Original Translation: Wu Talks Blockchain
This audio features Jason Kam, founder of Folius Ventures, participating in a Twitter space hosted by RootData, with authorization for reprint from Wu Talks.
Jason mentioned that he has hardly made any moves in recent months and is not very optimistic about the cycle; in the past, if you invested a 10% stake in a project with a valuation below $50 million in the early stages, and the project team managed to tackle the exchange listing, it could even have no product. As long as the hype is built up and they figure out how to get listed on Binance, they could achieve excellent paper gains. Once everyone sees through this routine, they will find many standard speculative projects; the industry is facing an oversupply of projects without blood-generating capabilities, coupled with a lack of buying power in the secondary market, leading to the current situation. There are significant opportunities on DISCORD, Telegram, and even games on Twitter, and it is highly likely that a platform similar to 4399 mini-games will emerge on TG.
The audio transcription was completed by GPT and may contain errors. Please listen to the full 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 session of the Crypto Financing First Lesson series space hosted by RootData. I am your host, Ruby, and tonight's theme is "Navigating Bull and Bear Markets: The Wisdom Behind Primary VC Investments."
We are honored to invite Jason Kam, founder of Folius Ventures. Jason graduated from Carnegie Mellon University and worked on Wall Street before entering the Crypto field in 2018. He created the Twitter account @MapleLeafCap, which now has over 45,000 followers. Jason will share his investment experiences during market fluctuations and insights into future trends in the crypto market.
Could you please briefly introduce yourself and the characteristics of Folius Ventures?
Jason: Hello, everyone. I am Jason. Folius Ventures was established in September 2021. Interestingly, after the DeFi Summer in 2020, two friends, Ben and Santiego, suggested that I start a fund because the market needed more focus on the Asia-Pacific region, especially entrepreneurs with unique backgrounds.
Since our establishment nearly three years ago, we have managed funds of around $220 to $230 million, with a team of five, mainly based 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 invested quite a bit in the primary market over the past two years. We are a mixed fund investing in both primary and secondary markets, with individual investments in the primary market generally ranging from $500,000 to $4 million, and we can lead or follow investments. Our positions in the secondary market are larger, allowing us to buy mainstream assets like BTC and ETH, as well as invest in smaller projects like Pump.Fun. We have a very open investment strategy.
The second difference is that we have always preferred entrepreneurs from the Asia-Pacific region. About 80% to 90% of our investments are concentrated in this area.
The third point is that our investment cases are mostly focused on the application layer, such as centralized exchanges, SaaS software, mobile applications, and consumer-facing products. I am very honored to be invited to participate in this event.
Ruby: We noticed that Folius Ventures remains active in the current market environment, especially in seed round investments in some well-known projects. Could you share the reasons for continuing to invest in such a market environment?
Jason: In fact, our investment pace has slowed down significantly this year. Apart from We.Rich, MegaETH, Catizen, and WSPN are our recent cases, but many projects completed their financing last year; the news has just been released recently. Since March of this year, we have made fewer moves, and in recent months, we have hardly invested at all. This is similar to the situation of other peers. Our caution is mainly due to a lack of optimism about the market cycle. The profit model that most VCs relied on through quick listings and exits over the past few years is changing, requiring a strategy adjustment.
Secondly, we lean towards application-layer investments, and good opportunities are hard to come by, with the emergence of entrepreneurs also showing some volatility. These three factors combined have slowed our investment pace this year. Of course, the timing of financing disclosures is not determined by us, which may give the impression that we are frequently investing, but that is not the case.
How should the current VC investment model be restructured?
Ruby: You mentioned that primary VCs generally adopt a broad approach, planning to go public on CEX within 6 to 12 months. You believe this investment exit method needs to be restructured. So, what should your ideal VC exit model look like?
Jason: First, I want to take a step back and talk about a "pleasant secret" that has existed in this industry. In the early stages, if a project's valuation is below $50 million and you invest a 10% stake, as long as the project team can tackle the exchange listing issue, they may not even need an actual product. As long as there is enough market hype and someone is willing to pay, the exit cycle can be calculated in months. In other words, if you invest now, the project could be listed in three months, and the liquidity brought by the exchange and the involvement of early traders would allow early investors to achieve extremely high paper gains.
If these early private investors not only invest in the company's name but also obtain shares through advisory agreements, staking, or airdrops, and even unlock at the TGE (Token Generation Event), then the entire exit cycle becomes very short. Even if there is a standard cliff period (usually 12 months), in many cases, the project can allow investors to break even in the first month, with the rest being profit.
This strategy became popular around 2019 and 2020, and today everyone has seen through this model. Many projects, even if not aimed at quick exits, have to operate according to this model. 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 go public.
However, the problem is that after these projects are listed, their circulating supply may only account for 2% to 10%. Without exception, these projects will face a large amount of circulating supply unlocking within 1 to 2 years after listing, increasing from 2% to 10% to 20% to 50%. This means that the circulating supply could increase by 5 to 10 times.
If more projects go public in the next six months, the supply of circulating supply in the market will increase rapidly. But I do not believe that the secondary market for Crypto has enough absorption capacity. We have observed that the amount of funds willing to bet on non-Bitcoin and non-Ethereum assets is far lower than the fundraising scale in the primary market. Therefore, I believe the dilemma facing the entire industry is: there is not enough blood-generating capability, an oversupply of projects, and insufficient buying power in the secondary market. This is also one of the main reasons we have slowed down our investment pace.
Views on the recent tension between retail investors and VCs
Ruby: Recently, there has been increasing discussion about the tension between retail investors and VCs, especially with the rise of FUD sentiment. Retail investors seem to be increasingly unfriendly towards institutional investors/VCs. What do you think about the future development of this relationship? What role will VCs play in it?
Jason: Actually, you invited me today because you hope I can talk more "authentically" about this issue, right? I will try to share sincerely. Regarding the relationship between VCs and retail investors, I think it is important to say that this binary opposition does exist 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 like A-shares, H-shares, or US stocks have a relatively mature secondary market, and companies themselves have clear profit logic, which can be reflected in equity value.
Therefore, when a company goes public, retail investors do not feel like they are "taking over" for VCs because the listed company itself is valuable and has clear profitability. This makes the relationship between retail investors and VCs less tense in traditional markets, with interests more aligned. However, in the Crypto field, this relationship is quite different.
Why does "bad money drive out good money" occur?
Jason: In the Crypto industry, the issue of "bad money driving out good money" arises for several reasons. First, as we discussed earlier, market liquidity can be easily manipulated, and the exit mechanism is relatively simple. This environment allows many fraudulent projects to easily enter the market, which is a common problem.
But there are two core reasons:
First, after incorporating 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 is cyclical and highly volatile. A project's revenue may decrease by 80% during a market downturn, which significantly impacts valuation. Therefore, even if you buy tokens from projects recognized as valuable in the industry, such as BNB or tokens from major public chains, these assets will be severely impacted during the switch between bull and bear markets. This has led many to believe that the quality of tokens invested by VCs is not high.
Second, although some project teams possess excellent business capabilities, they may not be willing to reflect this value in their tokens. The industry does not require project teams to do so, and even if they are willing, they must face regulatory scrutiny from the SEC in the United States. If a project performs exceptionally well and even touches the SEC's jurisdiction, it could lead to bigger problems. This results in truly valuable companies often being reluctant to issue tokens, while those without business models are willing to issue tokens, creating a situation where bad money drives out good money.
Additionally, the prevalent token design models in the industry are also problematic. Typically, token designs allocate over 50% of the shares to the community, 20% to 25% to the team, and the remaining 20% to 25% to investors. This is the industry norm, and failure to comply may lead to dissatisfaction from exchanges and investors. However, the underlying reason for this design is to avoid touching the SEC's definition of securities, as the SEC is more inclined to classify concentrated tokens as securities.
However, the problem with this design is that many project teams, in order to meet VCs' high valuation requirements, issue tokens under conditions of low circulating supply and high valuations. This design leads to a situation where, in the early stages of a project, the growth rate of the business is often unable to exceed the inflation rate of the tokens, resulting in token prices being sold off.
Despite this, I believe that if a project has a sufficient unlocking mechanism, and its core business growth and value capture can exceed the inflation rate, then these tokens still have investment value. Sorry for the lengthy response.
Analyzing Different Project Operation Models with Pump.Fun and Banana Gun as Examples
Ruby: As you mentioned, some projects that are reluctant to issue tokens may indeed have stronger business capabilities, like Pump.Fun, which has strong revenue and does not need to exit through token issuance. On the other hand, projects like Banana Gun, while having their own revenue logic, still chose to issue tokens. What are your thoughts on these two types of projects?
Jason: My view is that capitalization is indeed one of the best ways for a team to monetize years of effort. In the Crypto field, if a company is a leader in the industry, has high visibility, and can convince the community that its business model is sustainable, then issuing tokens can lead to a high valuation.
However, the project team needs to consider whether capitalization will affect business advancement. For example, if Pump.Fun issued tokens and reached a valuation of $500 million or $1 billion, but then faced competition, such as someone launching Sunpump, leading to a decline in Pump.Fun's revenue, the valuation could drop by 40% within days. Additionally, the SEC might view such actions as involving unlicensed securities issuance, which could bring trouble to the project.
In contrast, smaller projects like Banana Gun, while also issuing tokens, may not attract regulatory attention due to their smaller scale. If they do not target U.S. users, the issues are relatively fewer. Therefore, whether to issue tokens depends on the project team's business model, market size, and reliance on the U.S. market.
There Are So Many Projects in the Market That Retail Investors Don’t Know What to Buy
Ruby: Many projects in the market now seem very "shoddy," and as retail investors, it’s indeed hard to know what to buy.
Jason: This is indeed a dilemma. I did some statistics before, although it has been a few years since I updated them, based on my observations, there may be 20,000 to 30,000 tokens in the market, of which only about 2,000 to 3,000 are truly substantive projects. Among these, there are likely fewer than 50 projects that genuinely have long-term value capture potential. These projects not only have actual business models but also perform well in terms of user base and cash flow capture.
Many large Layer 2 projects are good examples; their cash flow is often allocated to equity rather than token holders. As a VC, in the early investments of these projects, one can often profit through advisory agreements or airdrops, while retail investors often bear the downward pressure after tokens are sold off. Therefore, shorting these projects through defunding might be a good option.
Folius's Project Evaluation Criteria
Ruby: In the current market environment, project valuations have become increasingly complex. So, how have your evaluation criteria changed compared to before? Do you have any new standards or methodologies?
Jason: I think we can look at projects from two angles. First, we need to assess the project team's ability in two areas:
The first is their execution capability, meaning whether they can execute, implement their business logic, attract users to use their products, and have a cash flow mindset. This is about the ability to get things done, which determines whether the project can survive.
The second is their ability to "create a scene" and tell a story, which determines how well the project can thrive and whether it can achieve a high valuation in the industry. Simply put, the former determines survival, while the latter determines how well they can thrive.
If a project excels in both areas and holds a leading position or is the only player in its niche, I would consider it a project worth early involvement. Such projects have a greater chance of navigating through bull and bear cycles, and even if they get stuck at a certain point in the current market cycle, we would still be willing to invest.
Conversely, if the project team is strong in execution but weak in storytelling and scene creation, they must hit a very strong demand market or be in a track where the value has not been fully explored. Even if the project’s website, resources, and the founder's performance are not outstanding, as long as the business itself can make money, especially if it can capture mainstream Web3 users and generate cash flow, we would still consider investing, though the exit for such projects may carry some uncertainty.
As for companies that specialize in creating scenes and telling stories, they are very common in the industry. Often, they cannot clearly articulate what their tangible business is, but they focus daily on how to get the project listed on major exchanges like Binance, providing an exit channel for all participants and driving up valuations. The risks of such projects are too high, with too many uncontrollable factors, so we usually do not participate. After all, the core levels of scene creation are difficult for us to access.
Therefore, if a project lacks both strong execution and storytelling capabilities, it is hard for us to take action.
Ruby: You just mentioned that you prefer to invest in long-term projects. When choosing investments, do you value the team or the project itself more?
Jason: That’s a great question. Simply put, adults don’t make choices; ideally, you want both a great team and an excellent project. Having both is the most ideal scenario.
Continuing to Favor Application End, Especially Mini-Games
Ruby: I noticed that Folius Ventures has a unique investment direction. I’m even tempted to follow your investment group and buy in.
Jason: This is actually a common thought, but I want to remind you of one point: even for the companies we invest in, the risk of loss when they first issue tokens is still very high. Many companies have a high market cap when they issue tokens, but the unlocking speed of the tokens is too fast, and the inflation pressure is significant. So, while we try to choose teams with a long-term mindset that can navigate bull and bear markets, we cannot guarantee that every project can avoid inflation issues in the market at the time of token issuance.
Ruby: Understood. Which sectors do you think will have innovative points in the future? What directions will Folius Ventures focus on?
Jason: Our investment style is somewhat unique, even a bit "quirky." An LP once told me that the projects you invest in are ones that other GPs have not invested in. This may be because we often like some projects that seem "strange" (laughs).
I believe the industry infrastructure is mature enough, but there is still a lot of room for optimization in user experience (UI/UX). If a company can truly achieve this, we would be very interested. Many of our current investments and evaluations are aimed at positioning for the next market cycle, promoting more people to use Web3+ products. I have always believed that the reason applications have not taken off in the past is due to insufficient support from industry infrastructure, rather than issues with the ideas themselves.
In the ToC (consumer-facing) sector, we are currently focusing on several points:
Projects must be able to tap into human weaknesses, such as greed, addiction, or even the vanity of wanting to look better than others in games. These human weaknesses often drive consumption, and consumer behavior can help the project's value move away from pure speculative attributes.
On the platform side, I believe there are significant opportunities in mini-games on platforms like Discord, Telegram, and even Twitter.
In the past, we have invested in many projects that attract users through economic models, but some Ponzi-like projects can easily collapse at a certain point. In the future, we hope to find projects with entertainment attributes that can create consumer behavior, even if they rely on some economic reward mechanisms.
Additionally, we hope that projects can develop network effects and user communities over time, which is key to long-term value. We are particularly optimistic about ToC products that combine human weaknesses, traffic, and Web3 elements.
For example, we really like the Catizen team, which has been cultivating in the ecosystem for a year and a half. We believe that a product similar to the 4399 mini-game platform may emerge on Telegram, and Catizen has the potential to occupy this position. If they can maintain a long-term mindset and continuously improve, the market will recognize them.
Moreover, projects like WSPN also have great prospects. Considering that Tether and Circle have market caps of $100 billion and $30-40 billion respectively, I believe there will be opportunities in the future to pass on the equity of stablecoins to users in token form. This field requires teams with both industry appeal and implementation capabilities; perhaps Richard from Binance is a suitable candidate, as BUSD previously reached a scale of $20 billion.
Additionally, there is the Puffpaw project on Berachain, which is a Web3-supported e-cigarette project involving product design, aesthetics, D2C consumption (direct-to-consumer sales), and how to integrate with Web3. Each aspect presents challenges, but the tobacco market is a necessity, especially for smokers, where consumption is ongoing. Therefore, while such projects are challenging, they are also very worth trying.
The Solana Ecosystem Has Strong Potential
Ruby: Yes, projects like Catizen and the Puffpaw e-cigarette project on Berachain are very interesting. Recently, the Solana ecosystem has also been a hot topic, with some believing it is like the previous BSC chain, which will not be mentioned again after the meme frenzy. Jason, what are your thoughts on the future of the Solana ecosystem?
Jason: First, we can take a step back and look at what makes a public chain attractive. A successful public chain or Layer 2 needs to have very strong investment attraction and service capabilities. It must not only attract developers but also think about how to enable companies within the ecosystem to profit. This may involve fiat currency exchange, optimizing user experience, especially lowering the barriers to entry and friction for users in the ecosystem.
From a technical perspective, I believe that in addition to independent innovation, public chains also need a certain degree of "borrowing." There is no need to be constrained by narrow-mindedness; any technology that can promote the prosperity of the ecosystem should be adopted. Ultimately, the criteria for evaluating a public chain should be the friction level for users entering the ecosystem, the volume of funds, real user interactions, and the application experience on the chain.
From this perspective, Solana is undoubtedly one of the best-performing ecosystems currently. 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 solid job in promoting application implementation. They have been continuously thinking about how to better serve applications and users.
Additionally, the Solana ecosystem also includes Telegram and Coinbase. For example, Telegram's Wallet Stars, full-chain applications on Coinbase, and fiat deposit solutions. While some projects like Blinks perform moderately, small tools like Tiplink still demonstrate Solana's potential in supporting on-chain business systems. If Ethereum does not make further efforts in this area, it may lose competitiveness in the next cycle and even be forgotten on the historical stage.
So, overall, the Solana ecosystem has strong potential in commercial implementation and user experience, and other public chains may gradually fall behind if they do not keep up with this pace.
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; even developing mini-games on Solana is easier than on TON. While Solana has higher requirements for programmers, it is relatively easier to find developers in the EVM ecosystem. However, developers in the Base ecosystem can sometimes be quite "aloof" and may not pay much attention to entrepreneurs. Each chain has its own issues.
My advice is to avoid fully binding yourself to a specific chain before the commercial logic loop is fully operational. The ultimate direction should be application agnostic. But this does not mean that entrepreneurs cannot utilize resources from Layer 1 or Layer 2 ecosystems. On the contrary, they should seize opportunities to leverage as many resources from these ecosystems as possible, whether it be financial support or technical assistance. Even if you need to choose a side, you can first gather resources and consider other directions once the project scales up.
The Market Will Continue to Reshape in the Next 18 Months
Ruby: For the last question, I would like to ask you to "recharge" some confidence for everyone. As a primary 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 even earlier, investing in primary projects was relatively easy back then. 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, etc. The entire market was small; even an intern could study 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 influx of entrepreneurs into the Crypto industry. Many people come in to start businesses, partly because they genuinely believe in this industry, but it is undeniable that many also come with a speculative mindset. Behind this, including us investors, we have also entered this market in large numbers.
The result is that the number of projects that can capture long-term value has not significantly increased, but the number of projects wanting to get listed, issue tokens, and cash out has surged by 10 times, 100 times, or even 1000 times. In such a situation, if market liquidity is not as abundant as in 2021, the result is increased pressure on the entire industry.
Currently, if you take the total market cap of the $1.1 trillion Crypto market and remove BTC, ETH, and StableCoins, and then remove some old projects that survived from the last cycle, such as Dogecoin and ADA, the remaining Altcoin market may only be worth $150 billion to $200 billion. This part of the market's valuation has already fallen below the levels at the beginning of the year. If another 20% of new projects enter the market, and each project's circulation increases by 50% to 100%, the result could be an average decline of 15% to 80% in the Altcoin market, which is what we have seen this year.
Jason: I believe the market will experience continuous reshuffling in the next 18 months. Many VCs need DPI (Distributions to Paid-In), so they will sell off tokens once they receive them, and project teams are also eager to cash out. While I have expectations for the projects we invest in, hoping they can establish business models and navigate market cycles, I think the market may worsen before it improves.
However, the outlook is not entirely hopeless. I believe that if we look forward 12 to 14 months, especially after the U.S. elections next year, if Trump is elected and appoints a new SEC chair, we may see clearer token policies and regulatory sandboxes around June 2025. With a clear policy framework, smart lawyers and project teams can design legal and compliant value capture methods. If everything goes smoothly, in the next 24 months, the user acquisition models, monetization models, and last-mile conversions of Web3 will all improve. I believe that by then, a number of very good secondary 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 current entrepreneurial ecosystem in Silicon Valley. Therefore, although the market will experience reshuffling in the coming year, I believe that if the above expectations come true, the future will be better.
Ruby: Understood. Although there may be a downturn in the short term, in the long run, our industry still has great prospects. This requires us builders to continue our efforts.
Jason: You're welcome, but I want to add one more point. In this industry, entrepreneurship does not necessarily have to follow the common route we see, such as building a complex financial model, creating a market-fit product, and then going live on Binance to cash out. This is certainly one path, but it is not the only one.
There are many companies with very strong cash flow that you may not have heard of, but their business models are very robust. For example, exchanges and stablecoins are very "positive cash flow" businesses; as long as they handle regulation, they can achieve significant profits. In addition, there are other lesser-known companies with considerable income, such as DEX Screener, which is a tool for monitoring meme coins, generating daily revenues of tens of thousands of dollars. There are also well-known SaaS companies, like Elliptic providing KYC services, Certik doing audits, and Chaos Labs simulating protocols, all of which have stable revenues.
So, entrepreneurs do not necessarily have to follow the route of issuing tokens and cashing out. Delving into clearer business logic and choosing entrepreneurial directions that have stability and cash flow is also a good choice.
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