Original translation: Wu said blockchain

This audio is Jason Kam, founder of Folius Ventures, participating in the Twitter space held by RootData. Wu said that he was authorized to reprint it.

Jason said that he had hardly made any moves in recent months and was not so optimistic about the cycle; in the past, if you invested less than 50 million US dollars in the earliest stage, and then the project party conquered the exchange, it could even have no products. As long as the popularity was built up, you could get excellent book returns by scheming how to list on Binance; after everyone understands this routine, they will find that there are many standard game-building projects; the industry has an oversupply of projects without hematopoietic ability, and the lack of buying in the secondary market itself has led to the current situation; DISCORD, Telegram, and even if the games on Twitter have great opportunities, there is a high probability that a platform similar to 4399 mini-games will grow on TG.

Audio transcription is done by GPT and may contain errors. Please listen to the full podcast:

Xiaoyuzhou: https://www.xiaoyuzhoufm.com/episodes/66ed8e0c87a9242776b3e53c

YouTube: https://youtu.be/Ya1HIcY8Ihw

Jason and Folius Ventures Introduction

Ruby:Good evening, everyone, welcome to the first event of the Crypto Financing First Lesson series space hosted by RootData. I am the host Ruby, and the theme tonight is "Crossing the Bull and Bear: The Wisdom Behind Primary VC Investments".

We are honored to invite Jason Kam, the founder of Folius Ventures. Jason graduated from Carnegie Mellon University and worked on Wall Street. He entered the Crypto field in 2018 and created the Twitter account @MapleLeafCap, which now has more than 45,000 followers. Jason will share with us his investment experience in market fluctuations and his insights on the future trends of the crypto market.

Can you please briefly introduce yourself and the characteristics of Folius Ventures?

Jason：Hi everyone, I'm Jason. Folius Ventures was founded in September 2021. It was interesting at the time. After the DeFi Summer in 2020, my two friends Ben and Santiego suggested that I start a fund because the market really needs to pay more attention to the Asia-Pacific region, especially entrepreneurs with unique backgrounds.

Since its establishment, in almost three years, the scale of funds we manage is about 220 million to 230 million US dollars. The team has 5 people, mainly in Asia, including Shanghai, Shenzhen, Hong Kong and Tokyo. We are different from other institutions in three aspects. First, although we have made fewer moves in the primary market this year, we have invested more in the primary market in the past two years. We are a mixed primary and secondary investment fund. The single investment amount in the primary market is generally between 500,000 and 4 million US dollars. We can lead or follow the investment. We have a larger position in the secondary market, and we can buy mainstream assets such as BTC and ETH, and we can also 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 in the Asia-Pacific region. 80% to 90% of our investments are concentrated in the Asia-Pacific region.

Third, our investment cases are mostly concentrated in 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. Can you please share the reasons for continuing to invest in such a market environment?

Jason:In fact, our investment speed 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 was only recently released. Since March this year, our investment has become less and less, and there has been almost no investment in recent months. This is similar to the situation of other peers. The reason why we are cautious is mainly because we are not optimistic about the market cycle. In the past few years, the model of most VCs to make profits through rapid listing and exit is changing, and the strategy needs to be readjusted.

Secondly, we prefer investment in the application layer, and good opportunities are hard to come by, and the emergence of entrepreneurs also has a certain volatility. These three factors combined have slowed down our investment speed this year. Of course, the timing of financing disclosure is not determined by us, so it may give people the illusion that we are frequent, but in fact it is not the case.

How should the current VC investment model be reconstructed?

Ruby:You mentioned that the current first-tier VC generally adopts a wide-net approach, planning to list on CEX within 6 to 12 months. Do you think this investment exit method needs to be reconstructed? So, what should your ideal VC exit model be like?

Jason:First of all, I would like to take a step back and talk about it, because in the past this industry had a "relatively cool secret". In the early stage, if the project valuation is less than 50 million US dollars, you invest in it for a 10% share. As long as the project party can overcome the listing problem of the exchange, even without the actual product, as long as there is enough market heat and someone is willing to pay, this exit cycle can be calculated on a monthly basis. In other words, if you invest now, the project can be listed on the exchange in three months. The liquidity brought by the exchange and the involvement 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 obtain shares through the project party in the advisory agreement, pledge or airdrop, and even unlock them in TGE (token generation event), then the entire exit cycle will be very short. Even if there is a standard cliff period (usually 12 months), in many cases the project can make investors return their capital in the first month, and the rest is all profit.

This strategy has been popular since about 2019 and 2020, and today everyone has seen this model clearly. Even many projects have to operate in this mode even if they are not for a quick exit. We estimate that in the next 6 to 12 months, there may be 50 to 200 projects with a valuation of more than 500 million US dollars, and they are all eyeing to go public on the exchange.

However, the problem is that after these projects are listed, their circulating market share may only be 2% to 10%. Without exception, these projects will face a large amount of unlocking of circulating stocks within 1 to 2 years after listing, from 2% to 10% to 20% to 50%. In other words, the circulating stocks may increase 5 to 10 times.

If more projects are listed in the next six months, the supply of circulating stocks in the market will increase rapidly. But I don’t think the secondary market of Crypto has enough capacity to take over. We have observed that the amount of funds willing to bet on non-Bitcoin and non-Ethereum assets is much lower than the scale of fundraising in the primary market. Therefore, I think the dilemma facing the entire industry is: there is not enough hematopoietic capacity, there is an oversupply of projects, and there is insufficient buying in the secondary market. This is also one of the main reasons why we slowed down our investment.

Views on the recent tensions between retail investors and VCs

Ruby:Recently, people have been discussing more and more about the tensions between retail investors and VCs, especially the rise of FUD sentiment. Retail investors seem to be becoming less and less friendly to institutional investors/VCs. What do you think about the future development of this relationship? What role will VCs play in it?

Jason:In fact, you invited me here today because you hope that I can talk about my views on this issue more "truly", right? I try to share my views sincerely. Regarding the relationship between VCs and retail investors, I think the first thing to say is that this binary opposition does not completely exist in the traditional financial market, but it is relatively "soft". In the traditional market, as an early angel investor, VC provides funds to help companies grow, and companies continue to raise funds until they exit 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 companies themselves have a clear profit logic, which can be reflected in the value of equity.

Therefore, when a company goes public, retail investors do not feel that they are "taking over" for VCs, because the listed companies themselves are valuable and have clear profitability. This makes the relationship between retail investors and VCs less tense in the traditional market, and everyone's interests are more consistent. In the field of Crypto, this relationship is not the same.

Why does "bad money drive out good money" appear?

Jason: In the Crypto industry, the problem of "bad money driving out good money" appears. 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 scam projects to easily enter the market, which is a common problem.

But there are two more core reasons:

First, after adding Web3 elements, it is actually very difficult to create a business model that can be sustained in the long term and is not affected by market cycles. If you believe that tokens can capture value, this value capture is cyclical and highly volatile. The project's revenue may decrease by 80% when the market falls, which has a great impact on valuation. Therefore, even if you buy a value project recognized by the industry, such as BNB or the tokens of large public chains, these assets will be hit hard when switching between bull and bear markets. This also leads many people to believe that the quality of tokens invested by VCs is not high.

Second, although some project parties have excellent business capabilities, they may not be willing to reflect this value in their tokens. The industry does not require project parties to do so, and even if they are willing, they will face the supervision of the US SEC. If the project performs very well and even touches the jurisdiction of the SEC, it may cause bigger problems. This leads to the fact that those truly valuable companies are often unwilling to issue coins, while those companies without business models are willing to issue coins, forming 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. Usually, the token design will allocate more than 50% of the shares to the community, 20% to 25% to the team, and the remaining 20% to 25% to investors. This is the industry practice. If it is not followed, both the exchange and the investors may be dissatisfied. However, the purpose behind this design is actually to avoid touching the SEC's definition of securities, because the SEC is more inclined to identify concentrated tokens as securities.

However, the problem with this design is that many project parties will issue tokens when the circulation is low and the valuation is high in order to meet the high valuation requirements of VCs. Such a design makes it difficult for the business growth rate to exceed the inflation rate of the tokens in the early stages of the project, which leads to the selling of token prices.

Nevertheless, 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 are still worth investing in. Sorry, the answer is a bit long.

Using Pump.Fun and Banana Gun as examples to analyze different project operation modes

Ruby:The projects you mentioned that are unwilling to issue tokens 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 tokens. And projects like Banana Gun, although they also have their own revenue logic, still choose to issue tokens. What do you think of these two types of projects?

Jason：My opinion is that capitalization is indeed one of the best ways for a team to realize its efforts for many years to come. In the field of Crypto, if a company is a leader in the industry, has high attention, and can convince the community that its business model is sustainable, it can obtain a high valuation by issuing tokens.

However, what the project party needs to consider is whether capitalization will affect the advancement of the business. For example, if Pump.Fun issues tokens and is valued at $500 million or $1 billion, but then competition emerges, such as someone launches Sunpump, which causes Pump.Fun's revenue to decline, the valuation may fall by 40% in a few days. In addition, the SEC may believe that this behavior involves unlicensed securities issuance, which will cause trouble for the project.

By contrast, smaller projects like Banana Gun, although they have also issued tokens, are smaller in size and may not attract regulatory attention. If it does not target US users, there will be relatively few problems. Therefore, whether to issue tokens depends on the project's business model, market size, and reliance 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 "copycats", and as retail investors, they really don't know what to buy.

Jason:This is indeed a difficult problem. I have done some statistics before, although it has not been updated for a few years, but according to my observation, there may be 20,000 to 30,000 tokens on the market now, of which there may be only 2,000 to 3,000 projects that are truly substantial. Among these projects, there may be less than 50 projects that 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, and their cash flows are often distributed to equity rather than token holders. As a VC, in the early investment of these projects, you can usually make a profit through advisory agreements or airdrops, while retail investors can only bear the pressure of falling tokens after they are sold. Therefore, it may be a good choice to short these projects by defunding.

Folius's criteria for evaluating projects

Ruby:In the current market environment, project valuation has become more and more complicated. So, what changes have you made in evaluating projects compared to before? Do you have any new criteria or methodology?

Jason:I think projects can be viewed from two perspectives. First, we need to look at the project party’s ability to do two things:

The first is their ability to do things, that is, whether they can execute, 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.

The second is their ability to "set up the game" and tell stories, which determines how well the project can survive and whether it can get a high valuation in the industry. Simply put, the former determines whether it can survive, and the latter determines how well it can survive.

If a project does well in both aspects and has a leading position or is the only player in its niche, then I think it is a project worth getting involved in early. Such projects have a greater chance of crossing the bull-bear cycle, and we are willing to invest even if they are stuck at a certain node in the current market cycle.

To take a step back, if the project party is strong in execution ability but not so good at storytelling and making plans, then they must hit a very strong rigid demand market or be in a track where the value has not been fully explored. Even if the official website, resources, and founders of the project do not perform so well, 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 there may be some uncertainty about the exit of such projects.

As for those companies that specialize in making plans and telling stories, such 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 to large exchanges such as Binance, provide an exit channel for all participants, and increase the valuation. Such projects are too risky and have too many uncontrollable factors, so we usually don't participate. After all, it's hard for us to get in touch with the core level of the game.

So, if a project has neither strong execution nor storytelling ability, it's hard for us to make a move.

Ruby:You just mentioned that you prefer to invest in long-term projects. When choosing an investment, do you pay more attention to the team or the project itself?

Jason:This is a good question. Simply put, adults don't make choices. It's best to have both the team and the project. You need both an excellent team and an outstanding project. It's ideal to have both.

Still optimistic about the application side, especially small games

Ruby:I find Folius Ventures' investment direction is very unique. I'm a little tempted to follow your investment portfolio and buy it.

Jason：Actually, this is a common idea, but I would like to remind you that even for the companies we invest in, the risk of loss when they first issue tokens is still very high. When many companies issue tokens, the circulating market value is very high, but the tokens are unlocked too quickly, and the inflationary pressure is also very high. Therefore, although we try to choose teams with a long-term spirit and can survive bull and bear markets, we cannot guarantee that every project can avoid inflation problems in the market when issuing tokens.

Ruby:I understand. So which tracks do you think will have innovations in the future? Which 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 invested in. Maybe it's because we often like some projects that look "strange" (laughing).

I think the industry's infrastructure is mature enough, but there is still a lot of room for optimization in user experience (UI/UX). If there is a company that can really do this, we will be very interested. Many of the investments and evaluations we are doing now are to lay out 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 come out in the past was because the industry infrastructure was not supported enough, not because there was a problem with the ideas themselves.

On the ToC side (the consumer-oriented sector), we are now focusing on several points:

1. The project must be able to touch the weaknesses of human nature, such as greed, addiction, and even the vanity of pursuing better looks than others in the game. These human weaknesses are often the driving force for consumption, and consumer behavior can keep the value transfer of the project away from pure speculation.

2. In terms of platforms, I think there are great opportunities for small games like Discord, Telegram, and even Twitter.

3. In the past, we have invested in many projects that rely on economic models to attract users, and some Ponzi-like projects are prone to collapse at a certain node. In the future, we hope to find projects that have entertainment attributes and can create consumer behavior, even if they rely on some kind of economic reward mechanism.

In addition, we hope that the project can precipitate 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 weaknesses, 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 in the future, there is a high probability that a product like the 4399 mini-game platform will appear on Telegram, and Catizen has the potential to occupy this position. If they can maintain long-termism and continue to improve, the market will recognize them.

In addition, projects like WSPN are also promising. Considering that the market capitalizations of Tether and Circle have reached 100 billion and 30-40 billion US dollars respectively, I think there will be opportunities to transfer the equity of stablecoins to users in the form of tokens in the future. This field requires a team that has both industry appeal and landing capabilities. Perhaps Richard from Binance is the right person, after all, BUSD has previously achieved a scale of 20 billion US dollars.

There are also projects like Puffpaw on Berachain, which is a Web3-supported e-cigarette project that involves product design, aesthetics, D2C consumption (direct-to-consumer sales), and how to combine with Web3. There are challenges in every link, but the tobacco market is a rigid demand, especially for smokers, consumption is continuous. Therefore, although such projects are challenging, they are also worth trying.

Solana ecosystem has strong potential

Ruby:Yes, e-cigarette projects like Catizen and Puffpaw on Berachain are very interesting. Recently, Solana ecosystem is also a hot topic. Some people think that it is like the previous BSC chain, which will not be mentioned again after the meme carnival. Jason, what do you think of the future of Solana ecosystem?

Jason:First of all, we can take a step back and see what kind of public chain is attractive. A successful public chain or Layer 2 needs to have very strong investment attraction and service capabilities. It not only needs to attract developers, but also think about how to make companies in the ecosystem profitable. This may involve fiat currency exchange, optimization of user experience, and especially reducing the threshold and friction for users to enter the ecosystem.

On the technical level, I think that in addition to independent innovation, public chains also need to have a certain degree of "take-it-as-it-is". There is no need to stick to the gate view. 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 interaction 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 in 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 applications. They are always thinking about how to better serve applications and users.

In addition, Solana's ecosystem also includes Telegram and Coinbase. For example, Telegram's Wallet Stars, the full-chain application on Coinbase, and the fiat currency deposit solution. Although some projects such as Blinks performed mediocrely, 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 competitiveness in the next cycle and even be forgotten by the stage of history.

So, in general, the Solana ecosystem has great potential in terms of commercial implementation and user experience, and other public chains may gradually fall behind if they do not keep up with this pace.

It is recommended that entrepreneurs make use of resources from multiple ecosystems 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 stage. 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 high requirements for programmers, developers of the EVM ecosystem are relatively easy to find. However, developers of the Base ecosystem may sometimes be "cold" and ignore entrepreneurs. Every chain has its own problems.

My suggestion is to try to avoid binding yourself completely to a certain chain before the business logic closed loop has not been run through. The final direction should be application agnostic. But this does not mean that entrepreneurs cannot use the resources of Layer 1 or Layer 2 ecosystems. On the contrary, we should seize the opportunity to make use of as many resources as possible, whether it is financial support or technical support. Even if we have to stand in a team, we can first gather resources and wait until the project scales up before considering other directions.

The market will continue to reshuffle in the next 18 months

Ruby:The last question, I would like to ask you to "recharge" some confidence for everyone. As a primary investor, how do you think the next bull market will be different from the past? What do you think of the future market trend?

Jason:If you still remember 2019 or earlier, it was relatively easy to invest in primary projects at that time. At that time, the number of Crypto VCs was not as many as it is now, and the projects on the market were also limited, such as The Graph, Circle, FTX, etc. At that time, the entire market was very small, and even an intern could study all the projects in two weeks. Most investors were still focused on the secondary market.

However, from 2019 to 2023, you will see a large number of entrepreneurs pouring into the Crypto industry. Many people come in to start a business, partly because they really believe in this industry, but it is undeniable that many people also come with a speculative mentality. Behind the scenes, including us investors, have also entered this market in a big way.

The result is that the number of projects that can truly capture long-term value has not increased significantly, but the number of projects that want to go public on exchanges, issue coins, and cash out has surged 10 times, 100 times, or even 1,000 times. In this case, if the market liquidity is not as abundant as it was in 2021, the result is that the pressure on the entire industry will increase.

Currently, if you remove BTC, ETH, and StableCoin from the total market value of the Crypto market of $1.1 trillion, and remove some old projects that survived the previous cycle, such as Dogecoin and ADA, the remaining Altcoin market may only be $150 billion to $200 billion. The market value of this part of the market has fallen below the level at the beginning of the year 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 of the Altcoin market between 15% and 80%, which is what we have seen so far this year.

Jason：I think the market will experience a continuous reshuffle in the next 18 months. Many VCs need DPI (dividend multiples), so they will sell the tokens when they get them, and the project parties are also in urgent need of cash. Although I have expectations for the projects we invest in, and hope that they can establish a business model and cross the market cycle, I think the market may get worse before it gets better.

However, the outlook is not hopeless. I think if we look forward 12 to 14 months, especially after the US election next year, if Trump is elected and appoints a new SEC chairman, we may usher in clearer token policies and regulatory sandboxes around June 2025. If there is a clear policy framework, smart lawyers and project parties can design legal and compliant value capture methods. If all this goes well, Web3's user acquisition model, monetization model, and last-mile conversion will be improved in the next 24 months. I believe that by that time, a group of very good secondary projects will emerge in 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 reshuffle in the next year, I believe that if the above expectations come true, the future will be better.

Ruby:I understand that although there may be a trough in the short term, our industry still has great prospects in the long run. This requires continuous efforts from us builders.

Jason:You're welcome, but I would like to add one more thing. To start a business in this industry, you don't necessarily have to take our common route, such as building a complex financial model, creating a market-fitting product, and then going online on Binance to cash out. This is certainly one way, but it is not the only way.

There are many companies with very strong cash flow. Although you may not have heard of them, their business models are very robust. For example, exchanges and stablecoins are very "cash flow positive" businesses, and as long as they deal with regulation, they can make huge profits. In addition, there are other less well-known but very profitable companies, such as DEX Screener, which is a tool for monitoring Dogecoin and has a daily income of tens of thousands of dollars. There are also some well-known SaaS companies, such as Elliptic, which provides KYC services, Certik, which does audits, and Chaos Labs, which simulates protocols, all have stable income.

Therefore, entrepreneurs do not 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.

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