The crypto venture capital industry has become more picky thanks to the overall market downturn and shaky confidence caused by a series of scandals and market disruptions, but investors in Big companies are still writing checks in the space.
Amid market volatility, decentralized finance, or DeFi, is an area that continues to be in focus both in the crypto VC world and across the community as use cases, protocols, and projects continue to grow. New born.
Some investors we surveyed said that between 20% and 50% of crypto-related pitches today are DeFi-focused. That shows that there are a lot of DeFi projects looking for funding.
“To stand out in this crowded space, founders should focus on highlighting their unique technology and clear advantages for them,” said Alex Marinier, founder and general partner of New Form Capital. a specific use case, as well as a defensible moat.
Ultimately, DeFi is a mirror of traditional finance (TradFi) and founders with deep expertise in TradFi, along with a fundamental understanding of blockchain will stand out from the crowd, says Paul Veradittakit, for general partner at Pantera Capital, shared.
Last year, the crypto world was faced with a large number of industry change event like Terra/LUNA ecosystem collapse in May and cryptocurrency exchange FTX collapsed in early November. Both events knocked out a lot of smaller startups and big players interspersed with now-defunct market players.
As the market moves into the future, some venture capitalists are refining their investment strategies, while others are keeping their current plans, perhaps with a slight tweak or two. Read on to find out how active investors are thinking about DeFi, how they advise companies in their portfolios amid a lack of capital, how best to approach them, etc
We surveyed:
- Michael AndersonCo-Founder, framework joint venture
- Alex Marinerfounder and general partner, New form capital
- Samantha Lewisprincipal, Mercury
- Paul Veradittakitfortifications, The capital city of Pantera
- David Ganfounder and general partner, Cryptocurrency OP
- Mike giapapafortifications, galactic venture
Michael Anderson, Co-Founder, Framework Ventures
How big is the DeFi market today? How much do you expect it to grow in the next five years?
When thinking about the DeFi market, we look at the total market capitalization of DeFi assets, total value locked (TVL), and trading volume. While total value locked (TVL) as a metric certainly has its flaws, we think it’s still a reasonable measure of performance in this area. As TVL increases, we also think total market cap could increase as well.
We are closely monitoring relative industry performance, such as transactions, volume, and users, compared to centralized alternatives such as exchanges. Despite the negative sentiment around crypto today, we still believe that activity will eventually return to the industry. However, after all these dramatic centralized finance (CeFi) booms, we think the next time users decide to enter the space, they will think twice about trusting a company. company or CeFi exchange and choose to use decentralized protocols instead.
What are the biggest challenges your company faces in 2022? What steps are you taking to better prepare for 2023?
As with most investors in the space, our biggest challenge has been navigating the seemingly endless CeFi setbacks and failures that have rocked our industry. We were able to avoid most of these explosions as we passed a number of FTX ecosystem projects.
As a result, the Framework hasn’t been hit as hard as many of the major VC firms in the space, and we’re in a pretty solid position to continue deploying capital into this new market.
These CeFi incidents have caused a lot of collateral damage across the industry, so a key priority over the past 12 months has been to make sure all the companies in our portfolio are up and running. , is liquid, well capitalized and can last for the next 1-3 years. This means helping founders in our portfolio cut costs, prioritize high-growth operations, and provide advice on future products, growth, and fundraising strategies. a less friendly funding environment.
All in all, our stance is to validate our core arguments for the past 3 years and we’ll continue to double down on DeFi, web3 games, etc. Given that many other companies aren’t actively investing. At this time, we see this market as a great opportunity for the Framework to selectively deploy capital.
How are you advising the companies in your portfolio in 2023?
We are working with them to cut costs and focus on survival for the next 1-3 years. We believe in crypto for the long term, but we don’t know how quickly the market can recover and so survival must be a priority.
We also encourage founders to think more strategically about project development. If a team is focusing on three different areas, we encourage them to prioritize only the activity with the highest growth instead.
Of all the pitches you receive, how many are DeFi protocols or projects? What can they do to stand out in the broader crypto landscape?
Today, about 30%-35% of the pitches we receive are definitely DeFi-focused.
If a DeFi project wants to really stand out, we want to see that they are thinking about the direction of the ball. We are looking for potential regulatory compliance projects. It wouldn’t start if the team didn’t think about the rule or think they could figure it out from start to finish.
In addition, we are interested in projects that have a direct connection to organizations or at least a compelling growth strategy involving organizations. We don’t think the retail industry will provide projects with a large enough market for DeFi in the next two years, so creating something that appeals to organizations should be a more core focus. before.
We also like to see that the project is differentiated from a product perspective. We’re not interested in another Uniswap clone or a flavored Open Sea clone of alt-L1 week.
What is your current strategy for investing in DeFi protocols and projects? How has that changed compared to previous quarters?
In 2020, during the peak of the DeFi summer, the market is large enough for projects to attract retailers and DeFi developers [a nickname for people interested in risky, niche, speculative crypto projects]. The market is completely different now.
Unfortunately, retail activity exploded in various ways last year, and they are unlikely to bounce back in the next few years. As a result, we are focusing more on projects that are thinking of addressing new, more institutional markets and users.
We understand that regulation is likely to come, so we are very interested in projects that are pro-regulation or at least regulation-friendly.
What kind of DeFi use cases do you think will be more commonly adopted in the future? What areas of DeFi are now considered more important than before?
With Consolidation officially behind us, liquidity betting has become an area of great excitement for us. We think liquidity staking projects will get more attention once Shanghai goes live and users have the opportunity to withdraw their assets without worrying about liquidity.
How to bridge the gap between traditional finance (TradFi) and DeFi?
We need to see more DeFi products and services that are more realistically tailored to organizations. This means that projects that have pro-regulatory elements baked into the product, including KYC, the ability to limit certain assets, etc. unlike the traditional DeFi that we are familiar with and will coexist as a relatively different ecosystem.
How do you think the regulatory framework could affect the DeFi space? Which country or region seems to be moving in the best direction?
At some point in 2023, we will have the landmark regulation of cryptocurrencies that everyone has been waiting for years. More clarity can be very positive.
We don’t take a firm stance, but on the surface it looks like the UK is quickly becoming one of the most open countries, from a thought leader perspective.
How do you like to receive pitches? What’s the most important thing a founder should know before they talk to you?
We really like a good storyline. We want to know why you’re dealing with this, why it needs to be addressed now, and why you think you can beat the others. Competitive advantage is key for us.
Alex Marinier, Founder and General Partner, New Form Capital
How big is the DeFi market today? How much do you expect it to grow in the next five years?
The DeFi market is currently valued at around $50 billion TVL. In the next 5 years, we expect the market to split into two categories: permissioned and unauthorized.
Permitted DeFi will gain traction among institutions, because it combines the benefits of blockchain technology with the compliance standards of traditional finance. If only a small percentage of traditional financial activity moves on-chain, it could create a market opportunity worth more than $1 trillion.
When you add in permissionless DeFi, which is more personal-oriented and makes up the majority of DeFi today, the combined market has the potential to become worth between $500 billion and $2 trillion by 2028 .
That said, DeFi’s growth will depend on more than just an increase in use cases. It will also be affected by the development of infrastructure, regulation and financial innovation.
What are the biggest challenges your company faces in 2022? What steps are you taking to better prepare for 2023?
Navigating the famous crashes (Terra, Celsius, FTX) is definitely the focus of 2022. We must spend more time supporting our founders and making sure they have enough runways to take over. endured a prolonged bear market.
This year, our focus is on helping founders find innovative ways to grow through this market and position themselves for the next bull market. We also focus on sourcing opportunities with attractive valuations and incubating more in-house projects.
