Thoughts on the current market, stablecoins, venture capital and angel investment

Author: Route 2 FI Source: substack Translation: Shan Ouba, Golden Finance

Current Market

The crypto market has been very tough recently, with altcoins slowly falling over the past three months, while Bitcoin has barely moved. I think this will continue throughout the summer until the market picks up in August after the Ethereum ETF is listed, the presidential election preparations, and the interest rate cuts. But that's just my opinion.

So what have I been doing recently? Apart from holding Ethereum, doing some yield farming with Pendle and Gearbox, and signing a lot of angel investment agreements, I haven't done much. Trading has become very difficult, and any airdrops on the market are basically sold (with a few exceptions, such as $ENA, which has risen by about 50% since the TGE). This is a new environment. I have written several newsletters on low circulation, high fully diluted valuation (FDV) tokens (you can read them here and here). While tokens launched in 2021 and 2022 have had some price action post-TGE (which is good for traders), this is hardly the case for tokens launched in the past year. The price action for these tokens happened during the private phase, as Cobie wrote in his latest Substack. So unless you are a founder, VC, angel investor, player connected to these people, or a key opinion leader (KOL), this bull run may be very difficult for you. Yes, there are exceptions: October 2023 to March 2024 was a good period overall, as was the case if you got in early on new memecoins. But other than that, most people would agree that this is their toughest bull run yet. What’s interesting is that the established players don’t have the advantage they used to. Take Hsaka, for example. While he’s still a key player, we mostly only see him when the market is in simple mode. The same goes for Ansem, who seems to have lost his way. But can we really blame him? After all, we are responsible for what we buy, when we sell, or what we trade. Yes, influencers create FOMO, but we are the ones who make the decisions about what to do with our money.

I spent most of 2023 and early 2024 on different trading terminals (PvP terminal, Tweetdeck/X Pro, Telegram alpha chat), but recently I have taken a more slow approach to the market. Basically because it is almost impossible to trade in any direction except scalping (the rumors about ETH ETF a few weeks ago are an exception). It reminds me of the period after the Terra crash in May 2022. There was nothing to do and you were forced to contact the real world. Although I see some similarities, I think DeFi is on the rise again. While I have been waiting for the return of classic DeFi, it seems that point farming and airdrop hunting are the new DeFi. APR is collected in the private phase or point phase. For example, with Ethena you can lock USDe for three months in advance and get the yield through airdrops. At that time, few people knew that Ethena would become so popular. I wish I had a better grasp of it, but now there is a new protocol that gives me a similar feeling (Usual - a stablecoin protocol). They are now doing a private phase and the APR is also high. The question is whether they can time the market as well as Ethena (their airdrop is scheduled for October).

Stablecoins

Speaking of stablecoins, I still think this is the most important use case for crypto. You can store funds in your own wallet completely offline and send it to anyone in seconds, no matter where they are. We now have stablecoins with yields (Ethena, Open Eden, Usual, etc.). While there is discussion about the stability/reliability of these yields, we are clearly further than UST (Terra). For example, Open Eden is a stablecoin protocol backed by treasury bills (with an annual yield of about 5%). Terra UST was 20 billion at the peak of the last bull market, while Ethena was only 3 billion. Looking forward to seeing how big it can get, or if some of the others can challenge it. My ultimate dream is that after this bull run (in the depths of the next bear market) we have a stablecoin that has become as "safe" as USDT/USDC and is able to provide some sort of sustainable yield (5%?). There is obviously market demand for this, just think of Wall Street and all the bonds people have in their portfolios. The first step is to make it 100% safe (hopefully with the help of Larry Fink and BlackRock).

There are other things I'm excited about in this bull run like EigenLayer, Pendle, Gearbox, Hivemapper, and sports betting/prediction market protocols. I do miss the crazy yield farms from the last bull run. For example $TOMB on Fantom. Definitely high risk decentralization, and while we still have similar decentralization projects, the TVL on these protocols is not high and the popularity is low. Overall I'm more interested in supporting projects that do innovative things, because I'm not sure how many new Pendle and EigenLayer forks we need to be honest.

Due to the slower market lately, I've also had more time to read books. I posted a photo of some of the books I've been reading recently. Mainly books on philosophy, economics, and life hacks. I also wanted to read some books on venture capital, as this is an area I've been gradually getting into over the past year and a half.

Some Basic Knowledge About Venture Capital

There are a few key terms to understand when pitching to investors that are related to venture fund structures.

Please take a look at the image below, which we'll explain in detail in the subsequent text.  

A venture capital fund is a pool of money used as the primary investment vehicle for investing in startup companies. This money, often called "dry powder," is used to invest in startup companies.

Each fund is structured as a limited partnership and is typically managed by a partnership agreement contract over a 7-10 year time span.

During this period, the fund's goal is singular: to make money. VC funds make money in two ways:

1. Performance fees on the fund's returns (about 20%)

2. Management fees (usually about 2%)

This is why you may have heard people talk about the 2/20 model (now you know what it is, too).

The management company, or venture capital firm, does the actual business of the venture fund. It is different from the venture fund. The management company is the operations and people behind the fund. It exists as a business entity created by the general partners of the firm.

The management company uses the management fees it receives to pay for expenses related to the operations of the venture capital firm, such as rent, employee salaries, etc. The management company receives the management fees in order to help deploy and grow its funds.

The VC managers receive the performance fees only after the limited partners (LPs) are paid.

A general partner (GP) is a partner who manages a firm. Another way to define a GP is someone who manages/oversees a venture fund. A GP can be a partner at a large venture capital firm or an individual investor.

GPs raise and manage venture funds, make investment decisions, analyze potential deals, recruit on behalf of the fund, help their portfolio companies exit, and make the final decision on what to do with the money they manage. Overall, the role of a GP can be boiled down to two key responsibilities: investing money in high-quality companies and raising future funds.

GPs earn their income from performance fees and management fees. For example, if the performance fee is 20%, that means 20% of the fund's profits will be paid to the GP.

So where does the actual capital for a venture fund come from? That's where the role of the limited partners (LPs) comes in. LPs are the money behind the venture fund. Typically, LPs are institutional investors, such as:

• University endowments

• Pension funds

• Sovereign funds

• Insurance companies

• Foundations

• Family offices

• High net worth individuals

The core of a venture fund structure is, of course, the portfolio companies. These startups receive financing from the venture fund in exchange for preferred shares.

It depends on the specific fund, but to receive venture capital financing, the portfolio companies must meet certain criteria or requirements. For example:

• They should operate in a large market

• Have product-market fit

• Have a great product that customers love

• They must show promising economics and the ability to generate strong returns for investors

Here is a list of some of the largest crypto VCs:https://coinlaunch.space/funds/venture/?per-page=50&page=1

Angel investing

One ​​of the reasons I love this field is that you can be a nobody, and after 1-3 years if you put in the time, effort, and consistency, you can become one of the important voices in the field. This field is so new that you can become an expert in this field even if you don’t have a degree from an elite university. It’s all about trial and error and curiosity.

How did I get into Angel investing myself?

To answer this question, we need to go back to where it all began. Before getting into crypto, I was a stock market "bro" and the Twitter I created in January 2019 was mainly focused on that as well as life maximization. Before Twitter, I had a blog where I talked about investing and I also wrote a few newsletters (now deleted). For me, getting into crypto full-time started in 2021, a few months after I quit my 9-5 job. In the beginning, I was just frantically buying NFTs, DeFi farms, and random tokens on Binance. But after writing posts and ideas about DeFi protocols for a while, I started receiving deal flow. In the beginning, I just rejected these deals because I felt inexperienced, but I gradually learned that many people who know less than me are already in this game.

As you know, I am a KOL/influencer (don't like this name, but it's true). After having a relatively large audience on Twitter (300k followers) and Substack (30k subscribers), project founders approached me and asked if I would invest in them, usually with no strings attached. However, there is a gentleman's rule that you should post something about the project, which makes total sense. Project gets exposure -> people get interested -> more people buy -> price goes up. Very well explained.

That being said, I think there are also more KOL rounds in this cycle because many founders feel that VCs don't contribute much. Yes, they have networks, but most of the time don't have big audiences. KOLs on the other hand have large audiences and usually solid networks as well. Therefore, many VCs also transform into semi-KOLs in order to get a bigger piece of the pie. I don't blame them, to be honest.

So basically what I do is follow my natural curiosity and dabble in multiple areas in the crypto/web3 space. I wouldn't call myself an expert in any field, but rather a jack of all trades who knows a lot of topics. If I don't have an answer myself, I use my excellent network in the field to find the answer. Many opportunities present themselves simply because people contact me after seeing what I wrote or tweeted. However, I do think I have some advantages in certain areas. On the DeFi side, I’m personally most interested in trading DEXs, stablecoin protocols, yield narratives (like EigenLayer/Pendle/Gearbox, Mellow, Symbiotic+++). I’m also really fascinated by trading (whether on CEX or DEX). My dream is to have a platform that can compete with Binance/Bybit, so I also like to work with teams that have this goal. I also have an advantage in marketing/growth, as an influencer, I know what works and what doesn’t.

Regarding trade flow, how do you get it? You should have some kind of expertise in a niche in the crypto space, or have a big brand. The best combination is both (obviously).

The reason people with big personal brands or audiences do well as angels is that companies want them on their side for credibility and distribution. The signaling power of having trusted people aligned with your business who can spread the word about your product or service.

Also, when founders send out their pitch materials, they can use your name on the materials to show that it’s a good investment. Let’s say you see a material and Cobie is on the equity table, I’m sure most people would blindly invest in the project without doing any due diligence. After all, if it’s good enough for Cobie, it should be good enough for you, right?

What am I looking for when I decide to do a deal?

Timing is undoubtedly a big factor. The terms of the deal are critical in my decision to invest. What kind of market are we in? What are the prospects for the next 3, 6, and 12 months? What about the next 2-3 years? Vesting schedules can be long, so it’s important to take that into account.

Is the team building something interesting that can get product-market fit? Do you think it’s sustainable? What narratives does it cover? Which VCs are coming in? I then talk to people in my trusted network. Why did some of my VC friends miss out? Or why didn’t they invest more? Who are the competitors? What do you think of TVL today and in the future? Will the protocol be abandoned after the incentive program ends? All of these are valid questions.

I’ve already covered the role of VCs and briefly mentioned the role of angels. Here’s a longer explanation from Ben Roy: To end this post, here’s an excerpt I like from @DCbuild3r’s latest post on angel investing. "A key point to note is that social capital compounds as much, if not more, than financial capital, and I believe that social capital is the biggest driver of career success in any endeavor, whether it's sales, technology development, research, or philanthropy/volunteering. Whatever it is, having skilled friends in your network, they have other friends, they have capital, new insights, and wisdom, they are able to change things, and if you become friends, together you can truly change the world."