The Evolution of Crypto Capital Markets

From my point of view, there are three core trade-offs to investing: sizing (how much you allocate to a position), timing (when you enter or exit), and your cost basis (the valuation you pay at entry). The core job of a Venture Capitalist is to balance this dynamic while predicting the future - to believe in a founder's vision before it's clear and support that vision with capital and resources. No one has a crystal ball to guarantee what comes next, so venture investments are typically smaller in size, with long time horizons, and a lower entry valuation than public market investors. For context, it typically takes 7 or more years from vintage (the 1st time the VC fund calls capital) for seed/pre-seed VCs to really return any meaningful cash to LPs (Distributions).

Over the last 20+ years, these tradeoffs have been distorted. In my opinion, legacy VC’s began to stray away from these principles due to talent patterns (backing founders with more capital who had similar backgrounds to others who have achieved large exits), technology hype cycles (dot com boom, SAAS unicorns, AI supercycle) and bull markets (high asset prices with a temporary influx of marginal buyers).

Most recently, crypto markets introduced another step-function change to these historic investment tradeoffs. Notable crypto founders have demonstrated their ability to develop products and generate meaningful revenue in shorter timeframes through permissionless smart contracts, universal token incentives, and a global buyer base. There are three core crypto accelerants to the distortion I previously described:

• Global Talent: Historically talent was concentrated geographically (SF, NY or incubators like Y Combinator), but now anyone around the world can build a category-defining company

• Marginal Buyer Expansion: Tokens broaden the universe of participants who can bid for an asset & unlock new forms of value accrual

• Potential for Faster Outcomes: Tokens accelerate the potential time to liquidity, they bypass traditional exit pathways like IPOs or M&A, allowing for earlier, market-driven liquidity

Crypto has disrupted the once-clear divide between retail and private market investors, fracturing traditional barriers at an unprecedented pace and reshaping access and participation in ways previously unimaginable. We all can see patterns in talent and hyped technology, and there is now a chance we don't have to wait 7 years for meaningful exits.... do we even need private funding rounds in crypto anymore?

Market participants have raised this concern before and I’m sure they’ll ask it again. Unsurprisingly, it often arrives when prices are high and conviction is cheap. To me, the question misses the point. What crypto founders need most are convicted buyers.

Sentiment during every technology-driven bull market is paired with techno-utopianism - the belief that a new technology will instantly solve longstanding problems without deeper structural changes. With notable projects achieving fast, large exits, the structural issue most common to crypto investors is the constant desire for a lower-cost basis.

In 2021, the crypto-native alternative to private funding rounds was DAO investments (Decentralized Autonomous Organizations). There was a popular belief that a group of friends would make joint investment decisions through a coordinated multi-sig wallet, and take on the role of VCs, funding high-risk start-ups with pooled capital. Unsurprisingly, with few exceptions, this approach has failed to date. The largest issue these DAOs ran into was coordination. Even with economic alignment, the incremental idea guy and lack of fiduciary duty made it very hard to make collective decisions on uncertain projects in a timely manner.

This cycle, with the rise of platforms like Pump Dot Fun, there is a growing desire to launch a token earlier in a project’s development and again, remove the need for private funding rounds. Essentially rebranding Initial Coin Offerings from 2017, as “fair launch tokens”. Tokens launched on Pump Fund have received a lot of flack as snipers and insiders have controlled supply and "farmed" retail for money with countless pump and dumps. I believe the issues from this cycle are secondary to my previous point, a lack of conviction.

As more tokens are launched and the crypto market matures, I’m seeing less evidence to justify another cycle where countless tokens sustain high valuations. Now, more than ever, it’s unclear if the alt season we saw in previous cycles will return. Going forward, I believe to accomplish sustained outperformance, new projects must deliver something valuable, something people truly want to use. I don't want to speak for founders, but from my experience, building something meaningful takes a very long time and is not cheap. This directly conflicts with the desire to launch tokens earlier in your product lifecycle.

Imagine you’re a founder who quit your day job, worked for months to build an MVP of your product, and launched a token early to give your community a "fair shot" at a low price...a few weeks after launch, an anonymous frog profile on Twitter with 3% of supply decides to dump your token to zero because you refused to join a last-minute twitter spaces with your “community”?

I’ll be the first to say, incentives are not always aligned between crypto VCs and founders. Too many VC’s push founders to launch tokens prematurely with a desire for early liquidity. The same imbalance is true of retail with liquid tokens, but as mentioned, it’s amplified by the breadth of holders and volatility of 24/7 crypto markets. Project quality is rarely ever radically apparent early in a start-up’s life cycle.

In my perspective, the most valuable role an investor can provide a founder is a calculated investment, strategic assistance, and patience. Valuable investors have conviction.

So what does this mean for the future of crypto funding rounds?

Tokens are one of many superpowers in crypto, but they are not the only advantage. Permissionless smart contracts still enable companies to leverage the magic of crypto without immediately launching a token and losing out on meaningful value because you’re focused on shipping more often than discord community management. I believe token launchpads that have reduced friction required to take advantage of token liquidity are incredibly productive in expanding the range of possible outcomes. I personally view them as temporary solutions that help us iterate through painful lessons to ultimately find a sustainable outcome for crypto value accrual. As we’ve seen before and are currently experiencing with altcoins today, when tough times persist, no market makers, insiders, or community can prop up a token price. Only the value of your project can instill conviction in a period of uncertainty. Because crypto markets introduced a step function change in access and economic gravity, attention and price can shift in days if not seconds. The fight for capital attention is more competitive than ever before.

Throughout all of this, I remain optimistic about our future. I believe we are very early in outlining a sustainable deal structure for early-stage projects in crypto. Considerations like investor protections, lockups and vesting cliffs, and fair token allocations are all still being worked out...and I believe with time and progressive regulation, we will identify enduring solutions where private investors and retail both win. I view platforms like Echo as a step in the right direction, where qualified investors can join private funding rounds for new startups or token projects. On Echo, Investors can also collaborate in groups to make collective investments, similar to an angel investor network but within the crypto space. From my perspective, popular crypto startups like Hyperliquid (with no VC funding and an undeniable value proposition) are exceptions to the rule, but also highlight what is possible in this new environment of crypto capital formation.

Regardless of your position as a founder, retail or VC, I believe there will never be a substitute for convicted, patient buyers willing to step in when things are uncertain. What we determine to be a fair cost basis for a project or token will continue to fluctuate, but in hindsight, I hope we’ll one day look back at DAOs, ICOs, and token launchpads the same way we view fax machines or CD players—early innovations that paved the way for something greater….stepping stones in a broader technological transformation that ultimately expand economic opportunity and improve society for the better.