The general downturn in crypto markets and the erosion of trust caused by a slew if scandals and market turmoil have made the crypto venture capital market more selective. But, big corporate investors continue to write checks in the space.
Decentralized finance, also known as DeFi, continues to be a hot topic in cryptocurrency and the community, despite market volatility. New use cases, protocols, projects, and other opportunities for DeFi are constantly emerging.
According to several investors, 20% to 50% (or more) of all crypto-related pitches today are focused on DeFi. This shows that DeFi projects are very popular and in need of funding.
“To stand out in this crowded space, founders must focus on highlighting a unique technology and clear advantage for a specific use case, as well as a defensible moat,” said Alex Marinier, Founder and General Partner at New Form Capital.
DeFi is ultimately a mirror of traditional finance (TradFi). DeFi founders with deep sector knowledge at TradFi along with a basic understanding about blockchain will stand out among other teams, Paul Veradittakit of Pantera Capital shared.
In the last year, cryptocurrency has faced a lot of challenges. Industry changing eventsTerra / LUNA ecosystem collapseIn may and cryptocurrency exchange FTX breakdownIn November. Both these events brought down large numbers of small startups as well as large players who mixed in with the now deceased players on the market.
Venture capitalists are changing their investment strategies as the market looks to the future. Some are updating their investment strategies while others are sticking to what they know, with maybe a few adjustments. Continue reading to learn more about active investors’ views on DeFi, how they advise portfolio companies in times of funding shortages, and the best way to approach them.
We surveyed:
- Michael Andersonco-founder, framework projects
- Alex MarinerFounder and General Partner New Form Capital
- Samantha Lewisowner, Mercury
- Paul Viraditakitcomrade general, Pantera Capital
- David JanFounder and General Partner OP encryption
- Mike Giambabacomrade general, Galaxy Ventures
Michael Anderson, Founding Partner, Framework Ventures
How big is the DeFi Market today? What growth do you anticipate it to achieve in the next five-years?
We look at the total market capital of DeFi assets, total value locked (TVL), as well as trading volume when analyzing the DeFi market. TVL is a metric that has its limitations, but we believe it is still a good indicator of activity in this sector. We believe that TVL will increase, and so could the total market capitalization.
We closely track the sector’s relative activity (volumes, trades and users) in comparison to centralized alternatives such exchanges. Despite the negative sentiment around cryptocurrency today, we believe that the industry will soon see a return to activity. We believe that after all the dramatic explosions of central finance (CeFi), users will be less likely to trust exchanges and companies in the space and will instead opt for decentralized protocols.
What are the biggest challenges facing your company in 2022? What steps can you take to prepare for 2023
Like most investors in this space, our biggest challenge was navigating the seemingly endless CeFi disasters and failures that have rocked this industry. We were able avoid most of these failures because we participated in several FTX ecosystem projects.
Framework has not been as badly hit as other larger VCs in this space and is therefore in a strong position to continue investing capital in this new market.
The CeFi incidents have caused a lot more collateral damage in the industry. Our main priority over the last 12 months was to ensure that all portfolio companies are sound and liquid, well-capitalised and can survive for the next 1-3 years. This means that we help portfolio founders reduce their costs, prioritize high growth activity, as well as advising on product, growth, future fundraising strategy, and in a less friendly funding climate.
Overall, our stance validates our core theses over three years. We will continue to increase our efforts on DeFi and web3 gaming and other areas. Framework sees this market to be a great opportunity to deploy capital in a selective manner, as many companies are not actively looking at investing at the moment.
What advice would you give your portfolio companies in 2023 to be successful?
We are working with them in order to reduce costs and help them focus on the next 1-3 year. We believe in cryptocurrency long-term. However, we don’t know how fast it can rebound. Therefore, survival should be our top priority.
We encourage founders to think strategically about project development. If the team is focusing in on three different areas, we encourage them instead to prioritize the highest growth activity.
Which percentage of the pitches you receive are DeFi projects and protocols? What can they do that will make them stand out in the wider crypto landscape?
Today, 30%-35% are heavily DeFi-focused.
If a DeFi project wants to stand out, they need to think about where the disc is going. We are looking for projects that have the potential to be organisation-friendly. It’s not enough to just start organizing.
We are also interested in projects that have a direct link to enterprises, or at the very least, a compelling growth strategy that involves enterprises. We don’t think retail projects will be a sufficient market in DeFi in the next few years. Therefore, institutions should be more interested in creating something that is attractive.
We want to see the project from a different perspective. We are not interested in any Uniswap clones or Open Sea copies of the alt-L1 flavor.
What is your current strategy to invest in DeFi projects and protocols? What has changed in the past quarters?
In 2020, at the height of DeFi summer, there was enough market for projects to deal with both retail and DeFi degens. [a nickname for people interested in risky, niche, speculative crypto projects]. The market is completely new now.
Retail was destroyed in more than a dozen ways last year and is unlikely to return for several years. We are now focusing more on projects that aim to engage with institutional users and markets.
We are aware that regulations will likely decrease, so we are interested in projects that support regulation or are friendly to regulation.
What types of DeFi use cases do think will be more popular in the future? Which areas of DeFi do you consider more important than before?
With the merger officially announced, liquid staking has become a huge area of excitement for us. We believe liquid staking will be more popular after Shanghai launches. Users will have the option to withdraw assets without worrying about liquidity.
How can you bridge the gap between traditional finance (TradFi), and DeFi?
We need more DeFi products that are truly inclusive of institutions. This means projects that have pro-regulatory features built into them, such as KYC and the ability to limit certain assets. Institutions will be able handle projects that are not similar to the DeFi system we are familiar with. They will have to adapt to this new ecosystem.
How do you think regulatory structures can impact the DeFi space, Which country or region seems the most forward?
We will soon have the historic cryptosystem that everyone has been waiting to see in 2023. It is possible to be more positive with more clarity.
We don’t have an official stance but it seems that the UK has been gaining more openness from a thought leader’s point of view.
How do you like to receive offers? What is the most important thing that a founder needs to know before they talk to you?
We love a good tale. We want to know the reasons you are working on this problem, how it can be fixed now, and how you think you can beat everybody else. We value competitive advantage.
Alex Marinier is the Founder and General Partner of New Form Capital
What is the DeFi market size today? What growth do you anticipate it to achieve in the next five-years?
The DeFi market is worth approximately $50 billion in TVL. We expect the market will be divided into two types in the next five-years: authorized and unauthorized.
Because it combines blockchain technology and traditional finance compliance, Licensed DeFi is sure to gain popularity with institutions. It could be worth more than $1 trillion if a small portion of traditional finance activity moves up in the chain.
Add permissionless DeFi to the mix, which is more oriented towards individual users, and the shared market could reach anywhere from $500 billion up to $2 trillion by 2028.
DeFi’s growth depends on more than just a rise in use cases. It will also be affected if there are changes in regulation, infrastructure, and financial innovation.
What are the biggest challenges facing your company in 2022? What steps can you take to prepare for 2023
2022 was a year of focusing on avoiding major meltdowns (Terra, Celsius, FTX ). We had to be more patient with our founders and ensure that they had enough runway for a prolonged bear market.
Our focus this year is to help founders find creative ways of growing through this market and positioning themselves for the next bull market. We also focus on finding opportunistic investments with attractive valuations and incubating additional projects in-house.
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