The recent market fluctuations have made both primary and secondary market investments "hellish". How do ordinary retail investors find opportunities? Last week, RootData invited six first-tier VCs and researchers to discuss the investment challenges and opportunities in turbulent markets under the theme of "Market Frontiers - Finding Opportunities in Turbulent Markets".
host:
Ruby, Head of Growth at RootData
Guests
LaoBai, ABCDE Investor & Research Partner
Calvin Du, Founding Member & Head of Platform, Inception Capital
Layla, Investment Manager at Bing Ventures
Jialiang Sun, Senior Analyst at Sosovalue
Michelle Ye, Associate Director of Marketing, Bixin Ventures
The following is a summary of Sapce in Chinese.
1. Host Ruby: In the past period of time, many VC coins have been spurned by the market , and people are more inclined to invest in meme coins. How do you view the long-term investment value of meme coins?
Lao Bai: In the short to medium term, meme coins rely on rapid dissemination and huge wealth effects, but in the long term, the value of meme relies on its own culture, especially memes with the "cyberpunk spirit" will be more favored in the long run.
Michelle Ye: Meme coins are great for quickly building communities and generating topics, which helps attract more people into the Web3 space. For example, Dogecoin, Shiba Pepe, and more recently Bera Chain show how meme coins can quickly become popular. While individual meme coins may disappear, their overall impact on expanding the Web3 user base is huge. So, I think they have a place in the long run, but don't expect any meme coin to exist forever.
Layla: The price of these tokens depends on community consensus. However, in practice, few meme coins achieve long-term success and most have a short lifespan. Therefore, it is difficult to say whether meme coins make sense as long-term investments. Currently, market activity mainly revolves around short-term transactions.
Calvin Du: There are many types of memecoins, some with long-term investment potential, while others may not be strong enough to consistently attract attention and are not worth investing in for the long term. For example, value-generating memecoins like BONK, which accrues value through Bonk Bot fees and various DeFi integrations, are compared to utility memecoins like SHIB that require certain on-chain activity, and event-based memecoins like TRUMP or celebrity memecoins like JENNER, which are catalyzed by current events as a proxy for that idea or person to attract attention. Memecoins that focus on revenue generation or have strong utility are more likely to have long-term investment value, especially if they are associated with strong applications, communities, and ideas that can last for many years and retain attention.
Jialiang Sun I think as an investor, paying attention to top meme projects, team dynamics, and celebrity endorsements is crucial to assessing their long-term investment potential.
Some of the top meme coins, with their influence and user base, usually have a higher chance of success. If they can be gradually applied to real-world scenarios, they may realize more long-term value. For example, Dogecoin is increasingly being accepted as a payment method by merchants due to its large community and wide acceptance; the Shiba Inu team is constantly exploring innovations in the fields of DeFi and NFT, striving to add more practicality and value to their tokens. In addition, celebrity influence is also an important factor in promoting the success of meme coin projects. For example, Elon Musk publicly supported Dogecoin, which significantly increased its popularity and market acceptance.
2. Ruby: In this cycle, many new coins are often valued at billions of dollars. How do you think this strange phenomenon came about?
Lao Bai: The current market is somewhat like the memory inheritance of the bull market in 2021. This strange situation is determined by the entire market, not just venture capital and exchanges, but also over-the-counter markets and other factors.
Layla: There are three main reasons. The first is the influx of private market capital. After 2020, private equity funds and capital quickly entered the crypto industry, leading to the emergence of many crypto-native funds. At the same time, traditional PE/VC companies also joined the competition, creating a very fierce competitive environment;
The second is aggressive valuations. The influx of capital has increased the influence of venture capital in shaping the valuation of the crypto market. As more money flows into the industry and venture capital firms participate in more transactions, valuations are inevitably pushed up. In addition, many projects have extended their financing period, leading to more intense competition among venture capitals.
The third is the impact of market sentiment. During periods of positive market sentiment (such as 2020 and the first quarter of 2024), financing activities and the number of high-value projects usually surge.
Calvin Du: First, the high valuations we are seeing are a lagging indicator of the mini-bull run we saw earlier this year. Total valuations in the crypto space are growing, and Bitcoin has grown a lot. In fact, if you value these projects using Bitcoin, they are about the same as in previous cycles. Similar to previous bull cycles, the rise in valuations in this cycle is mainly due to improved sentiment, founders taking advantage of interest and competition among existing investor groups.
I think the more meaningful discussion is how we should respond, with founders, venture capital, and exchanges realizing that high-valuation, low-liquidity projects are not helpful for industry growth, and starting with lower valuations when raising funds.
3. Moderator Ruby: Will you encourage projects to continue to use the points system to reward users? How do you evaluate the pros and cons of the points system?
Lao Bai: No. The point system used to be effective, but it is no longer effective now. At least, resisting the point system has become a trend. Its advantage is that it is easy to attract attention, but its disadvantage is also very obvious. Users do not have clear expectations, which may turn into emotional manipulation (PUA) by the project party.
Michelle Ye: I think the points system is an efficient way to attract users early on and get them involved before the project issues tokens. The key is to design it well and balance user participation and rewards. The question is not whether to use points, but how to design them effectively to maximize their benefits.
Layla: It depends on the overall market situation. Essentially, points are pieces of "financial Lego". They have no long-term meaning, and most of their ultimate value is tied to airdrops. While points may help build expectations for future airdrops and stimulate growth in the number of users and the total value (TVL) of the protocol, this effect is short-lived and usually disappears quickly after the airdrop is completed. Without long-term incentives, TVL and user numbers will plummet and the project will become a "ghost town".
Calvin Du: I encourage any loyalty program that is beneficial, transparent and secure for both the project and the users. At the same time, how users earn points or what behaviors can earn points can be defined very finely to encourage healthy user interaction. But in the end, the points program is a tool, not a goal. A good product is the goal.
I think the points system has the following advantages:
- Targeted incentives and optimization to improve long-term sustainability of programs/real-time behavioral insights and easy flexibility to adapt to optimization of targeted behaviors;
- Avoid regulatory risks in issuing tokens;
- No direct governance or economic ownership of the protocol is given;
- Possessing many of the same benefits as tokens, but without these drawbacks;
- Points are off-chain representations of user loyalty programs that work similarly to tokens, with airdrops and yield farming to attract initial users, but with added space and flexibility for project teams on how to ultimately handle these points.
- Can be used as a test group before tokenization
The disadvantages of the points system are as follows:
- The discretionary nature works both ways: it is good for the team, but means that users have to speculate on reward distribution, whether points will be honored, about fairness and transparency, about changes in reward distribution criteria (e.g., the EIGEN scandal);
- This means that in some cases, points may not be as effective as airdrops in incentivizing the target behavior;
- Additionally, because the program has so much control over the behavior of reward points, it may not allow for a more natural exploration of the product.
4. Host Ruby: What new concepts do you think are most promising or pessimistic ?
Lao Bai: I am more optimistic about the two narratives of Real-Time Blockchain and Blinks. I am not optimistic about decentralized AI or general AI. Also, there are more and more Layer2s and the track is very crowded, so I am not optimistic about them either.
Michelle Ye: One concept I really like is re-staking, like what Eigenlayer is doing. It enhances the security of Ethereum across different applications and chains. This not only increases demand for ETH, but also enhances the security of the entire ecosystem. However, I am skeptical of "pseudo-restaking projects" that simply add leverage without real innovation. These often just make the existing system more complicated without adding substantial value, and they may increase systemic risk rather than provide real benefits.
Jialiang Sun: I am optimistic about the RWA (real world asset) track for several reasons: First, tokenization allows traditionally illiquid assets, such as real estate, art, and bonds, to be traded 24/7 on the blockchain, significantly improving their liquidity. In addition, the proliferation of RWAs has led to the creation of innovative financial products such as interest-bearing stablecoins and tokens backed by real-world assets. In addition, large institutions are gradually entering the RWA field, and the participation of entities like Franklin Templeton and BlackRock can attract more traditional institutional players.
As for the concepts we are not optimistic about, given that the entire blockchain ecosystem is still in its early stages, the development of many concepts is still unclear and heavily dependent on developer innovation. In the field of technology, supply often creates demand, and many concepts are not favored by users before they are introduced.
5. Ruby: Given the current poor performance of the secondary market, what challenges and opportunities will primary market investments face? How are you prepared to deal with these changes?
Lao Bai: I think the challenges of primary market investment mainly lie in the long lock-up period, difficulty in exiting, and lack of innovative projects. These challenges can be addressed by finding more innovative projects, finding more product-market fit scenarios (PMF), and gaining more reputation.
Layla: It's not just the secondary market that's underperforming, the primary market is also facing many challenges. Given the state of the secondary market, financing in the primary market has become very difficult, and the corresponding exit is even more difficult. Of course, there are opportunities. Venture capital is venture capital, and risk comes first. All we can do is conduct thorough research and use that research to support the selection of promising industries and investment targets. The only way to face change is to adapt to it. Looking ahead, we will be more cautious in our investments.
Michelle Ye: The downturn in the secondary market will definitely make it more difficult to exit investments, which is a challenge. Some projects may postpone their TGEs and wait for better market conditions. However, this also means that the primary market valuation is lower, providing better investment opportunities, which is a good opportunity. We focus on strong fundamentals and support our projects with technical support, marketing, and community building strategies to ensure that they are ready when the market rebounds.
Calvin Du: Our response is to focus more on founder-market fit. Founders must be agile and execute quickly, but also be prepared to pitch. They need to have a deep understanding and appreciation of the complexity of the vertical. Venture capital deployment and transaction volume in 2024 are still lower than 2021 levels; venture capital has increased slightly; but valuations are significantly higher. For early-stage companies, it is recommended to lower valuations to win the competition among early investors and remain humble in the current market environment. We ourselves need to do further research, promote more cooperation among our portfolios, and be more sensitive to valuations. In addition, it is also necessary to make it clear that market sentiment may change at any time, and may be affected by hot events such as interest rate cuts, ETH ETFs, and the US election.
Jialiang Sun: We have recently observed some corrections in the secondary market, mainly due to short-term factors such as the sale of Bitcoin by the US and German governments. However, these are temporary events and we remain optimistic about the long-term outlook. Last week, we published a report analyzing the recent Bitcoin price fluctuations and concluded that buying activity was driven by long-term positive factors, while selling was due to panic about specific events. We expect the market to gradually absorb negative sentiment in early August.
6. Host Ruby: For startup founders, what suggestions do you have to help them better obtain investment in the current market situation?
Lao Bai: Try to build something innovative in terms of infrastructure, or attract a large number of users to actually use it in terms of applications. Try to get close to the core circle of the ecosystem, especially Chinese projects should go overseas and move towards the overseas core ecosystem.
Michelle Ye: First, clearly understand your strengths and identify unmet needs in the market. Focus on solving real user problems to gain recognition from the market and investors.
Second, plan your project milestones in advance. Outline your funding needs and key events, such as TGE and IPO. Having a clear timeline helps manage progress and shows investors that you are well prepared.
Third, build a strong and capable team with complementary skills. A professional, cohesive team is essential to executing your vision and adapting to challenges. Interact with investors frequently, listen to their feedback, and be ready to shift direction when necessary.
Finally, maintain regular and transparent communication with investors. Provide updates on your project’s progress, including technological development, market expansion, and financial status. This builds trust and confidence. Stay adaptable and be ready to adjust your strategy as market conditions change.
Layla: Seize the trend and adapt to changes. It is common for projects to end up doing something completely different from what they originally planned. It is important to observe market dynamics and trends, seize reasonable market and industry changes, and dare to make changes and try new things. Persistence is not the only best solution, and appropriate flexibility is necessary to keep up with the rapid changes in the market.
Calvin Du: Find investors who are aligned with your market thesis. Venture interest from a broader range of investors tends to slow down when the market slows down. But there are still many firms that continue to invest in high-conviction projects regardless of the current market; manage costs, manage runway; find investors who can provide strategic advantages to help your project reach the next level. Not all VCs just give you a check, as this space matures, investors have become more sensitive to valuations. Make sure the valuation you raise is realistic. It's a weak signal when investors see that you've been raising for a long time and even lower your valuation because of it.
Jialiang Sun: Clearly define the specific market segment you are targeting and understand the pain points you aim to solve. In addition, a clear and viable business model is essential to demonstrate the profit potential of the project. An effective marketing strategy is also necessary to expand the project's influence and user base.
For crypto projects, it is important to first identify potential barriers that prevent Web2 users from transitioning to Web3. These barriers include unfriendly user interfaces, lack of trust and security, and complex processes. For example, the Ton ecosystem leverages Telegram to effectively address these issues and reduce user barriers.
Furthermore, a sustainable token model, strong backing, and an experienced team are essential components.
7. Host Ruby: Finally, please ask each guest to share one suggestion or opinion on future investment.
Lao Bai: Pay attention to AI, not just Web3, but real AI. It will be the main narrative in the next 5-10 years.
Michelle Ye: Timing and rhythm are crucial in investing. Pay attention to market signals and be ready to act when the right opportunity presents itself. Understand your investment style, provide strong post-investment support, and promote collaboration among your portfolio projects.
Support your projects with more than just funding - help them with technical issues, marketing, and provide some advice on team management. Encourage collaboration within your portfolio and create a supportive ecosystem to maximize their success. Build trust and close relationships with these founders, because the next successful project may come from them or their circle of friends.
Layla: When you can’t do anything, spend more time learning and thinking; when you can, take action courageously. Ensure proper risk management.
Calvin Du: Focus on high-conviction, long-term bets and act earlier and faster.
Jialiang Sun: We still need to identify a promising track. Based on the current market, I believe that the tokenization of real-world assets (RWA) has strong growth potential. The advantages of RWA include liquidity and innovation. Through blockchain technology, ordinary users can gain access to asset classes that are usually unavailable to them, such as U.S. Treasuries. This not only enhances the liquidity of these assets, but also allows more people to participate in markets that have traditionally been limited to high-net-worth individuals and institutional investors.
