This audio is a Twitter space event hosted by RootData, in which Jason Kam, the founder of Folius Ventures, participated. Wu said that the reproduction is authorized.
Jason mentioned that he has hardly made any moves in the past few months and is not so optimistic about the market cycle. In the past, if he invested less than $50 million in the earliest stage for a 10% stake, and the project managed to get listed on an exchange, it could even be without a product, as long as there was enough hype and the project managed to get listed on Binance, it could generate excellent returns. Once everyone understands this pattern, they will find many standard speculative projects. The industry has an oversupply of projects without the ability to generate profits, coupled with a lack of buying pressure in the secondary market, leading to the current situation. There is a high probability of platforms similar to 4399 games emerging on Discord, Telegram, and even games on Twitter.
The audio transcription was completed by GPT and may contain errors. Please listen to the complete podcast:
Xiaoyuzhou:
https://www.xiaoyuzhoufm.com/episodes/66ed8e0c87a9242776b3e53c
YouTube:
https://youtu.be/Ya1HIcY8Ihw
Introduction of Jason and Folius Ventures
Ruby: Good evening, everyone. Welcome to the first event of the Crypto Financing 101 series hosted by RootData. I am your host, Ruby. Tonight's theme is "Navigating Bull and Bear Markets: The Wisdom Behind First-Level VC Investments."
We are honored to have Jason Kam, the founder of Folius Ventures, with us. Jason graduated from Carnegie Mellon University and worked on Wall Street. In 2018, he entered the crypto field and created the Twitter account @MapleLeafCap, which now has over 45,000 followers. Jason will share with us his investment experience in market fluctuations and his insights into the future trends of the crypto market.
Could you please briefly introduce yourself and the characteristics of Folius Ventures?
Jason: Hello, everyone. I'm Jason. Folius Ventures was established in September 2021. At that time, it was quite interesting. After the DeFi Summer in 2020, two friends, Ben and Santiego, suggested that I start a fund because the market needed more attention in the Asia-Pacific region, especially from entrepreneurs with unique backgrounds.
Since its establishment, for almost three years, we have managed funds of around $220 to $230 million. Our team consists of 5 people, mainly in Asia, including Shanghai, Shenzhen, Hong Kong, and Tokyo. We have three main differences from other institutions. First, although we have made fewer moves in the primary market this year, we have invested more in the primary market over the past two years. We are a fund that invests in both primary and secondary markets. Our typical investment in the primary market ranges from $500,000 to $4 million and we can lead or follow. We have a larger position in the secondary market, where we can invest in mainstream assets like BTC and ETH, as well as in small-cap projects like Pump.Fun. We have a very open investment strategy.
The second difference is that we have always favored entrepreneurs in the Asia-Pacific region. 80% to 90% of our investments are concentrated in the Asia-Pacific region.
The third point is that our investment cases are mainly focused on the application layer, such as centralized exchanges, SaaS software, mobile applications, and consumer-oriented products like games. It is a great honor to be invited to this event.
Ruby: We noticed that Folius Ventures is still active in the current market environment, especially in seed round investments in some well-known projects. Could you share the reasons for continuing to make moves in this market environment?
Jason: In fact, our investment pace has slowed down a lot this year. Apart from We.Rich, MegaETH, Catizen, and WSPN are our recent cases, but many projects completed their financing last year, and the news was only recently released. Since March this year, we have made fewer and fewer moves, and in the past few months, we have hardly made any investments. This is similar to the situation of other peers. The main reason for our caution is that we are not optimistic about the market cycle. In the past few years, most VCs have been changing their profit model from rapid listing and exit, and we need to readjust our strategy.
Secondly, we prefer investments in the application layer, and good opportunities are not always available, and the appearance of entrepreneurs also has a certain degree of volatility. These three factors combined have slowed down our investment pace this year. Of course, the timing of financing disclosures is not determined by us, so it may give the impression that we are making frequent moves, but in fact, this is not the case.
How should the current VC investment model be restructured?
Ruby: You mentioned that currently, first-level VCs generally use a wide net approach and plan to list on CEX within 6 to 12 months. You believe that this investment exit method needs to be restructured. What is your ideal VC exit model?
Jason: First, I would like to take a step back and talk about a "cool secret" in this industry. In the early stages, if the project's valuation is below $50 million, and you invest to hold a 10% stake, as long as the project can overcome the listing issue of the exchange, even without an actual product, as long as there is enough market hype and someone is willing to buy, the exit cycle can be calculated on a monthly basis. In other words, if you invest now, the project can be listed in three months, and the liquidity brought by the exchange and the involvement of early traders will allow early investors to achieve very high paper returns.
If these early private investors not only invest through the company, but also obtain shares through advisory agreements, pledges, or airdrops, and even unlock them at the TGE (token generation event), then the entire exit cycle is very short. Even if there is a standard Cliff period (usually 12 months), in many cases, the project can break even for investors in the first month, and the rest is all profit.
This strategy became popular around 2019 and 2020, and today everyone has seen through this model. Even many projects have to operate according to this model, even if they are not for a quick exit. We estimate that in the next 6 to 12 months, there may be 50 to 200 projects with valuations exceeding $500 million, all aiming to get listed on exchanges.
However, the problem is that after these projects are listed, their circulating supply may account for only 2% to 10%. Without exception, these projects will face a large amount of unlocked circulating supply within 1 to 2 years after listing, increasing from 2% to 10% to 20% to 50%. In other words, the circulating supply may increase by 5 to 10 times.
If more projects get listed in the next six months, the supply of circulating supply in the market will increase rapidly. However, I do not believe that the secondary market of Crypto has enough capacity to absorb this. We have observed that the amount of funds willing to bet on non-Bitcoin, non-Ethereum assets is much lower than the fundraising scale in the primary market. Therefore, I believe that the industry as a whole is facing a dilemma: there is not enough capacity to generate profits, there is an oversupply of projects, and there is a lack of buying pressure in the secondary market. This is also one of the main reasons why we have slowed down our investment pace.
Views on the recent tense relationship between retail investors and VCs
Ruby: Recently, there has been increasing discussion about the tense relationship between retail investors and VCs, especially the rising FUD sentiment. Retail investors' attitudes towards institutional investors/VCs seem to be becoming increasingly unfriendly. How do you see the future development of this relationship? What role will VCs play in it?
Jason: In fact, you invited me today hoping that I could talk more "truthfully" about my views on this issue, right? I will try to be as candid as possible and share my sincere thoughts. Regarding the relationship between VCs and retail investors, I think the first thing to say is that this binary opposition is not completely absent in traditional financial markets, but it is relatively "mild." In traditional markets, as early angel investors, VCs provide funding to help companies grow, and companies continue to raise funds until they exit in the secondary market. The difference here is that traditional markets such as A-shares, H-shares, or US stocks have a relatively mature secondary market, and companies themselves have a clear profit logic, which can be reflected in the value of equity.
Therefore, when companies go public, retail investors do not feel like they are "catching the ball" for VCs, because the listed companies themselves are valuable and have clear profit capabilities. This makes the relationship between retail investors and VCs in the traditional market not so tense, and everyone's interests tend to be more aligned. However, in the crypto field, this relationship is not quite the same.
Why "Bad Money Drives Out Good Money"
Jason: In the crypto industry, the problem of "bad money driving out good money" has several main reasons, in my opinion. First, as we discussed earlier, the market's liquidity is easily manipulated, and the exit mechanism is relatively simple. This environment allows many scam projects to easily enter the market, which is a widespread problem.
But the more fundamental reasons are twofold:
First, after the introduction of Web3 elements, creating a sustainable business model that is not affected by market cycles is actually very difficult. If you believe that tokens can capture value, this value capture has cyclical and highly volatile characteristics. Project revenue may decrease by 80% during a market downturn, which has a significant impact on valuation. Therefore, even if you invest in projects that are recognized within the industry as valuable, such as BNB or tokens of large public chains, these assets will be severely affected during market cycles. This has led many people to believe that the quality of tokens invested by VCs is not high.
Second, although some projects have excellent business capabilities, they may not be willing to reflect this value in their tokens. This industry does not require project teams to do so, and even if they are willing, they have to face regulation from the US SEC. If a project performs very well and even touches the jurisdiction of the SEC, it may cause even bigger problems. This often leads to truly valuable companies being reluctant to issue tokens, while companies without a business model are willing to issue tokens, creating a situation where bad money drives out good money.
Additionally, the prevalent token design pattern in the industry is also a problem. Typically, token design allocates more than 50% of the shares to the community, 20% to 25% to the team, and the remaining 20% to 25% to investors. This is an industry convention, and if not followed, both exchanges and investors may be dissatisfied. However, the underlying purpose of this design is to avoid triggering the SEC's definition of securities, as the SEC tends to classify concentrated tokens as securities.
However, the problem with this design is that many project teams, in order to meet the high valuation requirements of VCs, issue tokens when the circulating supply is low and the valuation is high. This design makes it difficult for the business's growth rate in the early stages to exceed the inflation rate of the token, leading to the token price being sold off.
Nevertheless, I believe that if a project can have sufficient unlocking mechanisms, and if its core business growth and value capture can exceed the inflation rate, then these tokens still have investment value. I'm sorry, the answer is a bit long.
Analyzing Different Project Operation Models Using Pump.Fun and Banana Gun as Examples
Ruby: Projects that are reluctant to issue tokens may indeed be due to their stronger business capabilities, such as Pump.Fun, which has strong revenue and does not need to exit through token issuance. On the other hand, projects like Banana Gun, although they also have their own revenue logic, still choose to issue tokens. How do you view these two types of projects?
Jason: In my opinion, capitalization is indeed one of the best ways for a team to realize the efforts of the future over the years. In the crypto field, if a company is a leader in the industry, has high attention, and can convince the community that its business model is sustainable, then issuing tokens can result in a high valuation.
However, project teams need to consider whether capitalization will affect the progress of the business. For example, if Pump.Fun issues tokens and achieves a valuation of $500 million or $1 billion, but then faces competition, such as someone launching Sunpump, leading to a decrease in Pump.Fun's revenue, the valuation may drop by 40% in a few days. In addition, the SEC may consider this behavior to involve unauthorized issuance of securities, which could cause trouble for the project.
In contrast, smaller-scale projects like Banana Gun, although they have also issued tokens, may not attract regulatory attention due to their smaller scale. If they do not target US users, the issues are relatively fewer. Therefore, whether to issue tokens depends on the project's business model, market size, and the degree of reliance on the US market.
Too Many Projects in the Market, Leaving Retail Investors Unsure of What to Buy
Ruby: Many projects in the market seem very "copycat," and as a retail investor, it's indeed difficult to know what to buy.
Jason: This is indeed a difficult problem. I did some statistics before, although it hasn't been updated for a few years, but based on my observations, there may be 20,000 to 30,000 tokens in the market, of which only 2,000 to 3,000 may be truly substantial projects. Among these projects, there may be fewer than 50 projects that truly have the potential to capture long-term value. These projects not only have actual business models but also perform well in terms of user volume and cash flow capture.
Many large Layer 2 projects are good examples of this. Their cash flow is often distributed to equity holders rather than token holders. As a VC, in the early investment in these projects, we can usually profit through advisory agreements or airdrops, while retail investors often only bear the pressure of token sell-offs. Therefore, shorting these projects through defunding may be a good choice.
Folius's Criteria for Evaluating Projects
Ruby: In the current market environment, project valuation has become increasingly complex. So, in evaluating projects, what changes have you made compared to before? Do you have any new criteria or methodologies?
Jason: I think projects can be viewed from two perspectives. First, it is important to consider the project team's capabilities in two areas:
The first is their ability to execute, which is about whether they can implement, whether they can bring the business logic to life, attract users to use their products, and have a mindset for cash flow. This is about the ability to get things done, which determines whether the project can survive.
The second is their ability to "play the game" and tell a story, which determines how well the project can thrive and whether it can achieve a high valuation in the industry. In simple terms, the former determines whether the project can survive, and the latter determines how well it can survive.
If a project does well in both of these areas and has a leading position or is the only player in its niche, then I would consider it a project worth early intervention. Such projects have a high likelihood of surviving market cycles, and even if they get stuck at a certain point in the current market cycle, we would still be willing to invest.
On the other hand, if a project team is strong in execution but not so good at storytelling and playing the game, they must hit a very strong demand market or be in a track where value has not been fully exploited. Even if the project's website, resources, and founder's performance are not outstanding, as long as the business itself can make money, especially capturing Web3's mass users and generating cash flow, we would still consider investing, but there may be some uncertainty about the exit for these types of projects.
As for companies that specialize in playing the game and telling stories, these are very common in the industry. Many times, they cannot clearly state what their physical business is, but they focus every day on how to get the project listed on major exchanges like Binance, provide an exit channel for all participants, and raise the valuation. The risks of such projects are too great, and there are too many uncontrollable factors, so we usually do not participate. After all, it is difficult for us to access the core level of playing the game.
Therefore, if a project lacks strong execution and storytelling capabilities, we find it difficult to make a move.
Ruby: You mentioned earlier that you tend to prefer investing in long-term projects, so when choosing investments, do you place more emphasis on the team or the project itself?
Jason: That's a good question. Simply put, it's best to have both the team and the project. You need to have an excellent team and an outstanding project, and having both is ideal.
Continued Focus on Applications, Especially Casual Games
Ruby: I find Folius Ventures' investment direction very unique. I'm starting to feel like following your investment portfolio.
Jason: Thank you for your interest. We are always looking for projects with strong potential and long-term value. If you have any further questions, feel free to ask.
Jason: This is a common thought, but I want to point out that even for companies we invest in, there is still a significant risk of losses when they initially issue tokens. Many companies have a high circulating market value when issuing tokens, but the token unlocking speed is too fast, leading to significant inflation pressure. So, even though we try to choose teams with a long-term mindset that can withstand market cycles, we cannot guarantee that every project can avoid inflation issues in the market during token issuance.
Ruby: I see. So, which areas do you think will have innovation next? And what areas will Folius Ventures focus on?
Jason: Our investment style is somewhat unique, even a bit "eccentric." An LP once told me that the projects we invest in are not invested in by other GPs. It may be because we often like some projects that look "strange" (laughs).
I believe that the industry's infrastructure is mature enough, but there is still a lot of room for optimization in terms of user experience (UI/UX). If a company can truly achieve this, we would be very interested. Many of the investments and evaluations we are doing now are to lay out the next market cycle and drive more people to use Web3+ products. I have always believed that the reason why applications have not taken off in the past is because the industry's infrastructure support is insufficient, not because the ideas themselves are flawed.
In the ToC (consumer-facing) space, we are currently focusing on several points:
The project must be able to touch on human weaknesses, such as greed, addiction, and even vanity, such as the desire to look better than others in games. These human weaknesses often drive consumption, and consumption behavior can convey the value of the project far beyond mere speculative attributes.
In terms of platforms, I believe that small games on platforms like Discord, Telegram, and even Twitter have great potential.
We have previously invested in many projects that attract users through economic models, and some Ponzi-like models are prone to collapse at some point. In the future, we hope to find projects with entertainment attributes that can create consumption behavior, even if they rely on some form of economic incentive mechanism.
Additionally, we hope that projects can build network effects and user communities during their development, which is key to long-term value. We are particularly bullish on ToC products that combine human weaknesses, traffic, and Web3 elements.
For example, we really like the Catizen team, which has been cultivating the ecosystem for a year and a half. We believe that in the future, there may be a product on Telegram similar to the 4399 gaming platform, and Catizen has the potential to occupy that position. If they can maintain a long-term mindset and continue to improve, the market will recognize them.
Furthermore, projects like WSPN also have great potential. Considering that Tether and Circle have market values of 100 billion and 30-40 billion respectively, I believe there is an opportunity in the future to give users equity in stablecoins in token form. This area requires a team with industry appeal and execution capabilities, and perhaps Richard from Binance is a suitable candidate, especially since BUSD has reached a scale of 20 billion before.
Projects like Puffpaw on Berachain are also promising. It is a Web3-supported e-cigarette project that involves product design, aesthetics, direct-to-consumer (D2C) sales, and how to integrate with Web3. Each aspect presents challenges, but the tobacco market is a necessity, especially for smokers, and consumption is continuous. So, while these projects are challenging, they are also very worthwhile to try.
Strong Potential in the Solana Ecosystem
Ruby: Yes, projects like Catizen and the e-cigarette project on Berachain, Puffpaw, are very interesting. Recently, the Solana ecosystem has also been a hot topic, with some people believing that it will be forgotten after the meme frenzy, similar to what happened with the BSC chain. Jason, how do you view the future of the Solana ecosystem?
Jason: First, let's take a step back and consider what kind of public chain is attractive. A successful public chain or Layer 2 needs to have very strong capabilities in attracting investment and providing services. It not only needs to attract developers but also needs to consider how to make companies in the ecosystem profitable. This may involve fiat currency exchange, optimizing user experience, especially reducing the barriers for users to enter the ecosystem and friction in usage.
From a technical perspective, I believe that in addition to independent innovation, public chains also need to have a certain degree of "eclecticism." They should not be confined to a narrow view, but rather adopt any technology that can drive ecosystem business prosperity. Ultimately, the standard for evaluating a public chain should be the level of friction for users to enter the ecosystem, the volume of funds, real user interaction, and the application experience on the chain.
From this perspective, Solana is undoubtedly one of the ecosystems that has performed very well. I believe it holds a place among the top five public chains. The Solana team, especially Lily (Chair of the Solana Foundation) and her team, has done a very solid job in driving application landing. They have been thinking about how to better serve applications and users.
Additionally, the Solana ecosystem includes Telegram and Coinbase. For example, projects like Wallet Stars on Telegram, full-chain applications on Coinbase, and fiat currency deposit solutions. Although some projects like Blinks have performed averagely, small tools like Tiplink still demonstrate the potential of Solana in supporting on-chain business systems. If Ethereum does not make further efforts in this area, it may lose competitiveness in the next cycle, or even be forgotten on the historical stage.
Overall, the Solana ecosystem has very strong potential in business landing and user experience, and if other public chains do not keep up with this pace, they may gradually fall behind.
Advice for Entrepreneurs to Utilize Resources from Multiple Ecosystems
Jason: Regarding the founders of projects, although the current "chain abstraction" technology is not yet fully mature, founders still need to choose which chain to stand on in the early stages. For example, the development difficulty of the TON chain is very high, and even developing small games on Solana is easier than on TON. While Solana may require a high level of programming skills, EVM ecosystem developers are relatively easy to find. However, developers in the Base ecosystem may sometimes be more aloof and less attentive to entrepreneurs. Each chain has its own issues.
My advice is to avoid completely binding oneself to a single chain until the business logic loop is fully operational. The ultimate direction should be application chain-agnostic. However, this does not mean that entrepreneurs cannot utilize resources from Layer 1 or Layer 2 ecosystems. On the contrary, they should seize the opportunity to utilize resources from these ecosystems as much as possible, whether it is financial support or technical support. Even if they have to take sides, they can first leverage resources and consider other directions when the project scales up.
The Market Will Continue to Shuffle in the Next 18 Months
Ruby: One last question, I would like to ask you to "recharge" everyone's confidence. As a first-tier investor, how do you think the upcoming bull market will differ from the past? What is your outlook on the future market trends?
Jason: If you remember 2019 or earlier, it was relatively easy to invest in first-tier projects at that time. The number of Crypto VCs was not as high as it is now, and there were limited projects in the market, such as The Graph, Circle, FTX, and others. The entire market was very small, and even an intern could research all the projects in two weeks. Most investors were still focused on the secondary market.
However, from 2019 to 2023, you will see a large number of entrepreneurs entering the Crypto industry. Many people are starting businesses, partly because they truly believe in this industry, but it cannot be denied that many people also have a speculative mindset. And behind them, including us investors, are also heavily entering this market.
The result is that the number of projects that can truly capture long-term value has not increased significantly, but the number of projects looking to list, issue tokens, and cash out has increased by 10 times, 100 times, or even 1000 times. In such a situation, if the market's liquidity is not as abundant as it was in 2021, the pressure on the entire industry will increase.
Currently, if you remove BTC, ETH, and StableCoins from the total market value of the $1.1 trillion Crypto market, and then remove some of the old projects that survived the previous cycle, such as Dogecoin and ADA, the remaining Altcoin market may only be worth $150 billion to $200 billion. And the market value of this part has already fallen below the level at the beginning of the year. If another 20% of new projects enter the market, and the circulating supply of each project increases by 50% to 100%, the average decline in the Altcoin market could be between 15% and 80%, which is what we have seen so far this year.
Jason: I believe that the market will continue to undergo continuous reshuffling in the next 18 months. Many VCs need DPI (dividend multiples), so they will sell tokens as soon as they receive them, and project teams also urgently need to cash out. Although I have expectations for the projects we invest in and hope that they can establish a business model and withstand market cycles, I think the market may deteriorate first and then improve.
However, the outlook is not entirely hopeless. I believe that if we look ahead 12 to 14 months, especially after the next U.S. presidential election, if Trump is elected and appoints a new SEC chairman, there may be a clearer token policy and regulatory sandbox around June 2025. With a clear policy framework, smart lawyers and project teams can design legal and compliant ways to capture value. If all goes well, in the next 24 months, the user acquisition model, monetization model, and last-mile conversion of Web3 will be improved. I believe that by that time, a batch of very good second-tier projects will emerge in the market.
Once the secondary market becomes active, the investment environment in the primary market will also become healthier, similar to the entrepreneurial ecosystem in Silicon Valley today. Therefore, despite the market experiencing reshuffling in the next year, I believe that if the above expectations come true, the future will be better.
Ruby: I understand. Although we may experience a downturn in the short term, there is still great potential for our industry in the long run. This requires continuous effort from all of us as builders.
Jason: You're welcome, but I would like to add one more point. In this industry, entrepreneurship does not necessarily have to follow the common path, such as building a complex financial model, creating a market-fit product, and then cashing out on Binance. This is certainly one path, but not the only one.
There are many companies with very strong cash flow, although you may not have heard of them, their business models are very robust. For example, exchanges and stablecoins are very "positive cash flow" businesses, and as long as they handle regulation, they can make huge profits. In addition, there are other lesser-known but substantial revenue-generating companies, such as DEX Screener, a tool for monitoring Dogecoin, which generates tens of thousands of dollars in daily revenue. There are also some well-known SaaS companies, such as Elliptic, which provides KYC services, Certik, which conducts audits, and Chaos Labs, which simulates protocols, all of which have stable income.
So, entrepreneurs do not necessarily have to follow the path of issuing tokens and cashing out. Delving into clearer business logic and choosing entrepreneurial directions with stability and cash flow is also a good choice.
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