Compiled & edited by TechFlow
Guest: Jason Choi, Tangent Co-founder
Moderators: Haseeb Qureshi, Managing Partner, Dragonfly; Tom Schmidt, Partner, Dragonfly; Tarun Chitra, Managing Partner, Robot Ventures
Podcast source: Unchained
Original title: VC vs. Liquid Fund & Inside Friend.Tech's Exit - The Chopping Block
Air Date: September 14, 2024
Background Information
Participants in this podcast discussion include DeFi expert Tom, Tarun from Gauntlet, and Jason Choi, co-founder of Tangent. They discussed the challenges of venture capital in the crypto market and the limitations of airdrops, while also emphasizing the potential of DeFi protocols to improve market efficiency. As the market continues to develop, how to improve investment quality and the actual value of projects will become the focus of the industry.
Tangent is a company focusing on blockchain technology and decentralized finance (DeFi) solutions. It is committed to providing users with innovative financial services and using the transparency and security of blockchain to improve the efficiency of traditional financial systems.
Summary of key points
Friend.Tech Token Crash: Friend.Tech’s token price plummeted 96%, highlighting the risks of launching a token without a sustainable product plan and user retention strategy.
Project Exit and Ethics: Early token issuance has raised concerns about the ethical responsibilities of teams when they abandon projects, and accusations of “leek cutting” are also increasing.
Impact of airdrops: Airdrops distort real user engagement, resulting in inflated metrics that incorrectly reflect product-market fit and real user growth.
Venture capital in crypto: Low barriers to entry allow venture capital firms (VCs) to inflate project valuations, often resulting in over-hyped and under-fulfilled crypto projects.
Challenges of Early Token Launches: Early token launches often hurt long-term project potential by confusing market signals and compromising user retention.
Venture Capital vs. Liquidity: The debate continues as to whether venture capital extracts value from crypto markets, or whether liquidity improves market efficiency.
Hedge Funds and Market Efficiency: Hedge funds may improve market liquidity, but their impact on long-term crypto growth remains under scrutiny.
Speculative Markets vs. Long-Term Value: Crypto markets continue to struggle to balance short-term speculative activity with creating sustainable, long-term value.
The influence of American politics in Singapore
General concern about American politics
Jason pointed out that American politics occupies an important position in the discussion in Singapore. Almost every day, everyone is paying attention to the developments in the United States, especially the political debate. He said that during this period, their work has become like a macro fund because they have been paying attention to political events, which makes him unhappy.
Concern over Trump family projects
Haseeb mentioned the Trump family's DeFi-related projects. Jason said that his knowledge of the project was limited to some superficial information and mentioned the relationship with the Aave token price.
Social media reaction
Tarun mentioned that his previous comments on certain projects have caused a lot of reactions, especially when he called a project a "rug-pull" or "poor man's exit scam", which received a lot of fierce feedback. Therefore, he chose to avoid further comments on such projects to avoid causing more controversy.
The current state of Friend.Tech
Haseeb mentioned that the Friend.Tech project has recently attracted a lot of attention. Friend.Tech is a social finance project that allows users to support creators and join creator chats by purchasing their tokens. Although the project caused a sensation in the summer of 2023, its token has performed poorly since its launch, and its price is currently down 96% from its all-time high.
Haseeb also mentioned that the project team transferred control of the contract to an invalid address four days ago, a move that sparked accusations of an “exit scam.”
Team’s explanation and market reaction
Although the team said they did not sell tokens and that the issuance of tokens was fair, the market reaction was still strong, and many people believed that the project was "exiting" or "abandoning." Haseeb suggested that this incident has triggered a broader discussion about the responsibilities that crypto product teams should bear.
Jason said he was an active user of Friend.Tech and despite the token price plummeting, he believed the project did attract a large number of users in its early stages.
Views on team responsibility
Tom further analyzed the scope of the team's responsibility, arguing that the situation of Friend.Tech is more complicated than some obvious "rug-pull" projects. He pointed out that although the team did not retain the tokens, they profited from the platform's transaction fees, which caused dissatisfaction among users because these earnings did not translate into the value of the tokens.
Haseeb also added that there is a gap between what users expect from tokens and what is actually happening, which leads to disappointment.
Jason concluded that Friend.Tech may not have done a good job in the timing of token release and failed to establish an effective value accumulation mechanism. They also had problems with product market fit, and although the project performed well in the early stages, it failed to attract users continuously. Overall, this incident has triggered a profound discussion about the responsibilities of crypto project teams and also provided important lessons for similar projects in the future.
The Future of Friend.Tech
Platform limitations and challenges
Jason mentioned that Friend.Tech’s design results in a very small user base. Due to the price curve of the token, users are quickly excluded, which makes it difficult for the platform to expand to more users. In addition, creators’ income on the platform mainly comes from users purchasing their tokens, and once users enter the group, creators have no motivation to continue to provide value. This mechanism makes many creators not actively participate after entering because they do not hold their own tokens.
Timing and Effects of Token Release
Haseeb believes that although Friend.Tech's token launch attracted a large number of users in the short term, the platform's infrastructure and user experience have not been improved. He pointed out that although the token launch brought back users, there are still many problems with the platform's functionality and the user experience is poor.
Haseeb likened the situation to a comedian going on television for the first time and if he doesn’t do well, he may not get another chance.
Reflections and suggestions for the future
Tarun said he has less of an emotional connection to Friend.Tech, but thinks the project is indeed ahead of the curve in some ways. He mentioned that Friend.Tech tried to combine elements of meme tokens to some extent, but failed to effectively implement these ideas.
Haseeb further added that Friend.Tech’s team failed to iterate enough on the core product, causing innovation on the platform to stagnate.
Decline in user experience and content quality
The discussion mentioned that over time, users’ questions became monotonous and creators’ interactions dwindled. Tarun even said that creators’ presence on the platform was affected, leading to a decline in the quality of their content.
Haseeb believes that Friend.Tech did not find a good balance between user engagement and content creation, which ultimately led to user experience fatigue.
How to Close a Startup
The norm and challenges of startups
Haseeb mentioned that it is normal for startups to shut down, especially in the crypto industry. Many early-stage startups may realize that they cannot achieve their initial goals and need to consider exiting. Unlike traditional industries, the crypto industry does not have clear exit norms or processes, which makes founders confused when closing their projects.
Exit strategy for founders
Jason believes that in the early stages of a startup, the shutdown process is relatively simple because there are no tokens at this time. Founders can work with lawyers to gradually liquidate the company and refund investors in proportion. However, once the token is released, the situation becomes complicated because the founders need to face thousands of token holders, not just a few investors.
Timing of Token Release
Jason stressed that founders must be cautious when deciding to release tokens. The release of tokens should be done when the project has reached a certain product-market fit, rather than a "desperate move" when the project is facing difficulties. He mentioned that some projects are considering how to gradually close tokens and refund investors proportionally after going through legal procedures.
Successfully closed cases
Haseeb and Tarun mentioned some successful examples of token closures, such as Vega and Fei, which used community voting and buyback mechanisms to handle the closure process. These methods not only allow the community to participate in decision-making, but also provide investors with certain compensation.
The possibility of decentralization and open source
Tom suggested that ideally, founders should consider making their projects open source so that the community can continue to operate. This approach can alleviate users' disappointment about the closure of projects to some extent, because users can maintain and manage the projects themselves. However, fully decentralized products are not common, and many projects still rely on centralized infrastructure.
Venture Capital Funds and Crypto Market Liquidity
Haseeb brought up a recent lively discussion on Twitter about the dynamics between venture capital (VC) funds and liquidity markets. This discussion was sparked by a tweet from Arthur Chung, who claimed that in the current crypto market, VC funds are actually “net extractors,” meaning they extract more money from the crypto ecosystem than they put in. The core of this argument is that VC funds typically invest in new projects at low valuations, and then sell tokens through exchanges when the projects mature, thereby pulling money out of the ecosystem.
Different Types of Venture Capital Funds
Jason believes that this view is too simplistic and cannot be generalized. He pointed out that the threshold for venture capital funds in the crypto industry is relatively low, resulting in uneven quality of projects in many funds. Although there are indeed some funds that buy tokens at low prices and sell them at high valuations, this does not represent the situation of the entire venture capital industry. He emphasized that the excess of funds in the market has led to increased competition for high-quality projects.
Early-stage investment opportunities
Jason further explained that Tangent's goal is to focus on early-stage investments, as many large funds are often unable to effectively support these startups. They hope to fill this gap by providing small investments. In addition, he mentioned that the price discovery mechanism of the liquid market is relatively insufficient, resulting in a lack of consensus on the valuation of tokens, which is also the problem mentioned by Arthur.
Uniqueness of the Crypto Market
Tarun pointed out that the crypto market blurs the line between private and public investment, and venture capital has a greater influence in the crypto space than in traditional markets. He believes that investors can directly influence the liquidity and market pricing of projects in the crypto market, while in traditional venture capital, investors have relatively little control over the final public price.
Pricing efficiency in private equity markets
Tarun also mentioned that the pricing efficiency of the private market may be lower than that of the public market. Due to competitive pressure, investors often need to complete transactions at prices higher than they think are reasonable. This auction mechanism makes the pricing of the private market more unstable and inefficient.
Winner's Curse
The "winner's curse" mentioned by Haseeb is a well-known phenomenon that was first discovered in the 1960s when the US government auctioned oil blocks in Alaska. In the auction, oil companies could take samples from the land and then decide how much they were willing to pay. Since each bidder only sampled a specific area, it could cause some bidders to overestimate the value of the entire land, and then bid too high in the bidding, ultimately causing the "winner's curse."
The Winner’s Curse in Crypto Venture Capital
Tarun believes that the winner's curse exists not only in crypto venture capital, but all venture capital may face this phenomenon, but in the crypto field, this situation is more serious. He pointed out that private investors in the crypto market are often also investors in the public market. They participate in the liquidity formation process when the token is released and trade with market makers. This participation allows them to intervene more when the asset is publicly listed.
The impact of market intervention
Haseeb further explained that Tarun’s point is that highly competitive venture capital deals often lead to overpricing, and the ultimate winner may suffer a loss in expected value.
Tarun added that while they may appear to have won the deal on paper, the final value could be lower than they expected if they had not intervened. Private equity funds in the crypto market are able to intervene more in the market as assets become public, which is very different from the pricing mechanism dominated by intermediaries such as banks in traditional public markets.
Dynamics of public and private markets
Brand Value and Liquidity
Tarun believes that in technology venture capital, the value of the brand is higher because investors are more willing to pay a higher price for well-known brands before liquidity. In the crypto market, the premium of the brand is relatively low. Haseeb countered that in the early stages of crypto projects, the influence of the brand is very important because many projects have not yet launched products and the brand has become an important signal.
Phase Differences and Investment Strategies
During the discussion, Haseeb and Tarun also touched on the differences between the crypto market and traditional tech investing. Haseeb pointed out that while brand influence is strong in the early stages, the brand effect of investment may weaken in the later stages. Tarun believes that the lack of later funding stages in the crypto market makes the impact of branding more prominent in the early stages.
Liquidity Events and Market Speculation
Jason mentioned that the public market in the crypto space often gives projects a premium far higher than their actual value, which allows venture investors to get rich returns when the project goes public. For example, if a venture investor invests in a new Layer 1 project at a fully diluted valuation (FDV) of $30 million, and the project is valued at $1 billion when it goes public three months later, this creates a "fiduciary responsibility" for the venture investor - in this case, they are almost obligated to sell their tokens.
The impact of speed to market
Jason further pointed out that the liquidity window in the crypto market allows projects to obtain funding in a short period of time, which is a significant difference compared to the seven to ten years it usually takes to go from startup to public company in traditional markets.
Although Haseeb questioned the idea of projects listing tokens in a short period of time, arguing that no one could launch a token in two months, Jason believed that even if it was not two months, the time was still much shorter than in the traditional market.
Market speculation and valuation pressure
Jason believes that this fast-to-market dynamic has resulted in projects failing to truly realize their potential, in part because the market imposes a huge speculative premium on new projects. Almost all projects that enter the crypto market with even a little potential are accepted by the market at high valuations, but these projects often find it difficult to achieve these high valuations in the early stages.
Self-correcting markets
Jason suggested that the market will eventually correct itself. As ordinary investors begin to realize that buying tokens at fully diluted valuations of hundreds of millions may result in losses, this speculative behavior in the market may gradually weaken. He mentioned that the issuance of tokens in the last six months shows that except for a few highly liquid "meme coins", the prices of almost all newly issued tokens have fallen. This shows that investors are gradually recognizing this pattern and may lead to adjustments in future market behavior.
Hedge Funds and Market Efficiency
Market volatility and the role of venture capital
Haseeb noted that the market has fallen sharply in the past six months, with almost all assets down 50%. He stressed that while he is a venture investor, he does not subscribe to the view that liquidity funds are good for the market and venture capital funds are bad. He believes that this view implies that the projects they build have no real value, which is not true.
Haseeb stressed that many venture capital-funded projects like Polymarket, Solana, Avalanche, Circle, Tether, and Coinbase actually drive the crypto market forward and make it more valuable.
The role of liquidity funds
Haseeb further discussed the effectiveness of liquidity funds, arguing that the performance of liquidity funds in the market does not necessarily drive the long-term development of projects. He believes that the goal of liquidity funds is to obtain short-term profits through frequent transactions rather than to provide funds for new projects. The operating model of liquidity funds makes them more inclined to extract value from the market in the short term rather than supporting long-term technological development.
Market Efficiency and Liquidity
Haseeb mentioned that the efficiency of the liquidity market is also worthy of attention. He questioned whether if liquidity funds enter the market, it means that they will perform poorly. He pointed out that the goal of liquidity funds is to make money quickly rather than long-term investment, which may cause them to extract more funds from the market instead of supporting the development of new projects.
Comparison between venture capital and traditional finance
Tarun also participated in the discussion, pointing out that in traditional financial markets, there are also doubts about venture capitalists. He mentioned that many people think that venture capitalists are just bidding up each other's valuations, but in fact this reflects the tension between long-term investment and short-term profit in the capital market. He believes that this tension is one of the core conflicts of capitalism, which leads to frequent trading activities.
Airdrops and Wash Trading
(Note from Shenchao: Wash trading is a form of market manipulation, where traders frequently buy and sell the same asset without actually transferring the asset in order to create false trading volume. This behavior can mislead other investors into thinking that a certain asset is in high demand, thereby attracting more investors to participate. Wash trading not only affects market transparency, but can also lead to inflated prices, which has a negative impact on the healthy development of the market.)
Lack of market financing efficiency
Tom pointed out that the cryptocurrency public market is not very good at providing and raising funds for teams that issue tokens. He mentioned that unlike the traditional stock market, teams cannot easily issue new tokens through the public market when they need more capital, and most of the time, teams actually sell tokens to venture investors instead of trading directly on the public market. This makes the crypto market inefficient in providing funds for teams.
The relationship between hedge funds and ordinary investors
Haseeb further discussed the relationship between hedge funds and regular investors, noting that discussions on crypto Twitter tend to favor hedge funds, which works against the interests of regular investors.
Tarun mentioned that similar to the GameStop situation, ordinary investors have a complicated attitude towards hedge funds, especially when the market fluctuates.
The Quality of Venture Capital and Market Perception
Jason mentioned that different qualities of venture investors can significantly affect the market’s perception of venture capital. He believes that projects supported by high-quality venture investors can usually attract more capital, while low-quality venture investors may cause the market to misjudge projects and form a pessimistic attitude towards venture capital.
The value of a liquid fund
When discussing liquidity funds, Jason emphasized that different liquidity fund strategies may have different impacts on the market. He pointed out that high-frequency trading funds may provide more liquidity to the market, while some theme-based funds may improve market efficiency by sharing their investment ideas, thereby transferring capital from low-quality projects to higher-quality projects.
The impact of wash trades
Regarding wash trading, Tarun and Haseeb discussed the prevalence of wash trading and its impact on the market. Tarun mentioned that wash trading may be legal in some cases, but it may distort the true market situation, and in the crypto market, the cost of wash trading may not be enough to curb this behavior.
The controversy of airdrop
Jason mentioned that systematic airdrops and shilling behaviors may have a negative impact on projects because they will lead to a false expansion of the project’s user base and affect the founder’s judgment on the market fit of the product. He believes that such behavior is not conducive to the long-term development of the project.
Market future and strategy
When discussing market strategies, Tarun expressed his concern about the lack of medium-frequency trading strategies in the current market, believing that this lack limits the maturity and efficiency of the market. He believes that the market needs more medium-frequency trading strategies to better conduct price discovery under different market conditions.
