advice or recommendations. Neither Pantera nor Mr. Veradittakit is acting, or purports to act, as an investment adviser or in a fiduciary capacity with respect to any recipient of this paper. Information contained in this document is believed to be reliable, but no representation is made regarding such information’s fairness, correctness, accuracy, reasonableness or completeness. There is no obligation to update this document or to otherwise notify a reader if any matter stated statement or information contained here changes or subsequently is shown to be inaccurate. Nothing contained herein constitutes any representation or warranty as to future performance of any financial instrument or company. Forward-looking statements should not be relied upon, and performance or outcomes may differ materially from what is contemplated herein. Opinions included here incorporate subjective judgments or may be based on incomplete information. This document does not constitute or contain an offer to sell or a solicitation to buy any securities or a recommendation to enter into any transaction, and no reliance should be placed on this document in making investment decisions.
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Hi, I’m Paul Veradittakit, a Managing Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.
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