Author: @reganbozman

Translation: Plain Blockchain

In the venture capital world, it is widely accepted that profits are made by holding views that contradict the mainstream but turn out to be correct.

However, in the cryptocurrency venture capital field, this view is absolutely wrong - the only thing that matters is whether you can predict the direction of market sentiment in advance.

Here are some chaotic thoughts about what we call the "memetic economy":

1. Contrarian Investment

In venture capital, being logically correct is often not enough - if many other investors hold the same view, the market will price it in.

This view more or less applies the efficient market hypothesis to private markets.

Let's take a deep dive into B2B companies, the largest category in venture capital and the easiest to value.

Typically, venture-backed B2B companies:

(a) Do not have a large amount of assets,

(b) Are growing rapidly.

Therefore, we can assume that their valuation is based on future cash flows.

Obviously, this is not always correct. In a booming market or industry, investors are willing to pay a higher price for a specific set of cash flows, but I think this is the right direction.

"Contrarian investors" are those who oppose or reject prevailing opinions. Therefore, in the context of venture capital, being a contrarian investor basically means looking for the largest difference between a startup's expected future cash flow and actual future cash flow.

When you hear a seasoned venture capitalist talk in a podcast about how they discovered a $10 billion company at the early stage, there are usually anecdotes indicating that the company's first round of financing was not well received.

Investors made the right contrarian bet. In practice, there are several ways to make contrarian venture capital investments.

(a) Invest in overlooked geographic areas or verticals.

(b) Know something that others don't.

I think choosing A is much easier than choosing B, so it is more common. For example, investment in defense technology has long been unpopular.

If you have foresight and can foresee the growth of this area, you will reap substantial returns. There are many reasons why people don't like this area - limited potential customer base, extremely difficult sales cycles.

As the potential of this area becomes more apparent, more and more people enter, leading to increased competition. It may be more difficult to make money now compared to 2017 or when Anduril received seed funding.

Trading is more expensive, companies face more competitors, and so on.

In venture capital, being "correct" usually means that some kind of liquidity event has occurred. For example, a company has gone public (IPO) or been acquired by another company.

If you are making seed investments, typically (but not always), you will need large funds to enter after you, as it usually takes a lot of money to grow a company to a certain size.

All these market participants more or less focus on future cash flows.

Of course, there are exceptions.

Some intellectual property (IP) may not be profitable at the moment, or may be profitable in the future.

Acquisitions can be strategic rather than purely financial.

But overall, "cash is king".

If you support a SaaS company for agricultural machinery in Iowa and the company's annual recurring revenue (ARR) reaches $100 million, someone will buy the business and you will get a good return.

You don't need Iowa or SaaS for agricultural machinery to become popular.

There is a Kazakhstani fintech app called http://kaspi.kz that went public last year with a market value of $20 billion.

This is a very good result for early investors.

Kazakhstan may still be an inactive market for venture capital, but Kaspi generates billions of dollars in revenue annually, so it doesn't matter.

2. Differences Between Crypto and Traditional Markets

Many people enter the cryptocurrency market from Sand Hill Road or Wall Street with their Rivian and fail completely because these markets operate differently:

• Different market participants
• Different things of market value

If you are making seed investments in the startup investment field, you will focus on:

• People who can add value to your shares (later-stage investors)
• Potential acquirers (exit liquidity)
• People willing to buy company stock when it goes public

If a company can generate cash flow, that's a huge opportunity. If you are making seed investments in the cryptocurrency venture capital field, you will focus on:

• People who can add value to your assets (later-stage investors)
• People willing to buy tokens in the open market (exit liquidity)

While there are some later-stage investors, they are not many.

In the past twelve months, 11 funds have led or co-led rounds of financing of over $10 million.

There are too few later-stage investors.

This makes the performance of tokens in the open market more important, as cryptocurrency startups cannot sustain themselves in private markets for ten years as traditional venture capital does.

Given the relatively small capital market in the cryptocurrency space, public market participants become more important.

Yes, some institutions participate in cryptocurrency trading, but if you exclude Bitcoin (BTC) and Ethereum (ETH) from the cryptocurrency market, what percentage of tokens do you think are held by retail investors?

Over 80%.

So, your ultimate liquidity comes from retail investors.

Whatever you do in the seed stage, you need to ensure to some extent that retail investors will be excited to buy the token in the open market.

This is a market completely different from traditional venture capital in terms of ultimate liquidity.

This leads to the second important difference between cryptocurrency and venture capital. What does the cryptocurrency market value?

I can give you a hint - it's not cash flow.

The cryptocurrency market values attention. What does attention mean?

It means you are part of the current narrative.

It means the cryptocurrency community is talking about you.

It means retail investors want to own your token.

It means your community is creating interesting memes.

It means other projects want to have "partnerships" with you.

Just look at DEPIN and $HNT. Becoming an industry leader helps integrate you into the narrative, which is arguably more important than actual cash flow. Perhaps this is not how these markets will always operate, but it is how they currently operate.

You can look at DEPIN Ninja and easily see this, or review the top 100 on Coingecko and look for the correlation between FDV (Fully Diluted Valuation) and cash flow. But it doesn't exist.

I mentioned earlier that in the venture capital field, success in a unique category does not require that category to become popular.

If a company has stable cash flow, investors will pay attention. Obviously, this view does not apply in a market that does not value cash flow.

In a market based on attention, you absolutely need the category you are investing in to become popular at some point.

Therefore, the best venture capital strategy is to try to predict the development trend of the narrative in advance. What does "predicting the narrative in advance" mean? It means entering it earlier than others.

This is somewhat different, but not entirely the same. This means attention has not yet appeared. It does not mean attention has appeared and been rejected.

3. Conclusion

Let's go back to the definition of "contrarian investor": "A contrarian investor is someone who opposes or rejects prevailing opinions."

In the current cryptocurrency market, true contrarian behavior would be to invest in a stagnant ecosystem, such as Polkadot, Tezos, and ICP. This is likely a good way to lose money. Most experienced market participants do not do this because they know it is a bad strategy.

The cryptocurrency market values attention and highly values new things.

Therefore, put capital into areas you believe will reach consensus in 1-3 quarters.

There are also some exceptions - buying SOL after the ftx crash and supporting the Solana company is not popular, but respect to those who did so.

They got returns.

But I think if you start putting capital into SOL or the Solana ecosystem in early Q3, you may achieve equally outstanding performance, as this trade becomes more consistent in the venture capital field after risk adjustment.

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