Despite a turbulent 2020, companies in the U.S. raised over $148 billion from venture capital firms. Arguably even more impressive is what is going on globally in the world of decentralized finance (DeFi), where DeFi protocols and projects have captured over $40 billion in Total Value Locked (TVL). DeFi is offering an innovative way for projects and investors to align interests to support network growth.
Founders now have various financing options depending on what they are building and what industry they are focused on. In the blockchain industry, projects often have an overwhelming amount of interest from various investors and groups and can choose who they want to work with. This is a far cry from traditional venture investing where founders compete for the attention of investors. Charles Read and Camron Miraftab of Rarestone Capitol shared some of their insights on trends and changes for Venture Capital in 2021.
Shama Hyder: What separates a good VC from a great VC?
Charles Read: A good VC brings a network and brand recognition to the table. A great VC brings hands-on strategic support that is an extension of a core team. A poor VC simply cuts a check and doesn’t offer any other support.
Camron Miraftab: When searching for a great VC, it is recommended to work off of references and your research. If you do not have references, founders can also consider adding distinct KPIs to an investment contract. This may sound counter-intuitive, but founders in this situation have the leverage.
Hyder: What is the biggest mistake you see founders make?
Miraftab: Communicating the value their project offers effectively. Given the sheer amount of complexity in this industry, it is increasingly difficult to come across an entrepreneur who can succinctly present what they are building, why they are building it, and how it works. Communication and the ability to convince others is a critical skill needed to build diverse communities and attract developer talent.
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Read: As a founder, you need to find individuals who complement your skillset. Know what you’re good at. Double down on it. This is a very common first-time founder or solo founder problem.
Hyder: What does the future of venture capital hold in the blockchain industry?
Read: There is an emergence of syndicates and anonymous venture funds deploying through decentralized autonomous organizations (DAO’s) – particularly into DeFi protocols that are governed on-chain. Crypto-native and DeFi-native users who spend all day as protocol and application users will continue to form communities that are typically ahead of the curve and represent collective expertise that most traditional venture investors won’t be able to replicate.
Miraftab: The open-source movement is more firmly aligning the incentives of early-stage investors with the needs of user’s pre- and post-network effects. I believe that this will result in more symbiotic relationships between venture funds, founders, and the wider community as a whole. We’ll see more VCs transitioning away from being primarily financial capital providers to playing a more active role through offering development support and adding value directly through supplying production capital to the supply side of these emerging crypto networks.
Hyder: How can new founders approach VCs?
Read: Find investors who share your vision and you’ll have long-term alignment beyond a contracted vesting schedule. Research the investors you’re talking to, understand their thesis and approach to investing, it’s just as important as their analysis of you as a founder. Choose those who will stand by you when things don’t go to plan or when conditions don’t favor you.
Miraftab: Through an introduction. If that’s not possible, I believe Twitter to be an underappreciated and underutilized social network for putting yourself on an investor’s radar. First, take time to understand your target investor’s thesis, read their blog, or listen to their podcast. Then, tweet at them directly to compliment, respond or ask questions about their content. This approach will more times than not capture their attention and potentially trigger the first conversation.
Hyder: For investors looking to launch a fund, what advice would you give?
Miraftab: Don’t rush into it. Begin with managing your capital and make sure to network and build long-term relationships with potential LPs.
Read: The industry is fast-paced and constantly changing. Having conviction in a thesis is great, but understanding that dramatic change can happen much faster than in traditional markets is very important when deciding what kind of fund structure and investments you are making. Market cycles have also proven very aggressive and can last longer than expected. Timing is everything.