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VeradiVerdict - Issue #254
I recently gave a panel talk at REDeFiNE Tomorrow 2023 on navigating crypto investing in a bear market.
Read on for the interview transcription:
Moderator: How does the investment landscape today compare to previous cycles?
Paul: Growth funds that invested in an earlier stage than normal and took more risk on crypto are out of the market. I’m also seeing a lot of traditional VC funds backing away from investing in crypto during this time. Valuations are also dropping. We have a larger fund, and while seed rounds are still attractive, Series A’s and Series B’s are very attractive to us during this time. If you’re able to get a Series A valuation done at the same valuation that a seed deal was done six months ago, and you can get more ownership, that’s very appealing to us. We have the opportunity to make a lot more conviction bets, and hopefully find winners – many of which emerge from the bear market.
There are also more opportunities around dev tooling, bringing institutions into the space, and consumer platforms. The opportunity for more entrepreneurs to come into the space has greatly increased. Compared to the last bear market, we’ve seen many more quality teams come into the space and build. That’s been our north star during this period.
Moderator: What are you seeing on the dealflow side? Can you touch on LP discussions, valuations, and how other firms are handling this time?
Paul: For AI, it’s not just its own category – it spans across a bunch of other spaces, so it’s natural to explore what that intersection may be.
In terms of capital allocation, there is a desire to start putting fairly large pools of capital to work in crypto – especially in geographies like the Middle East and Hong Kong that are being more pro-crypto. On the investing side of things, I think there’s a lot of opportunity and it depends on what size fund and what strategy you have. If you’re a smaller fund where you can take a more diverse set of bets and conflicts aren’t as big of a factor, there’s a lot of great teams building at the seed stage.
Moderator: Can you talk more about your focused investment areas? What are your theses around those?
Paul: Things can change quite rapidly in terms of things that work and things that don’t. For us, we continue to be bullish on defi. We’re interested in how institutions will connect to defi, whether that looks like options, structured products, real world assets, etc. Middleware and lower level infra is also exciting to us. We’ve invested in Flashbots, Starkware, Alchemy, Arbitrum, and we continue to be bullish on these types of new technologies. We are also more likely to invest into a company that we think we can add a lot of value to. Pantera has built up a ton of relationships and we can help teams the most when it comes to ecosystem partners to help scale, regulations, market development, tokenomics, and things like that.
Moderator: Given the market, what’s the mentality of your LPs currently?
Paul: From what I’ve seen, when there’s a bull market and everything looks great, no one really asks about things. When the market’s down, things aren’t going well in the headlines, etc, there are a lot more questions. In general, there is a lot more scrutiny in a bear market. We try to be very transparent and hopefully our LPs appreciate that – this transparency is also very aligned with the ethos of the industry. We want to be great actors and share everything that we’re going through along the way; the more information that LPs have, the more that they can provide value in terms of portfolio help and learnings about managing assets.
Moderator: I’m curious about your thoughts on deploying capital into the secondary liquid markets. There’s a potential disconnect between the liquid secondary market, the token market, and the initial pre-token generation valuations. Do you have insight into why you’d invest in one versus the other?
Paul: In my experience, the liquid markets are a bit more current in terms of reflecting where the market’s at. The private markets take a bit more time to be reflective. Because of what’s going on in the macro markets, I don’t necessarily see the liquid markets really picking up yet. For the private markets, there’s some lag in terms of the realization that we can’t go after the same valuations; it just takes a period of time to adjust.
Paul: The liquid markets have also gotten a lot more sophisticated, and there’s also a lot more on-chain data and tooling out there. Also, because liquid markets are super fast-moving and LPs think of them a certain way, we’ve been having a separate team focus more on that side of things that can have that mentality and infrastructure to be able to execute well.
Moderator: This year and last year were a pretty challenging market environment. What do you find are the most common challenges and opportunities that your portfolio companies are facing?
Paul: One main challenge we’ve seen is around hiring. Also, some founders took advantage of the bull market and raised at a bit higher valuation that they potentially could’ve been raising in another market – that means they have a war chest to sustain them through the bear market and beyond. Deciding how to allocate the capital and what to prioritize in terms of roadmap is a big theme we’ve been seeing. Regulations are also top of mind, and there’s an opportunity to think more globally and provide more credibility and clarity as we’ve been seeing in various international regions. Treasury management is another aspect of it; teams need to decide whether to hold it in cash or diversify into crypto or other things.
- Paul Veradittakit
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.