Throughout 2022, venture funds seeking to capitalize on the growing adoption of Web3 products and services helped the space break previous funding records despite facing a bearish market environment.
However, investing in early-stage blockchain startups is not the same as traditional investments. The Web3 space is relatively new and still evolving, so a different approach is needed. Additionally, the cryptocurrency industry is not heavily regulated, making it essential for venture capital firms and investors to understand the legal and regulatory implications of investing in cryptocurrency projects.
While evaluating the team behind the project, technology use cases, market demand, and sustainability, investors must go through many checkpoints before making an investment decision. To better understand how the crypto investment industry works, he spoke to Deng Chao, Managing Director of HashKey Capital, who is based in Hong Kong and invests exclusively in blockchain technology and digital assets. I heard.
We invited Deng to share his thoughts and perspectives on the current investment landscape as new investors enter the market and the Web3 ecosystem flourishes. Chao holds a master’s degree from the University of Hong Kong, where he has over 10 years of experience in the field of wealth management and fintech. He is also an early founding member of Wanxiang Blockchain Labs.
Investments across crypto projects are at an all-time high. What do you think is driving the industry’s appetite at this stage?
Deng: Every new industry has an early bubble, not just cryptocurrency. Cryptocurrencies are still in their early stages and have a lot in common with the early internet industry in terms of development. People are interested in finding more opportunities in cryptocurrency because there are more opportunities than in the traditional industry, the current internet industry.
Furthermore, cryptocurrencies and blockchains can be seen as disruptive innovations that solve real-world problems. These technologies have the potential to greatly improve efficiency and create large-scale network effects in various industries such as financial industry, internet and gaming. These network effects are achieved through decentralized networks and, for the most part, do not rely on centralized parties. This is incredibly unique given how technology has evolved historically since the first industrial revolution over the past 250 years. This creates an asymmetric opportunity and is what drives the appetite to invest in the crypto space so much.
Is investing in crypto initiatives the same as traditional investments? Are there additional parameters or areas of due diligence that crypto venture capital funds should evaluate before investing?
Deng: In general, the investment framework remains unchanged. The difference is that there are two types of investment structures in the crypto space, one of which is the traditional equity structure that follows traditional investment methods. Companies using this structure typically provide centralized services to crypto users. Another aspect is the structure of the token, which should consider the economics of the token, its usefulness within the product, the management of token issuance and liquidity, and the coordination of stakeholder interests.
Besides, the blockchain space is a very fast-paced industry. Product development cycles are accelerated by the fact that nearly everything in the crypto space is open source and transparent. This often translates into something called composability. Composability refers to the ability to build on existing components to create new features and new products.
This is great for accelerating the development of new products on the blockchain, but it is often technically very complex. That’s why we have a team that
Can you briefly describe how crypto funds evaluate crypto projects they are considering? What are the steps or processes they follow?
Deng: There are no hard and fast rules for evaluation, there are a few things to consider. However, it is best to consider four key aspects: the sector, the team behind the project, product feasibility, token economics and valuation.
First, we need to understand if it’s promising enough, or if the benefits are big enough. Importantly, investors should update their sector focus quarterly or occasionally based on market trends. The next thing we want to see is a good track record. It’s important to appreciate the thinking and insight into what the team behind the project is doing. strong technology? Strong operability? Strong resources and networks? Are the teams fully dedicated to what they are building?
Then test product market fit and its long-term sustainability. For example, for technology-oriented projects, it is recommended to assess whether the technical design is feasible. Other considerations include analyzing whether the project is sustainable and whether it is really necessary for the project to issue tokens. If tokens are required, investors should also ensure that the tokens are priced appropriately.
When it comes to return on investment (ROI), many people believe that investing in cryptocurrencies can bring huge returns. How correct is this assumption? How do you think the returns will differ from traditional investments? And what are the potential advantages and disadvantages that crypto VCs will have to navigate?
Deng: As an early-stage investment, it yields higher returns. According to public data, returns for BTC, ETH and the early top 30 tokens are thousands of times higher. But it’s also risky, with 95% of projects struggling to survive the winter. Successful crypto projects yield greater returns and shorter payback periods as the tokens provide these projects with early access to liquidity. Therefore, it is more important for VCs to successfully manage risks while seizing opportunities. These risks differ from traditional risks not only in asset prices, but also in crypto-specific risks such as the impact of products, strategies, and FTX events.
Play-to-Earn games and Web3 projects attracted the largest share of venture funding this year. With new segments popping up all the time in the blockchain world, which crypto-based niches do you see showing the greatest potential to attract capital in the near future?
Deng: Both P2E and Web3 projects belong to the application layer, and relatively few projects are doing well in the application layer. Now we are more concerned about the underlying infrastructure and some middleware, which is the premise that future application layers can explode: ZK, AA, rollup, data, communication, storage layers. doing.
According to our research, the NFT/gaming category received about $7 billion in venture funding last year. However, the aforementioned infrastructure sector also raised around $7 billion. Infrastructure and middleware represent the core and underlying layers of ecosystem development. Investing in this infrastructure layer is like investing in the Internet layer 30 years ago instead of investing in individual applications.
Your fund, HashKey Capital, is a leading investment firm in the crypto space. Can you elaborate on how your company is navigating the volatility of the cryptocurrency market and, more importantly, how are you doing as a venture capital fund dealing with the current crypto winter?
Deng: We need to zoom out and look at the macroeconomic cycle that includes all asset classes, including crypto. Understanding the big picture and these market cycles can really help investors adapt their investment strategies and improve the timing of their investments.
We tried to align our last fundraising with these market cycles, but the timing of current VC funds is no better. In 2022 he has raised $500 million. This means that startup valuations are putting money into a more realistic market. Away from the hype and his FOMO, we believe now is the perfect time to build and invest.
Can I join an emerging crypto project seeking capital? Is there a specific method required to approach venture funding? From your point of view, the most optimal approach an early stage cryptocurrency startup can take What is?
Deng: Well, there is no one-size-fits-all answer to this question. HashKey Capital invests in projects at every stage. However, it’s important that founders can communicate their vision, intent, and why they’re building “XYZ” from the start. A clear and concise deck can be the entry point.
Researching the VC space is important. The first step is to create a spreadsheet with all VCs investing in the crypto space. Next, understand the relationship between these VCs. Many of them can co-invest in projects and share deal flow between them. Step two is to create a private Twitter list that includes all VCs and their respective partners. Make sure to interact with them on Twitter to start building basic social currency.
The next step is to start sending emails to the main VCs. When you meet with a VC, your goal is to communicate your passion to them and share the value your project brings to the world. Finally, it’s very important to leave your ego at the door when talking to VCs. Remember, a ‘no’ in the seed round can turn into a ‘yes’ in the series A round. Maintaining good relationships with all VCs, even after being turned down, can yield 10x profits in the next round.