Interview: Arain, ChainCatcher
Guest: Eraser, Founding Partner of Seven X
整理：Scof、Arain，ChainCatcher
During Devcon in Bangkok, Web3 asset data platform RootData and ChainCatcher jointly held the "DeInsight 2024" annual summit and officially released (RootData: 2024 Web3 Industry Development Research Report and Annual List) (click the link to view the full report and list).
This list is the second annual selection launched by RootData after its first release in 2023. This year's RootData List 2024 covers five lists, namely: Top 50 projects (completed TGE), Top 50 projects (not conducted TGE), Crypto VC Top 50 investment institutions, Top 10 angel investors, and Top 20 best CEOs.
ChainCatcher will publish a series of articles, interviewing the institutions listed on the RootData List 2024, looking for builders who have survived the bull and bear markets and tracking the latest trends in Web3.
SevenX was successfully selected into the Crypto VC Top50 and recently visited RootData Space to share its secrets to success.
Seven X was founded in 2020. In August of that year, it launched its first fund with a scale of US$5 million and an exit return rate of 700%. The dark horse projects it invested in include asset issuance platform DAOMaker and Web3 application Mask Network. SevenX Ventures currently has three main funds and one FoF, with an asset management scale of hundreds of millions of dollars. What is more special is that SevenX Ventures practices boutique investment rather than track-based players, so it proposed the "three drafts" theory + "CIVIC" model + industrial chain layout.
In this interview, Seven X founding partner Eraser shared the process of forming his Web3 investment system from the perspective of IT industry investment, pointed out that there are two main investment themes in the current market: infrastructure improvement and consumer-driven development, and predicted that the application of the entire chain will explode in the next 3-5 years.
“I personally am not very confident about the integration of Web3 projects with the real world.” Eraser also frankly stated the areas that he is not optimistic about at the moment.
The following is the main content of Space:
My computer background has enabled me to develop a systematic way of thinking about investment
Arain: Could you please briefly introduce yourself and SevenX?
Eraser: My experience dates back to before I entered Crypto. I worked in Africa for six years, participating in the infrastructure construction and investment of the Belt and Road Initiative. During my time in Africa, I witnessed many currency devaluations and hyperinflation, especially in Nigeria and Angola. These experiences made me believe in Crypto. The economic collapse and the plight of people's livelihood made me deeply realize the seriousness of the problem.
In 2017, my partner entered Crypto earlier than me and advised me to learn more about various industries. Later, we jointly joined one of the earliest funds in China at that time. In 2020, I co-founded Seven X with my two partners.
Arain: You said you have a computer background, but your first job was to invest in the Belt and Road Initiative in Africa. Why is that?
Eraser: Although I studied computer science at Nanjing University and did graduate studies at the University of Waterloo, I realized after returning to China that programming was not my strong point. Initially, I joined the strategic consulting industry and later participated in the "Belt and Road" project.
Although I am not a technical expert, I hope to think about projects, industries and investment strategies from a technical perspective. My computer background makes me pay more attention to logic and architecture, which is also reflected in our investment style, which embodies a relatively systematic way of thinking. This combination helps me find my position in the investment industry.
Looking at Web3 development from the perspective of IT investment: infrastructure improvement and consumption-driven development
Arain: SevenX Ventures focuses on high-quality investments, which is different from the general track-based investment style of early-stage investments. For this reason, you have created a theoretical system. How did this theoretical system come about?
Eraser: At the end of the ICO era, a large number of VC investment funds emerged. At that time, people did not pay attention to research, lacked investment logic, and many people just followed the trend to invest. As market returns were affected by the overall Beta, we realized that this approach was difficult to sustain, so we began to explore a set of methodologies and logical frameworks to guide investment concepts. This framework continues to evolve, including our theoretical manuscripts and judgment models. Recently, I think there are two important themes in the market: infrastructure improvement and consumer-driven development. Infrastructure is still a branch of the computer industry. We can draw on the development standards of the Internet industry in the past 20-30 years to deduce the logic of the entire industry.
I believe that the three fundamental pillars of the computer industry are computing, storage, and networking. Judging from the development of the IT industry over the past few decades, the order of development of these three is clear. First, the evolution of computing speed and paradigm is the foundation. The initial single-core computers, like Ethereum, had limited processing power; then, multi-core multi-threading and parallel computing gradually became mainstream, and some current infrastructure projects are emphasizing this. In the process of computing development, general computing has gradually evolved into dedicated computing, and the division of labor for different computing tasks has gradually formed. For example, the central processing unit was initially responsible for all calculations, and later graphics computing was handed over to the GPU. In the future, we may see more changes in hardware architecture to meet the needs of different application scenarios. Storage has also experienced an evolution from small-capacity hard disks to large-capacity storage, giving rise to new concepts such as databases, data warehouses, and data markets.
In the past decade, the industry has mainly developed around computing, but in the future it may evolve towards storage and data-related protocols. Regarding the network, I think the Web3 industry can be roughly divided into two categories: one is the protocol for cross-chain and single-chain connections; the other is the physical network connection that truly realizes decentralization. This involves many depin projects that achieve global connections through hardware. In general, the evolution of technology can refer to the history of the IT industry, but we need to be cautious about the speed and avoid going too fast or too slow. For example, investing in a decentralized database in 2017 may be too far away from the actual market demand.
The changes in the IT industry over the past 30 years are obvious, from the rise of SaaS to Web 1.0, Web 2.0, and the shift from fixed Internet to mobile Internet, all due to the continuous increase in application scenarios, which in turn prompted the upgrade and transformation of infrastructure. Before the popularization of smartphones, people could not imagine that the future would be so dependent on mobile phones. Today, it is also difficult for us to foresee that the entire Internet industry may be based on blockchain or Web3 in the next ten or twenty years. Although I don’t like the word "Web3", such a possibility exists. At present, the discussion about application scenarios is very heated. The biggest pain point facing Web3 is the oversupply of infrastructure, especially in the past year, with the collapse of several venture capital companies, everyone realized that more attention should be paid to the consumer end. However, so far, no particularly successful projects have been born in the Web3 field, and the industry’s enthusiasm seems to be refocused on the issuance of new assets or.
We have done a lot of thinking in terms of consumer logic. However, we have not yet formed a complete investment model to ensure that application investment will be successful. The success of an application is often random and does not rely solely on an idea or a new way of user interaction. We participated in Web3 social investment in the early days, including from Mask Network to Cyber Connect, and the recent investment in Blue Sky, a project incubated by the former Twitter team. In this process, we realized that current users are not concerned about improving experience or reducing costs through blockchain technology or Web3 services. Looking back at the time when the Internet first appeared, it did help people save a lot of costs, such as the way of information communication, which was very expensive at the time.
I think the core of blockchain is not to reduce the cost of the Internet, but to introduce trust and immutability. These features result in higher costs, such as redundant storage and consensus mechanisms. Therefore, blockchain transaction costs are destined to be higher than Web 2 standards. So what exactly does Web 3 bring to users? I think there are two key points. The first is cross-border payment and settlement, especially the emergence of stable coins, which has greatly reduced the complexity and cost of cross-border payments and currency exchanges. Secondly, the threshold for asset issuance has been significantly lowered. In the traditional environment, only listed companies or institutions with government endorsement are qualified to issue stocks or bonds. On the blockchain, individuals and small groups can easily issue NFTs, tokens, or publish their own works, such as music, comics, or articles through content platforms. Blockchain has significantly lowered the threshold for asset issuance, allowing anyone to issue and trade their own assets at extremely low cost. Therefore, the real cost reduction of blockchain is mainly on the supply side, not the consumer side. It makes some assets or transactions that would otherwise be difficult to achieve convenient, and even enables asset issuance without permission.
Currently, the problem we see is that consumer demand has failed to expand significantly, but assets continue to be issued in large quantities. Whether it is a new token project or NFT, the supply of assets is increasing rapidly and the cost is decreasing, but the demand is growing slowly, forming a situation of "supply exceeds demand". This leads to a misallocation of capital, with more supply than demand, causing industry disappointment and difficulty in raising prices.
Web3 may reduce costs through incentive mechanisms. By reshaping the incentive environment, people can obtain corresponding assets or rights based on their contributions to the project or ecosystem, rather than just a traditional employment relationship.
In summary, I think the areas where Web3 can really reduce costs are mainly cross-border payments, asset issuance, and incentive systems. The rest are more difficult to reduce costs, and may even increase costs. Therefore, I tend to support projects that do bring cost optimization in these areas, and will not invest in projects that increase costs on the chain.
Recently I have observed an interesting phenomenon: the new generation of crypto consumers is blurring the boundaries between consumption and investment. In Web3, we see a reverse trend similar to "consumption is investment" - "investment is consumption". For example, when people participate in activities such as meme coins, game tokens, and gambling, although they invest less and most of them lose money, they still enjoy it. These "investments" are more like entertainment consumption for them, satisfying psychological needs rather than economic returns. Therefore, in current entrepreneurship and investment, we may need to rethink how to break the boundaries between consumption and investment and make the two more integrated. By simplifying the decision-making process of investment, making it more like a consumption experience or even a form of entertainment. In this way, investment is more likely to attract mass participation and achieve wider popularity. These ideas are still in the initial stage of formation, but they are worth further exploration.
Arain: I can hear the industrial logic you just mentioned, which is basically your re-examination of the IT industry. You mentioned that computing is still the core now, so have we seen the next step?
Eraser: About two to three years ago, we began to invest in storage and data. For example, we are one of the biggest supporters of the Arweave ecosystem and have invested in multiple projects in the Arweave ecosystem. In addition, we have also supported early projects such as decentralized databases and decentralized data lakes, such as Space and Time. At the same time, we have also invested in data protocols, including RSS3 and Debank. With the increase in on-chain activities and transaction volume, the demand for data storage has also continued to increase, not only transaction data, but also other types of information. For example, permanent storage public chains like Arweave have shown demand. Early data protocol projects, such as Ocean Protocol, have not made much progress despite their attempts to promote data transactions. I think that although everyone emphasizes that data is the future and the "oil" of AI, the application and circulation of on-chain data still face many challenges.
I think the data of Web3 is not rich enough. The amount of user data and the state of on-chain storage have not reached the ideal standard. In addition, the industry itself is still in its early stages - if computing power is not yet perfect, it may be too early to invest in databases. We should be patient and observe industry trends from the perspective of entrepreneurs and VCs half a year to a year in advance, rather than rushing to chase new technologies. It is also possible that the focus of the industry will shift, such as data demand will weaken, and the combination of AI and finance will become more important, and eventually we will return to the computing field. This change in technological evolution is also reasonable.
An increasingly mature investment system: post-reinvestment and heavy position management
Arain: Can you use your investment system to evaluate the current market and several hot spots in the market?
Eraser: Here are my personal opinions. I am not very confident about the integration of Web3 projects with the real world. I think that in the next 3 to 5 years, the relationship between this industry and the traditional world will remain parallel and difficult to integrate. This is because if these projects are too radical, they will be regulated, leading to centralized control, which is contrary to their original entrepreneurial intentions.
Among our current investments, the only Depin project is IO.net. We do not view it as a typical Depin project, but more like a two-sided market project that aims to solve the problem of matching supply and demand rather than simply reducing GPU costs.
I am on the sidelines about the combination of AI and Web3. AI may become a tool, but its core concept is not consistent with Web3's solution to the trust problem. Therefore, we are very cautious about investing in AI plus Web3 projects. As for DePin, we believe that the most important thing at the moment is to connect everyone, so we have abandoned all DePin projects about data sharing. We believe that the era of data sharing has not yet arrived, and building an Internet connection service that is not affected by centralization is the key. Therefore, we have not invested in similar DePin data projects.
Arain: According to the data, SevenX Ventures has invested in hundreds of projects, which can be said to be an active investment institution in the market. Is it easy to implement this set of boutique investment theory system? What challenges and temptations did we encounter during the operation?
Eraser: This is a sharp question. As an active VC in the industry, it is difficult for us to completely ignore the industry noise and commonly followed solutions, but we insist on not investing in competitors in the same segment, or rarely investing in competitors.
For example, we were one of the first investors in YGG and did not invest in other popular competing projects afterwards. We invested only after Merrit Circle improved and transformed and was no longer in the same track. Therefore, the only principle we adhere to is not to invest in directly competing projects and ensure that our user base does not overlap with that of our competitors. However, we may consider investing in projects that are in similar tracks or have overlapping users.
Arain: This year, the number of projects we have invested in and the frequency of investment have changed compared with previous years. Can you talk about the reasons behind the changes?
Eraser: I think the biggest change is that we have slowed down our decision-making process, but the amount of each investment has increased. Previously, we usually invested between $1 million and $800,000, but now we often invest $1.5 million or even more than $2 million. This is because we have more investment opportunities, so the decision cycle has become longer, the overall number of projects has also decreased, but the shareholding ratio of each project is higher.
The reason for this change is that we realized we made mistakes before. First, as the fund size has grown, we have adopted a model based on post-investment services. If you invest in too many projects, you can't actually devote enough energy to managing them. Secondly, we have a clearer understanding of the projects we want to invest in and those we don't want to invest in, instead of trying them randomly as before. In the past, the industry lacked a clear vision and theoretical framework, which led to everyone taking an experimental investment approach, but now we have established some clear frameworks, so although the number of projects has decreased, the investment amount of each project will increase.
From an industry perspective, the total number of projects that the market can accommodate will gradually decrease in the future. Now almost everyone can issue coins or assets, which leads to dilution of attention. In the future, the market will be stratified, with a dozen competing projects at the top, some short-lived projects in the middle, and low-quality projects that are only popular for a few days at the bottom.
Arain: You just said that this is a natural growth process for the fund, and at this stage it is time to do things that are appropriate for this stage. By the way, can you share the planning and layout of future fund products?
Eraser : Our layout first emphasizes European and American infrastructure and Asian applications. European and American entrepreneurial teams focus on values and concepts, such as decentralization and community, and have strict technical requirements, but this also leads to long cycles and neglect of growth. In contrast, Asian entrepreneurs are more skilled in growth and user operations. China's Web2 applications are superior to many European and American products in user experience, which makes us believe in this strategy.
At the same time, we are also exploring more community-oriented projects, rather than relying solely on traditional VC investment methods. Over the past year or so, the view on VC coins has changed, and many people have begun to question the influence of VC. Therefore, we hope to find a better way to develop, such as leveraging community power or co-creation models, rather than relying solely on traditional investment models. This traditional VC business model has obviously come to an end.
Applying the “Pendulum Theory” to Investment Rhythm
Arain: How do you control the investment rhythm? Do you have a corresponding evaluation system?
Eraser : This is a good question, because we have made similar mistakes in our investment process. Take our fund as an example. In the second fund, we were too obsessed with so-called innovations, especially in the fields of NFT and the metaverse, believing that as long as there was something new, it was worth investing in. As a result, many projects seemed too advanced. For example, in 2021, we invested in dynamic NFTs, which may be the first project of its kind in the world, but the NFT market itself is not yet mature, and dynamic NFTs are even more difficult to gain attention, and ultimately failed. Similarly, when the industry was still discussing infrastructure construction, we invested in some applications that hoped to change the status quo, such as decentralized music streaming platforms. However, due to insufficient infrastructure and market conditions, this project also failed.
When investing in Web3 projects, we also faced the problem of timing and cycle. For example, when technologies such as AA Wallet and Paymaster were immature, we tried to invest in decentralized music streaming projects, but failed due to insufficient infrastructure. In response, we proposed the "Pendulum Theory": the blockchain industry is always swinging between centralization and decentralization, just like a pendulum swinging back and forth on a train towards decentralization.
Looking back at history, the ICO era emphasized complete decentralization, but it led to frequent project runs and lack of supervision. Then centralized exchanges rose and determined the rules for asset issuance. As centralized exchanges exposed various drawbacks, DeFi Summer in 2020 brought people back to the chain. However, the excessive derivation of DeFi brought problems, such as too many projects such as food coins and farm coins, which lost supervision, and eventually triggered the return of centralized exchanges. Recently, people's interest in coins invested by centralized VCs has weakened, and instead they pursue on-chain assets such as memes, leaning towards decentralization again. The other end of the pendulum also involves the pursuit of use value and nothingness. Sometimes the application scenarios of tokens are highly praised, and sometimes pure meme coins are popular. Ethereum has also experienced a transition from single-chain dominance to multi-chain competition. I think this industry will move forward in constant cycles and swings.
Arain: The pendulum theory can provide us with the next direction. We are now in several intertwined states. Investing in the future should be the opposite, right?
Eraser: The decentralization of Web3 is not only reflected in technology, but also reflects the distrust of authority. In the past, whether it was Binance listing, Vitalik's speech, or the investment of institutions such as a16z, they were all regarded as authority. However, people gradually discovered that these authorities did not always bring good results, so they began to stop blindly following them. But long-term decentralization will lead to chaos, and eventually new authorities will be generated, forming a cycle.
It is expected that the full chain application will explode in the next 3-5 years
Arain: Most of SevenX’s invested projects are infra projects. We have invested in applications but not many. What is our current investment rhythm for infra and applications? Regarding the future of applications, how do we determine the time nodes and take action?
Eraser: In our previous discussion, we mentioned that we started to pay attention to and invest in some applications about a year ago. In fact, we also invested in some less successful applications as early as our second phase. I admit that we were too early at that time because the infrastructure of the entire industry was not yet perfect, many L2s were not online, and L1 did not play its due role. Therefore, the focus at that time should have been on solving the bottlenecks of computing and infrastructure rather than promoting the development of applications.
As time goes by, in the next one to two years, it is expected that large-scale on-chain applications will emerge. Many projects have emerged recently, but these applications are often not completely built on the chain, but partially rely on the functions of the chain or web3, and the user experience is still mainly based on the web2 model. For example, the Blue Sky project we invested in, although it cuts into the social and content creation of Web3, the user experience is still native to web2, but it uses some assets or philosophical concepts of web3 to operate in a more decentralized way.
I believe that in 3 to 5 years, the first batch of full-chain applications will begin to emerge. We have invested in some full-chain games, and I am personally very enthusiastic about them and support their development. However, it must be pointed out that from the current data, the number of users of full-chain games is indeed not as high as those of Web2.5 games.
Arain: Just now you mentioned that when you invest in consumer applications, you will not support projects that claim to reduce consumer costs but actually increase consumer costs in the end. How do we judge whether a project is a "pseudo-consumer cost-reduction" project?
Eraser: The reason why we failed in investing in music streaming is that we only considered the needs of creators and ignored the experience of consumers. As consumers, Web2 platforms have made listening to music convenient and cheap, such as NetEase Cloud Music and Spotify, where you only need to pay a monthly fee to listen to music. In contrast, the Web3 model requires users to pay for each song, pay the on-chain gas fee, and install a wallet, which is too burdensome for users.
Our original intention was to help long-tail creators through decentralized recommendations and pay-per-view, but from the consumer's perspective, this model is neither convenient nor cost-effective. The music industry also lacks stickiness, and users can switch platforms at will, and there is little difference in where they listen to the same song. Therefore, the problem cannot be solved by changing the supply side alone. Unless we find a way to make Web3 truly improve the experience on the consumer side, it will be difficult for the music industry to succeed in Web3ization.