This audio is from Jason Kam, founder of Folius Ventures, participating in X Space organized by RootData. Wu Shuo has authorized it to be reprinted.
Jason said that he has hardly made any investments in recent months and is not that optimistic about the cycle. In the past, if the initial investment was less than 50 million U.S. dollars to achieve a 10% market share, and then the project team conquered the exchange, it would even have no products. As long as the popularity rises, how to list the game on Binance, you can get excellent book profits; after everyone understands this routine, you will find that there are many standard game-building projects; the industry has an oversupply of projects that do not have the ability to create blood. In addition, the lack of buying in the secondary market has led to the current situation; DISCORD, Telegram, and even games on X have great opportunities, and there is a high chance that a platform similar to 4399 mini-games will grow on TG.
About Jason and Folius Ventures
Ruby: Good evening everyone, and welcome to the first space event in the Crypto Financing Lesson 1 series hosted by RootData. I am the host Ruby, and tonight’s topic is “Thriving Through Bulls and Bears: The Wisdom Behind Tier 1 VC Investments.”
We are honored to host Jason Kam, founder of Folius Ventures. Jason graduated from Carnegie Mellon University and worked on Wall Street. He entered the Crypto industry in 2018 and created the Twitter account @MapleLeafCap. It now has more than 45,000 followers. Jason will share with us his investment experience and investment amid market fluctuations. Insights into future trends in the crypto market.
Could you please briefly introduce yourself and Folius Ventures?
Jason: Hi everyone, my name is Jason. Folius Ventures was founded in September 2021. It was interesting at the time. After my 2020 DeFi Summer, two friends Ben and Santiego suggested that I create a fund because the market desperately needs more attention to the Asia-Pacific region, especially entrepreneurs with unique backgrounds.
In almost three years since its establishment, we have managed funds ranging from US$220 to US$230 million, with a team of five people, mainly in Asia, including Shanghai, Shenzhen, Hong Kong and Tokyo. We are different from other institutions in three ways. First, although we have made fewer investments in the primary market this year, we have invested more in the primary market in the past two years. We are a primary and secondary mixed investment fund. The amount of a single investment in the primary market is generally between US$500,000 and US$4 million. We can lead or follow the investment. We have larger positions in the secondary market, where we can buy mainstream assets like Bitcoin and Ethereum, as well as invest in small-cap projects like Pump.Fun. We have a very open investment strategy.
The second difference is that we have always preferred entrepreneurs from the Asia-Pacific region. Between 80% and 90% of our investments are in the Asia-Pacific region.
Thirdly, most of our investment cases focus on the application layer, such as centralized exchanges, SaaS software, mobile application games and other consumer-oriented products. It is a great honor to be invited to participate in this event.
Ruby: We have noticed that Folius Ventures is still active in the current market environment, especially investing in some well-known projects in the seed round. Could you please share your reasons for continuing to invest in such a market environment?
Jason: Actually, our investment pace has slowed down a lot this year. In addition to We.Rich, MegaETH, Catizen and WSPN are our recent cases, but in fact many projects have completed financing last year, but the news has only been released recently. We have been investing less and less since March this year, with almost no investment in recent months. This is similar to other peers. We are cautious mainly because we are not optimistic about the market cycle. The model that most VCs used to profit from rapid IPOs and exits over the past few years is changing, requiring a recalibration of strategies.
Secondly, we prefer investment in the application layer, but good opportunities are hard to come by, and the emergence of entrepreneurs also has certain volatility. The combination of these three factors has slowed down our shots this year. Of course, the timing of financing disclosures is not determined by us, so it may give people the illusion that we make frequent moves, but in fact this is not the case.
How should the current VC investment model be reconstructed?
Ruby: You mentioned that Tier 1 VCs currently generally adopt a wide-net approach and plan to list on CEX within 6 to 12 months. You think this investment exit method needs to be restructured. So, what would your ideal VC exit model look like?
Jason: First of all, I want to take a step back and talk about it, because in the past, this industry had a "cool secret." In the early stages, if the project valuation is less than 50 million US dollars, you can invest in it and capture 10% of the market share. As long as the project side can overcome the listing problem on the exchange, it does not even require an actual product, as long as there is enough market popularity, and If someone is willing to pay, this exit cycle can be calculated on a monthly basis. In other words, if you invest now, the project will be listed on the exchange three months later. The liquidity brought by the exchange and the intervention of early traders will enable early investors to obtain extremely high book returns.
If these early private equity investors not only invest in the name of the company, but also gain market share through the project party through advisory agreements, pledges or airdrops, and can even unlock it during TGE (token generation event), then the entire exit cycle will be very complicated. short. Even if there is a standard cliff period (usually 12 months), in many cases the project will pay back investors in the first month, and the rest will be profits.
This strategy became popular around 2019 and 2020, and today everyone has clearly seen this pattern. There are even many projects that have to operate according to this model even if they are not aiming for a quick exit. We estimate that in the next 6 to 12 months, there may be 50 to 200 projects valued at more than $500 million, all of which are aiming to be listed on exchanges.
However, the problem is that after these projects are listed, their circulating supply may only account for 2% to 10%. Without exception, these projects will face the unlocking of a large number of circulating disks within 1 to 2 years after listing, growing from 2% to 10% to 20% to 50%. In other words, the circulation plate may increase by 5 to 10 times.
If more projects are listed in the next six months, the supply of circulating disks in the market will increase rapidly. But I don’t think Crypto’s secondary market has enough capacity. We have observed that the amount of funds willing to bet on non-Bitcoin and non-Ethereum assets is far lower than the scale of fundraising in the primary market. Therefore, I think the dilemma facing the entire industry is: insufficient hematopoietic capacity, oversupply of projects, and insufficient buying in the secondary market. This is one of the main reasons why we have slowed down our investment pace.
Thoughts on the recent tension between retail investors and VCs
Ruby: Recently, there has also been increasing discussion about the tension between retail investors and VCs, especially the rise in FUD sentiment. Retail investors appear to be becoming increasingly unfriendly towards institutional investors/VCs. How do you see this relationship developing in the future? What role will VCs play in this?
Jason: In fact, when you invited me here today, you also hope that I can talk about my views on this issue in a more "authentic" way, right? I try to tell everything I know and share it sincerely. Regarding the relationship between VCs and retail investors, I think the first thing to say is that this binary opposition is not completely absent in the traditional financial market, but it is relatively "soft". In the traditional market, as early-stage angel investors, VCs provide funds to help the company grow, and the company continues to raise funds until it exits in the secondary market. The difference here is that traditional markets such as A shares, H shares or US stocks have a relatively mature secondary market, and the company itself has a clear profit logic, and this profit can be reflected in the value of the equity.
Therefore, when a company is listed, retail investors will not feel that they are "taking over" for VCs, because the listed company itself is valuable and has clear profitability. This makes the relationship between retail investors and VCs less tense than in the traditional market, and everyone's interests are more aligned. In the Crypto industry, this relationship is different.
Why does "bad money drive out good money" appear?
Jason: In the Crypto industry, there is a problem of "bad money driving out good money". I think there are several main reasons. First, as we discussed before, the liquidity of the market is easily manipulated and the exit mechanism is relatively simple. This environment allows many scammer projects to easily enter the market, which is a common problem.
But there are two more core reasons:
After adding Web3 elements, it is actually very difficult to create a long-term sustainable business model that is not affected by market cycles. If you believe that a token can capture value, this value capture is cyclical and highly volatile. A project's revenue can drop by 80% in a market downturn, which takes a big hit to valuations. Therefore, even if you buy a value project recognized in the industry, such as BNB or the tokens of a large public chain, these assets will be hit hard when switching between bull and bear markets. This has also led many people to believe that the tokens invested by VCs are not of high quality.
Although some project parties have excellent business capabilities, they are not necessarily willing to reflect this value on their tokens. The industry does not require project parties to do this, and even if they want to, they will have to face the supervision of the US SEC. If a program does very well and even falls under SEC jurisdiction, it could lead to bigger problems. This results in companies that are truly valuable often unwilling to issue coins, while those companies without a business model are willing to issue coins, creating a situation where bad coins drive out good coins.
In addition, the current common token design model in the industry is also one of the problems. Typically, token design will allocate more than 50% of the market share to the community, 20% to 25% to the team, and the remaining 20% to 25% to investors. This is an industry practice. If it is not followed, both the exchange and investors may be dissatisfied. However, the purpose behind this design is to avoid touching the SEC’s definition of securities, because the SEC prefers to identify centralized tokens as securities.
However, the problem caused by this design is that in order to meet the high valuation requirements of VCs, many project parties will issue tokens when the circulation is low and the valuation is high. Such a design makes it difficult for the business growth rate to exceed the inflation rate of the token in the early stages of the project, resulting in the token price being sold off.
Nonetheless, I think that if a project can have a sufficient unlocking mechanism and the growth and value capture of its core business can exceed the inflation rate, then these tokens still have investment value. Sorry, the answer is a bit long.
Use Pump.Fun and Banana Gun as examples to analyze different project operation models
Ruby: The projects you mentioned that are unwilling to issue coins may indeed be because they have stronger business capabilities. For example, projects like Pump.Fun have strong revenue and do not need to exit through issuing coins. Although projects like Banana Gun have their own revenue logic, they still choose to issue tokens. What do you think of these two types of projects?
Jason: My view is that capitalization is really one of the best ways for a team to monetize their efforts for many years to come. In the Crypto industry, if a company is an industry leader, has high attention, and can convince the community that its business model is sustainable, it can obtain a high valuation by issuing tokens.
However, the project party needs to consider whether capitalization will affect the advancement of the business. For example, if Pump.Fun issued a token and was valued at $500 million or $1 billion, but then competition emerged, say someone launched Sunpump, causing Pump.Fun's revenue to drop, the valuation could drop in a matter of days fell 40%. Additionally, the SEC may consider this conduct to involve an unlicensed issuance of securities, causing problems for the project.
In contrast, smaller projects like Banana Gun have issued tokens, but their size is smaller and may not attract regulatory attention. If it wasn't targeted at US users, there would be relatively few problems. Therefore, whether to issue tokens depends on the project's business model, market size and dependence on the US market.
There are so many projects on the market that retail investors don’t know what to buy
Ruby: Many projects on the market now seem to be very "copycat". As a retail investor, I really don't know what to buy.
Jason: That's a real problem. I have made some statistics before. Although they have not been updated for a few years, according to my observation, there may be 20,000 to 30,000 tokens on the market now, of which there may only be 2,000 to 3,000 projects that are truly substantial. And of those projects, fewer than 50 may have real long-term value capture potential. These projects not only have actual business models, but also perform well in terms of user volume and cash flow capture.
Many large Layer 2 projects are good examples, where cash flow is often allocated to equity rather than token holders. As a VC, in the early investment of these projects, you can usually make profits through advisory agreements or airdrops, while retail investors can often only withstand the downward pressure after the tokens are sold off. Therefore, shorting these projects through defunding may be a good choice.
Folius criteria for evaluating projects
Ruby: In the current market environment, project valuation is becoming increasingly complex. So, when you evaluate projects, what changes have you made compared to before? Do you have any new standards or methodologies?
Jason: I think the project can be viewed from two perspectives. First of all, it depends on the project party’s ability to do two things:
Their ability to do things means whether they can execute it, whether they can implement business logic, whether they can attract users to use their products, and whether they have cash flow thinking. This is about the ability to get things done, which determines whether the project can survive.
Their ability to "make plans" and tell stories determines how well the project can survive and whether it can obtain high valuations in the industry. To put it simply, the former determines whether you can live, and the latter determines how well you can live.
If a project does well in both aspects and has a leading position or is the only player in its segmented industry, then I will feel that this is a project worthy of early intervention. Such a project has a high probability of crossing the bull-bear cycle. Even if it is stuck at a certain node in the current market cycle, we will be willing to invest.
To take a step back, if the project party is strong in execution capabilities but not very good in storytelling and game planning, then they must hit a very strong demand market, or be on a track where the value has not been fully exploited. Even if the performance of the project's official website, resources, and founders are not that outstanding, as long as the business itself can make money, especially if it can capture the mass users of Web3 and generate cash flow, we will still consider investing, but exiting from such projects is possible. There will be some uncertainty.
As for those companies that specialize in making games and telling stories, these types of companies are very common in the industry. Many times, they cannot clearly say what their physical business is, but they focus every day on how to push the project onto major exchanges such as Binance, provide an exit channel for all participants, and increase valuations. The risks of such projects are too great and there are too many uncontrollable factors, so we usually will not participate. After all, it is difficult for us to access the core level of game making.
Therefore, if a project has neither strong execution nor the ability to tell a story, it will be difficult for us to take action.
Ruby: You just mentioned that you prefer investing in long-term projects. When choosing to invest, do you pay more attention to the team or the project itself?
Jason: That’s a great question. To put it simply, adults don’t make choices, it’s best for both the team and the project. You need both a great team and a great project, ideally both.
Continue to be optimistic about the application side, especially small games
Ruby: I find Folius Ventures’ investment approach unique. I kind of want to follow your investment portfolio and buy it.
Jason: Actually this is a common idea, but I would like to remind you: even for the companies we invest in, the risk of loss is still very high when they first start issuing coins. When many companies issue tokens, their circulating market value is very high, but the tokens are unlocked too quickly and there is great inflationary pressure. Therefore, although we try to select teams that have a long-term spirit and can ride through bulls and bears, we cannot guarantee that each project can avoid the inflation problem in the market when the token is issued.
Ruby: Got it. Which tracks do you think will be innovative next? What directions will Folius Ventures focus on?
Jason: Our investment style is a bit unique, even a bit "weird". An LP once told me that no other GP has invested in the projects you have invested in. Maybe it’s because we often like projects that look “weird” (laughs).
I think the industry infrastructure is mature enough, but there is still a lot of room for optimization in user experience (UI/UX). If there was a company that could actually do this, we would be interested. Many of the investments and evaluations we are making now are to prepare for the next market cycle and promote more people to use Web3+ products. I have always believed that the reason why the application side did not take off in the past was because the support of the industrial infrastructure was insufficient, not because there were problems with the ideas themselves.
On the ToC side (consumer-oriented industry), we are now focusing on several points:
Projects must be able to touch upon human weaknesses, such as greed, addiction, and even the vanity of looking better than others in a game. These human weaknesses are often the driving force for consumption, and consumption behavior can make the value delivery of the project away from pure speculation.
Platform-wise, I think things like Discord, Telegram, and even small games on X have great opportunities.
We have invested in many projects in the past that rely on economic models to attract users. Some Ponzi-like projects are prone to collapse at a certain node. In the future, we hope to look for projects that have entertainment properties and can create consumer behavior, even if they rely on some kind of financial reward mechanism.
In addition, we hope that the project can generate network effects and user groups during its development, which is the key to long-term value. We are particularly optimistic about ToC products that combine human vulnerability, traffic, and Web3 elements.
For example, we like the Catizen team very much. They have been working in the ecosystem for a year and a half. We believe that a product like the 4399 mini-game platform is likely to appear on Telegram in the future, and Catizen has the potential to occupy this position. If they can maintain long-termism and keep improving, the market will recognize them.
Additionally, projects like WSPN are promising. Considering that the market capitalization of Tether and Circle has reached US$100 billion and US$30-40 billion respectively, I think there will be opportunities in the future to transfer the equity of stablecoins to users in the form of tokens. This industry needs a team with both industrial appeal and implementation capabilities. Perhaps Richard from Binance is a suitable candidate. After all, BUSD has reached a scale of US$20 billion before.
There are also projects like the Puffpaw project on Berachain, which is a Web3-supported e-cigarette project that involves product design, aesthetics, D2C consumption (direct-to-consumer sales), and how to integrate with Web3. There are challenges in every link, but the tobacco market is in urgent need, especially for smokers, and consumption will continue. Therefore, although this type of project is very challenging, it is also worth trying.
The Solana ecosystem has strong potential
Ruby: Yes, e-cigarette projects like Catizen and Puffpaw on Berachain are interesting. Recently, Solana ecology has also been a hot topic. Some people think that it is like the previous BSC chain, which will not be mentioned again after experiencing the carnival of memes. Jason, what do you think about the future of the Solana ecosystem?
Jason: First of all, we can take a step back and look at what kind of public chain is attractive. A successful public chain or Layer 2 needs to have very strong investment and service capabilities. It not only needs to attract developers, but also thinks about how to make companies in the ecosystem profitable. This may involve legal currency exchange, optimization of user experience, especially reducing the threshold for users to enter the ecosystem and the friction of use.
On a technical level, I think that in addition to independent innovation, public chains also need to have a certain degree of "borrowing". There is no need to stick to sectarian opinions. Whatever technology can promote the prosperity of ecological business should be adopted. Ultimately, the criteria for evaluating a public chain should be the degree of friction for users to enter the ecosystem, the amount of funds, the real interactions of users, and the application experience on the chain.
From this perspective, Solana is undoubtedly one of the ecosystems that is currently performing very well. I think it has a place among the top five public chains. The Solana team, especially Lily (Chairman of the Solana Foundation) and her team, have done a very solid job in promoting the implementation of the application. They are always thinking about how to better serve applications and users.
In addition, Solana’s ecosystem also includes Telegram and Coinbase. Such as Telegram’s Wallet Stars, full-chain applications on Coinbase, and fiat currency deposit solutions. While some projects like Blinks are underperforming, gadgets like Tiplink still demonstrate Solana’s potential in supporting on-chain business systems. If Ethereum does not make further efforts in this regard, it may lose its competitiveness in the next cycle and even be forgotten by the stage of history.
Therefore, in general, the Solana ecosystem has great potential in terms of business implementation and user experience, and if other public chains do not keep up with this pace, they may gradually fall behind.
It is recommended that entrepreneurs make use of multiple ecological resources as much as possible
Jason: Regarding the founders of the project, although the current "chain abstraction" technology is not yet fully mature, the founders still need to choose which chain to stand on in the early stages. For example, the development of the TON chain is very difficult, and even developing small games on Solana is easier than on TON. Although Solana has higher requirements for programmers, developers in the EVM ecosystem are relatively easy to find. However, developers in the Base ecosystem may sometimes be aloof and pay little attention to entrepreneurs. Each chain has its own problems.
My suggestion is to try to avoid completely binding yourself to a certain chain before the closed loop of business logic has been run through. The ultimate direction should be application agnostic. But this does not mean that entrepreneurs cannot take advantage of the resources of the Layer 1 or Layer 2 ecosystem. On the contrary, we should seize the opportunity and make use of as many ecological resources as possible, whether it is financial support or technical support. Even if you want to take sides, you can gather resources first and then consider other directions after the project scale increases.
The market will continue to reshuffle over the next 18 months
Ruby: Last question, I would like to ask you to give everyone some confidence in "recharging". As a primary investor, how do you think the next bull market will be different from the past? What do you think of future market trends?
Jason: If you remember 2019 or earlier, it was relatively easy to invest in Tier 1 projects. At that time, the number of Crypto VCs was not as large as it is now, and the projects on the market were limited, such as The Graph, Circle, FTX, etc. At that time, the entire market was so small that even an intern could study all the projects in two weeks. Most investors also focus on the secondary market.
However, from 2019 to 2023, you will see a large influx of entrepreneurs into the Crypto industry. Many people come to start businesses partly because they truly believe in this industry, but it is undeniable that many people also have an opportunistic mentality. Behind the scenes, investors including us have also entered this market in a big way.
As a result, the number of projects that can truly capture long-term value has not increased significantly, but the number of projects that want to be listed on exchanges, issue coins, and cash out has surged by 10 times, 100 times, or even 1,000 times. Under such circumstances, if the market is not as liquid as it was in 2021, the result will be increased pressure on the entire industry.
Currently, if you remove Bitcoin, Ethereum, and StableCoin from the Crypto market with a total market value of 1.1 trillion U.S. dollars, and then remove some old projects that survived the previous cycle, such as Dogecoin and $ADA, the remaining Altcoin market may only be 150 billion to 150 billion. $200 billion. The market value of this part of the market has fallen below the level at the beginning of this year. If another 20% of new projects enter the market, and the circulation of each project increases by 50% to 100%, the result will be an average decline in the Altcoin market between 15% and 80%, which is what we have seen this year. to the situation.
Jason: I think the market is going to experience continued disruption over the next 18 months. Many VCs need DPI (dividend multiple), so they will sell the tokens when they get them, and the project team is also in urgent need of cash. While I have expectations for the projects we invest in to build business models and survive market cycles, I feel the market will probably get worse before it gets better.
However, the outlook is not all hopeless. I think if we look forward 12 to 14 months, especially after the U.S. election next year, if Trump is elected and appoints a new SEC chairman, there may be clearer token policies and regulations around June 2025. Regulatory sandbox. If there is a clear policy structure, smart lawyers and project parties can design legal and compliant value capture methods. If all goes well, Web3's user acquisition model, monetization model, and last-mile conversion will all improve over the next 24 months. I believe that by that time, a number of very good secondary projects will emerge on the market.
Once the secondary market becomes active, the investment environment in the primary market will be healthier, similar to the current entrepreneurial ecosystem in Silicon Valley. Therefore, although the market will experience a shakeout in the next year, I believe that if the above expectations come true, the future will get better.
Ruby: I understand that although we may experience a trough in the short term, in the long term, our industry still has great prospects. This requires continuous efforts from us builders.
Jason: You're welcome, but I wanted to add one more thing. Starting a business in this industry does not necessarily have to take the common route, such as building a complex financial model, creating a product that fits the market, and then listing it on Binance to cash out. This is certainly one way, but not the only way.
There are a lot of companies with very strong cash flows, and although you may not have heard of them, their business models are very solid. For example, exchanges and stablecoins are very "positive cash flow" businesses, and huge profits can be made as long as supervision is handled properly. In addition, there are other companies that are less well-known but have considerable revenue, such as DEX Screener, which is a tool for monitoring Dogecoin and has a daily revenue of tens of thousands of dollars. There are also some well-known SaaS companies, such as Elliptic that provides KYC services, Certik that does audits, and Chaos Labs that simulates protocols, and their revenue is very stable.
Therefore, entrepreneurs do not necessarily have to take the route of issuing tokens and cashing out. It is also a good choice to dig deeper into some clearer business logic and choose entrepreneurial directions with stability and cash flow.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reproduced with permission from: (PANews)
Original author: Wu Shuo Blockchain
