Why crypto industry needs venture capital: Q&A with veteran investor
Traditional funding in the crypto space was once considered useless. After all, the industry itself offers different, controversial, but nonetheless, ways to fund a project – initial coin offering (ICO), initial exchange offering (IEO) and the current darlings of offerings – launchpads and initial decentralized exchange (DEX) offerings.
But with the industry maturing and more startups wanting not only the capital but mentorship to build a working and valuable product, venture capital has emerged as one of the most attractive options. Cointelegraph talked to Li Rongbin, founding partner of SevenX, about why venture capital funding is the next big thing for crypto startups and entrepreneurs.
Tell us about your fund.
Our company, SevenX Ventures, was launched at the beginning of 2020, so we are a relatively young brand. But all of our three founding partners have around six years of experience in crypto VC. We are one of the earliest VCs to invest in DeFi and NFTs in China. We’ve backed such DeFi projects like Dodo, Zerion, Debank, Furucombo, Daomaker, Vega, etc., and NFT-related projects, including YGG, Alchemy NFT, Rangers, and Whale, etc.
Before SevenX, we’ve separately had our own crypto venture funds, based in Beijing and Shanghai, which were early investors of some great projects, including Huobi, Tron, NEO and others. We decided to merge into one because we want to really gather our experience and knowledge to better deliver value to our portfolios.
Why do you think the crypto industry needs corporate investment, given that there are many options to fund a project like ICO and IDO, for instance?
We believe in decentralization and really think that a decentralized way of fundraising is cool and helpful. Such kind of fundraising will bring users, publicity and community. But VCs are experienced and have great connections and resources in the industry, which are good for bootstrapping,
There is a debate around whether to take VCs’ funds as an entrepreneur. Sometimes these firms do little help, and they are also the fastest to dump the project in the bear market. But I think the problem really is in how you deal with the communication and utilization of what VCs have to offer in the most efficient way.
What kind of companies do you invest in? How do you do your research and due diligence?
We love innovations. We are looking for anything that is innovative enough to change the current paradigm of crypto, and we are not afraid of taking risks.
More specifically, we are investing in projects with logical reasoning ability and founders who clearly know where it is going. We like imagination, but those bold imaginations should be based on logical reasoning and analysis. We think right now the whole industry is in the very early stage, just like the Age of Exploration.
We want to be the backers of those ambitious “captains,” we want to give them support on “the sailing” with “gears like compass, toolbox and knowledge” because we have seen a lot of captains before and used to be captains ourselves (we still are, from an investment perspective).
We will provide the capital needed for the voyage, the safety and even sometimes as a crew member. But we need to back the entrepreneurs who know what they’re doing. And we only invest in captains who really want to find the new continent, not the ones who just want to discover another island and ship some goods back.
For research, we always map a specific market to form an architect structure, for example, what is the foundation of the whole DeFi direction, or how many pillars should it really have? We then analyze the driving forces or impact factors behind it. We have a so-called “get-BTC” model to analyze a product from six different aspects, including governance, economy, team, business model, technology and community.
What matters most when investing in a crypto company – the product or the team?
I would say that at an early stage, the team matters most as products could evolve as time passes by. But people are hard to change. We’re also interested in investing in teams that have seen failures before.
But at a later stage, it is the product that matters most as a lot of things might influence the outcome and lead to failure in this ever-changing market.
What's the most difficult thing about investing in crypto companies and products? What kind of risks are involved?
The most difficult thing is that there is too much happening every day in the space. I often sleep for only six hours a day, trying to catch up with the innovations happening all over the world. Sometimes we need to slow down a little bit and think rather than act fast.
The risk is that we have to realize we are participating in a great experiment in the whole new world. And it’s definitely not risk-resilient. But how do you change the world without experimenting?
What is the most promising direction in the industry right now? Why?
But we are looking at potentially interesting directions like the arweave ecosystem. We think it is the backbone of Web 3.0, NFT infrastructure and the new paradigm of NFT utility. Other potentially interesting developments include DID, credit lending, community decentralized autonomous organizations (DAOs), and any type of technology that could bring crypto to mass adoption.
What kind of assistance do you provide to the companies you invest in?
A compass, toolkit, a supply station. We provide assistance throughout the entire process of product development – from building tokennomics, designing marketing strategy, setting up business development, to recruiting and providing emotional support.
Did you ever have an unfortunate experience with projects?
For the past two years, so far, so good.
What does the future of investment in crypto look like? Do you think it’ll see an inflow of more institutional investment firms?
More competition from traditional Web 2.0 giant investors and more small two- or three-men teams that root deep in the ecosystem will take place at the same time.
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