Fundraising in Crypto

Mark Lurie:

When we recorded this episode in December of 2021, crypto was at all time highs. Bitcoin was over $49,000, and ETH was over $3,300. In the month since recording, crypto markets have crashed by over 25%. Bitcoin is now at 36,000 and ETH is now at only 2,500. Since we're publishing today, a month later, after this crash, listeners may wonder if the thoughts herein are still applicable, and perhaps even tone deaf.

Mark Lurie:

My view is, yes, they are still applicable. This is for three reasons. First, crypto valuations are still pretty enormous. Even after coming down over 25%, crypto still has a market cap of over 1.7 trillion. That's pretty amazing, almost inconceivable a few years ago.

Mark Lurie:

Second, this is kind of within the range of normal volatility in crypto markets. In fact, right now, Bitcoin is still higher than it was just six months ago in July of 2021. Third, private funding markets are not the same as public markets. In 2021, venture capital firms raised 103 new funds comprising $20 billion in capital dedicated solely to crypto.

Mark Lurie:

Venture capitalists only make money if they deploy the money they raised. So they're going to keep investing. That will likely keep competition fierce and private, early-stage valuations high. Of course, this isn't investing advice, and it's really impossible to know what the future holds. The private funding markets may cool off, but in historic terms, they are still running fast, running high, and at least for now, entrepreneurs and investors seem full steam ahead. So I think the thoughts in this episode still apply and I encourage you to listen.

Mark Lurie:

Welcome to WTF, Crypto, where we peel back the layers of the onion of the crypto universe to understand what's really going on, and how it affects you and your portfolio. I'm your host, Mark Lurie. Today, we're talking about the fundraising markets in crypto with Regan Bozman. Welcome, Reagan.

Regan Bozman:

Thank you for having me.

Mark Lurie:

It seems to me from the headlines like entrepreneurs are raising at insane valuation, sometimes just off a deck, sometimes as first time founders. Is this the case? What kind of valuations are people actually raising at?

Regan Bozman:

Yeah, 100%. I think you have a backdrop of many factors, a lot of interest in Web3, low interest rates, and it's just driven a huge amount of money into the space. And so, we're certainly seeing all sorts of very early, pre-product, young teams raising at valuations like 50 million pre-launch. It's pretty wild.

Mark Lurie:

$50 million. And so what do they actually have at that point? Like, do they have a product or a company, or is it literally just a few slides?

Regan Bozman:

I think it depends. For some games, we're seeing a few slides that kind of like demonstrate what gameplay might look like, and that's potentially enough. In some cases, teams have kind of hacked together like a very, very alpha version of a product. And then in some cases, there's just like, "Here's our idea and here's what we want to build." And that's enough.

Mark Lurie:

I mean, that's amazing. You could literally, in weeks, put together a pitch and create a company worth $50 million out of nothing. Wild. When I see things like this, I sometimes worry I'm missing something. Like do VCs know something that I don't, and should I be readjusting my investing strategy? Like, should I be getting on these trends or paying these valuations for things? I feel like traders might need to know if the FOMO they're feeling is real, or if there's real reasons for these valuations that maybe shouldn't apply to the decisions they're making as traders. And so maybe before we dig into that, I'd love to just understand a little bit about you. Like what makes you a good guide for this topic in general? And then we can try to unpack this whole milieu.

Regan Bozman:

Yeah, absolutely. So I'm a co-founder of a venture fund called Lattice Capital. We announced our fund this week that we've been investing since the summer. We're an early-stage venture fund, 100% focused on crypto. And before that, I was the first employee at CoinList. I spent about three and a half years there, mostly running the token sales business, and so worked with a lot of the top, layer one blockchains on their launches. So teams like Solana, Filecoin, NEAR.

Regan Bozman:

And I've been investing in this space for about three years. So I've been fortunate to work with teams like OpenSea, Audius, Dune Analytics, Axie Infinity, Yield Guild pretty early on. Beyond that, our team at Lattice runs Dove Metrics, which is the like leading sort of fundraising database for the industry. So kind of think about like Crunchbase for crypto. And so, I think both from like the investing side and from the data side, we at least feel like we have a decent perspective on what's going on in the markets.

Mark Lurie:

Makes sense. Okay, great. And you know I use Dove Metrics when I was raising around for my company, Shipyard. It was the best source of data for fundraising rounds and investors out there. So, great resource. Thanks for putting that together. Okay, so maybe let's level set on what's happening in fundraising right now so we can kind of give ourselves a baseline as we unpack what's going on here. What does the fundraising landscape look like? What do valuations look like? How big are rounds? Paint us a picture.

Regan Bozman:

I would say, generally, we are seeing teams, and let's just focus on teams where liquidity will likely come from a token. I'd say we're generally seeing teams raise one or two rounds before launch. So the first round, generally, we're seeing something like $1 million to $3 million on $20 million to $40 million valuation. And then the second round, maybe $5 million to $10 million on call it like a $50 million to a $200 million valuation. There's outliers on both ends of this, although certainly like fewer outliers on the less expensive side. I think there are certain categories, for example, like cross chain bridges. There's like fewer smart contract platforms now, but there's still some where I think valuations are even higher. And then there's some cases are where like a team is just ex-Stripe engineers or like spun out of ConsenSys, or like has some very strong, especially technical pedigree where things will just get done at a very high price. But those are kind of generally what we're seeing teams raise up.

Mark Lurie:

Wow. And where is all this money coming from? Who's the source of all this capital?

Regan Bozman:

I mean, there are some funds in the space where people are just investing their own money. So I think mechanism is one where they've been pretty public that they don't have LPs. They just made money in the markets and that's what they invest. But on the whole, most funds, and we're part of this, have what are called limited partners, who are basically just people who invest in funds. And that could range from high-net-worth individuals, to endowments and nonprofits, to specific vehicles like fund of funds and family offices that basically just try to compound wealth. And the market today is radically from what it was four years ago. You talked to someone who raised a fund, let's call it like a 2016 or 2017 vintage. It was probably really hard for them to even put together $20 million.

Regan Bozman:

And I think it's not surprising you look at a lot of the funds from that era, I think the first multi-coin venture fund was like $30 million. And they were small because they couldn't raise a lot of money. Now you're almost in the opposite situation where I think a combination of very good macro backdrop for Bitcoin, where people are worried about inflation, very low interest rates, and so people are generally seeking yield wherever they can get it, more and more just belief and adoption of Web3. And a lot of this is reflexive, where it's like someone like Andreessen Horowitz raises a big crypto fund, and everyone, I think rightfully so, thinks they're really smart. So people think that there is something there, which is kind of like self-fulfilling.

Regan Bozman:

And then I think that the other maybe bigger thing is just like the funds from the last vintage did so incredibly well that if you're an LP, and your goal is just to turn $1 into as many as you can over time, and I have no proprietary knowledge, but people say like that first multi-coin venture fund, I think is somewhere from like 80 to a 100X. Like that is an absurd amount of money that you gave multi-coin a dollar in 2017, and you're going to get back $80 to $100 for every dollar you invested.

Regan Bozman:

Like that's probably by far and away the best investment in the world you could have made over that time. And so I think most capital allocators look at those returns and they understandably just don't want to miss it. And so that kind of just sets up a backdrop where there are way more dollars that want to flow into this space than there are funds that can soak up that demand. And that has a lot of downstream effects. Like funds are deploying it quicker because they know they can go back out to market. There's more and more funds popping up to try to soak up that demand. And I think that kind of like flows all the way downstream, where you see companies raising at $60 million pre-launch. And you pull back the onion and there's kind of like things downstream that cause that.

Mark Lurie:

But the result of this is like a 60 million valuation for something that hasn't launched. I mean, is that even rational? Like, does that make sense?

Regan Bozman:

Depending on what the outcome of that company is, it either does or it doesn't. At the time of investment, I think the way I would think about it from like a venture fund's point of view is the math on a venture fund is generally that returns are driven by power laws. And so what that means is maybe you make 20 investments out of a given fund. It's very unlikely that what drives most of the returns is that 15 of those 20 investments are 2 to 3Xs. That would be quite unusual.

Regan Bozman:

The way it generally works is there are, if let's say you do well, there are one or two companies in that fund that are massive winners, and they return north of a 100X on invested capital. And then most of the other companies just statistically will like not be that meaningful financially. And so here, if a venture fund is making a rational investment at a $60 million valuation, they probably think that this thing can 100X from here in the best case scenario.

Regan Bozman:

So the market moves quickly. You want to take a lot of shots on goal, and you kind of want to build a portfolio. And so if that's the market clearing price of startups right now, you kind of have to play ball. On the other hand, maybe it is rational. If you believe that Web3 is going to be like a generational shift in finance and technology, and like you think this company even has a 1% shot of being a category leader, and you think that category is going to be worth $10 billion, then maybe $60 million is the right price. I don't know. But then I think also just you take it a step back and it's really supply and demand. There's a lot of money chasing deals. And so naturally, prices get moved up. And in general, I think if funds want to stay active, you kind of have to play ball with the market price.

Mark Lurie:

Interesting. Well, I'm trying to tease out, what's really going on because from what you're saying, on the one hand, there is a secular trend and there's a real chance some of these businesses become the next big thing worth billions of dollars. And so at that point, who cares if you're investing in at 5 million or a 20 million or a 60 million valuation? On the other hand, if VC is a power law, the more bets you make the better. And the higher valuation you pay, kind of like the fewer bets you can take, which can potentially return the fund. And so valuation does still matter at the end of the day. And so, I'm trying to think, okay, well, the outcomes can be large, and maybe they're more likely to be large these days. And so because of that, you should be willing to pay more in the early days. So maybe that's one thing. And that, I guess, seems healthy.

Mark Lurie:

The other is that there's a glut of supply of capital, as you've described. And VCs can raise that capital so funds emerge. And then they have to deploy it or they have no reason for being, and they just look bad if they've raised a bunch of capital and they're not deploying. And so they got to put it somewhere. And so you get these valuations that actually don't make sense. There's economist, Minsky. He talks a lot about how the reasons we have business cycles and bubbles is because actually rational actors will invest at overpriced valuations because they have to play ball or get out of the game, and it's rational to stay in the game. And so I'm trying to figure out which is going on here. Maybe the answer is it's a little bit of both. Maybe the answer is there's no way to tell until after the fact.

Regan Bozman:

I think it's a bit of both. People always referenced that Carlota Perez book about there's always a sort of these mini secular bubbles where a lot of things get overfunded. Most companies from that era don't end up making sense, but like the underlying technologies that come out of that, they're kind of subsidized through this like speculative funding. And then that ends up leading to something really meaningful. And so maybe that is where we are now. Or maybe that was like the last cycle. Was that what that was, and this is like a generational shift? Or maybe there's another big winter and nothing meaningful emerges here for 5 to 10 years. I think it's like impossible to tell which one is the case right now.

Mark Lurie:

Makes sense. I guess the positive thing is that regardless of which it is, even if these valuations don't turn out to make sense from venture perspective, it still kind of works out well for society. To your point, it's subsidizing a lot of creation, experimentation, and growth that kind of works out well for the economy and for the rest of us. So why complain?

Regan Bozman:

I think there are like negative consequences for it. So I would say one, I think focus is like a very rare commodity these days, and we're seeing a ton of people leaving awesome companies, like Coinbase as an example, just because anything, how good the idea is, is getting funded right now. And so on the whole, I think that's largely good, but it makes it very hard for companies to retain talent.

Regan Bozman:

And so I think on the flip side, building anything meaningful, I think, is really hard and takes a long time. And so I think there's a little bit less appetite for that these days just because the opportunity costs of not starting something is very high. We're starting to see somewhat of an M&A market emerge in crypto. But I think there are so many sources of capital now, ranging from venture funds to hedge funds, to ecosystem funds, to like DAO Treasuries, that some companies that just haven't really figured it out, and probably have like a great team and should just join a bigger team that has more of a semblance of product market fit, and that could potentially compound. Those things are just like harder to find just because those teams can just kind of find like another source of capital that's willing to fund them. So on the whole, it's good, but I do think there are some sort of negative implications.

Mark Lurie:

I see. So one is that it makes talent hard to keep at the places that are creating the most value. And the other you mentioned is that it kind of can allow zombie companies to survive when there could be a more productive use of that team's talent. Great points.

Mark Lurie:

So we've talked a little bit about this from the investor's perspective. One point I want to follow on from that actually is the M&A market. So in crypto, it's a little bit odd. Maybe it's not an acquisition, but you could release a token to the public and generally decentralize. And then in some ways, that's kind of like an exit. It is a good point that if the M&A market has high valuations, then it makes sense that the early-stage market would also have high valuations. So that could be another pressure here, now that you mention it. And I guess all the same pressures you mentioned about why funds are raising a lot of capital, that also applies to the late-stage crypto markets. Is that fair to say?

Regan Bozman:

It definitely is. I think less of it is driven by expected, large M&A outcomes, and more just stuff gets kind of comped against public markets. Right now, Yield Guild Games, which is sort of the largest gaming guild, trades at, I think, $7 or $8, for just a $7 billion or $8 billion fully-diluted valuation. And so this is zero judgment on whether or not that's the right price for that. But I think it means that now every gaming guild is going out at 100 million to 200 million pre-launch, which maybe if Yield Guild is 8, then that's the right price. But I don't know that it is for those like early-stage teams. And so I think there, it's just more as the markets have gotten frothier on like the liquid side, stuff just gets comped to kind of more established companies there. And so that pushes private prices up.

Mark Lurie:

I mean, there's another dynamic there, which is there's a lot of wealth that's been generated just from Bitcoin and ETH. And that has to diversify somewhere. And sometimes, that's just tough to pull out of the crypto markets for various reasons. And so if it has to diversify somewhere, then it's going to diversify into these late-stage tokens, and that raises the comps. Then that raises the early-stage [inaudible 00:19:25]

Regan Bozman:

Yeah. It's very hard to say how much of that is what's driving it here. I think you look at something like the NFT boom, and like 100%, that is what is driving a lot of that. So if I had to guess, I think it's definitely partially responsible for what's happening here. But you also have many, many billions of dollars raised by funds that are just sitting on this cash and need to deploy it into the markets. And that kind of just helps drive everything up.

Mark Lurie:

Interesting. Makes sense. So we've talked a little bit about why this is kind of rational from the perspective of VCs and funds. From the founder's perspective, in some ways, it seems like a no-brainer. If you can raise at a really high valuation, why not do that? You agree with that contention, or is it more complex?

Regan Bozman:

I think it's more complex. On the whole, taking more money at less dilution seems really good. And I think in many ways, it is. But I think there's too much money and there's too high of valuation. So let's just start with the too much money side. This is very subjective, and it's hard to really falsify, but I do think that if you're are a small team and you are constrained by money, that drives focus. If you are six months in, and you just raised $20 million, and you have three people on your team, well now, actually, you're constrained by needing to spend all this money. And so look, I think founders should always have some money in the bank. I think there will be another bear market. I think people should prepare for that. But there's no reason you should have 5 to 10 years of runway on your balance sheet. I think that just means you raised way too much money. And I think it causes people to get distracted.

Mark Lurie:

So hold on. On that, I'm not sure I would agree. I can understand, for sure, how some people would lose focus. I mean, with $20 million, you can last forever, have a lot of steak dinners, what have you, buy a company Lambo. But also, I mean, as an entrepreneur, there's something appealing to the idea that like, well, if it's on the table, I'll just raise a bunch of money. I'll put in the bank, and then I'll stay focused, and I have a personal discipline to do that. So there is this counter argument to that, which is maybe a good entrepreneur can have their cake and eat it too.

Regan Bozman:

100%. I think it's not universal by any means. But look, we're all human. And I think there is a natural human instinct where, yeah, it's just easy to get distracted when you have this much money. I would say also, I think the money comes with some pressure to spend it. If I was as an investor and a team had just raised $20 million and they were burning half a million a year, I'd kind of be a bit skeptical. It's like, why are you spending so little of the money you have? Presumably you raised it to spend it and invest in growth. And so I think there is some pressure that, not in every case, but I think in many, kind of just causes teams to get distracted.

Mark Lurie:

I guess in some ways, when you take venture capital, you're signing up for a deal. You're signing up for operating a certain way with your venture investor. They are expecting you to shoot for insane growth. And by taking their capital, you're agreeing that you are going to shoot for insane growth because that's what they need out of their portfolio. And so if you don't do that, the venture investor's not going to be happy. It's not really the deal they thought they were signing up for.

Regan Bozman:

Yeah. I mean, it's all kind of an unspoken thing, but yes, I think that is how most funds, including us, operate.

Mark Lurie:

Do you think most founders really realize that? I mean, you say it's unspoken, but is it unspoken, or actually just unsaid?

Regan Bozman:

That's a good question. I don't know. I think some probably don't fully understand the implication of it. We pass on stuff all the time because I think there are probably good businesses, they just don't really make sense in the context of our portfolio. And so we're pretty upfront about that, and we pass because of that reason. But I think there's probably many cases where investors do not necessarily communicate clearly what a great outcome for them looks like. And I'm sure that leads to a lot of issues downstream. We've only been doing this for six months, so my data points there are limited, but I think you're probably right.

Mark Lurie:

It's odd. It's counterintuitive to just shoot for the moon all the time because growing up, I think you hear this common sense, Warren Buffet kind of guidance, which is like, well, build a profitable business. Don't take risk-adjusted bets. Do what you think will work. And then there's some entrepreneurs who do that, and then they speak with venture capitalists, and venture capitalists don't seem to value that. And then entrepreneurs are confused why they wouldn't value that. And in some ways, it's just two entirely different belief systems, right?

Regan Bozman:

Yeah. I wouldn't characterize it with such a broad brush. I think we tend to like teams that have operated somewhat conservatively and scrappily. And for example, teams I think that can show some level of TVL without any artificial incentives, that maybe are much lower than comps that are heavily subsidizing it, I would back those teams any day because I think there is a much more sustainable loop there than dumping a bunch of tokens on liquidity. But I think the market also matters. In almost every investment we do, we take the leap of faith that Web3 is going to be huge. And so I think our view there is even if a team has kind of operated conservatively and not dumped a bunch of money on growth, we think this market is just going to get so big that them continuing what they're doing, there's just a lot of natural tailwinds there.

Mark Lurie:

Makes sense. And ideally, you have both, right?

Regan Bozman:

Yes.

Mark Lurie:

There's a lot of companies who can grow super fast and also do it in a way that makes sense. And those are of the unicorn, I guess, is a term that's been co-opted to mean a billion dollar valuation, but tho those are unicorns that are tough to find. And I guess those are the ones that make you the best investor.

Regan Bozman:

If you know any, you should send them my way.

Mark Lurie:

Yeah. Note everyone listening, send them Regan's way.

Regan Bozman:

But to answer your part about why the downstream effects of high valuations, I think most people underestimate this, but one is whatever your current valuation is, that's the price that employees are getting in at. And so I talked to someone maybe two or three weeks ago who was considering joining a pretty high profile, kind of like interface layer DeFi app. And this team had just raised at call it a billion-dollar valuation. And he was concerned that like, "Look, I'm getting in at this really high price. Is there a lot of meaningful upside for me?" And that's like a pretty valid question. So I think you kind of make it harder to attract talent. The second is, look [crosstalk 00:26:26]

Mark Lurie:

That's a great point. Just to make sure, so when you say getting in, it seems like you're referring to options, right? So when company hires an employee [crosstalk 00:26:34] an employee.

Regan Bozman:

Yeah.

Mark Lurie:

Can you just explain briefly how options work?

Regan Bozman:

I am not an expert on this, but essentially, when a startup gives someone a stake in the company, they're not just granting an equity for zero cost. There's usually some strike price associated with that. And it's generally the last what's called a 409A valuation, at least in the US, which is just like, it's generally the last valuation that you raise money at. And so if you generally join a company right after they raised a seed round, your options are at the seed round price, and that's great. And then if they go to raise a Series A at 10X the price, and your coworker joins after that, generally they're getting many fewer options, but on paper, they're worth 10X as much. And so they have a higher strike price associated with them.

Regan Bozman:

I don't know that there was like a consensus way on how to do this with tokens, but I would imagine that it's reasonable. If you join a team where they're going to issue a token, and their last token round was at a much higher price than it was a year ago, even if the token's not liquid, you're going to get less tokens because on paper, they're worth more. So yeah, essentially just like as a rule of thumb, the higher valuation you join a company at, in theory, all else equal, there was less upside for any given employee.

Mark Lurie:

That makes sense. And that makes it hard to hire.

Regan Bozman:

It can. Yeah. And it can make it hard to raise money down the line. You always want to raise money at a higher valuation than you did before, otherwise, you and your investors are taking a huge amount of dilution. The advice we give to portfolio companies, for example, is if you don't think you could sustain this valuation in a bear market, and you might need to raise more money, you should never ever take money at that price because it's going to put you in a really, really bad position if you do have to take more money.

Mark Lurie:

I mean, from an entrepreneur's perspective, if I can raise a bunch at a billion-dollar valuation, and later on, I have to raise at a 500-million valuation. I mean, it's too bad. I have to go down, but why would I want to take money at a lower valuation the first time?

Regan Bozman:

There is a signaling thing, which is just it is considered very, very, bad to have a down round. And it makes it significantly less likely that you could ever raise money in the future if it was going to be in a down round. There's also just your employees, your investors, are all getting diluted significantly if you have to sell more of the company for less money. And so it would make existing investors very unhappy, potentially who could block a transaction like that. It really depends. So I think here, it's yes, if you take a lower valuation in the short term, you are probably giving up some more dilution, but ultimately, it's really about optionality. You just have significantly more flexibility if you do that and it can be a lot better.

Mark Lurie:

I see. It's really important to be building momentum when you are thinking-on a multi fundraising round, on a lifetime cycle of a company, where it's always going up as opposed to up and down.

Regan Bozman:

Exactly.

Mark Lurie:

Okay. So sometimes, taking a real risk then if you're raising at a high valuation, I mean, especially if the markets tank, and that's not even in your control.

Regan Bozman:

100%, and I think you ... I'm not a good enough historian of these like massive fundraises from the last cycle, but I think you saw a lot of teams, HashCraft is maybe an example. They just raised a really high valuation in the private markets. They couldn't sustain that in the public ones. And then your investors sell if they don't think the market's going to support the price they paid. Like that's just what happens.

Mark Lurie:

They can create a, a downward spiral, but it somehow creates valuation failure in public markets. That's tough. I mean, geez, you got to build a business, and you got to manage the narrative around the fundraising. Even if you do everything else right, you could still get tanked by that. It's tough.

Regan Bozman:

It's a hard job.

Mark Lurie:

Yeah, I guess that's why you get paid well if it goes well. Let's talk a little bit about structure. So I'm kind of confused what these investors are buying. Are they buying equity? Are they buying tokens? In traditional fundraising markets, you have preference, which means the investors get the first money out. Is that still the case with tokens? How are these investments structured? And should we really see a headline valuation as the real valuation, or are these highly structured instruments that generate returns independent of what the exit price is?

Regan Bozman:

We're seeing deals get done on a variety of instruments. I mean, generally, they fall two buckets. Is there equity, are there tokens, or are there both? We are somewhat agnostic, to be honest. We want all investors to be aligned and we want to be aligned with the founding team. But beyond that, as long as it's a relatively accepted instrument, like say for the token warrant or a SAFT, we don't really have a strong preference.

Regan Bozman:

Tokens are generally valued higher than equity. And I think there's good reasons for that. One, the liquidity timeline is generally a lot quicker. The second is that equity you can get diluted, right? A company can always issue more shares of preferred stock. But generally, the valuations we're using for a token network are based in a fully diluted value, and so you can't get diluted. We rarely ... I've never seen anything like some tokens are preferred versus others. Generally, the kind of like main differentiator we see between rounds is obviously price and then vesting schedule. And so we see tokens vesting on everything from six-month to like seven-year cycles. It really depends.

Mark Lurie:

When you say vesting, are you referring to lockups or repurchase rights? In the traditional markets, startups offer equity to their employees, including the founders. And they have a vesting schedule, typically one year cliff, four year vesting, so that if the person leaves, they don't get shares. Technically, the company repurchases those shares. And so repurchase rights are a vesting. In the crypto markets, people seem to use the term vesting, and what they really mean is lockup, whereas a grant is given, but it can't actually be unlocked. It can't actually be sold for a certain amount of time, but it doesn't actually mean it's vesting. And this is semantics, but that's kind of what I'm trying to unpack.

Regan Bozman:

Yes, no, you're right. And people in crypto generally like to reinvent the wheel around terminology. Yeah, what I mean is generally, there is some lockup on this. So let's say like zero tokens are available to investors for 6 to 12 months, and that's pretty common. And then maybe unlock is a better term where maybe tokens are locked for a year, there's a one year cliff, and then the remaining tokens unlock monthly, or linearly, or quarterly over the next one to three years. So that's generally what we see. It's a combination of kind of an unlock schedule. And generally, there's a cliff on there.

Mark Lurie:

And so walk me through this. So a company raises around, and they perhaps are pre-selling their tokens. So you give bunch of those token away, maybe launch the token. Now they need more operating capital. They need to do another round. Where exactly do they get that? Which tokens are they selling?

Regan Bozman:

That's a good question. If a token is pre-launch and a company is not decentralized, which it sounds like the scenario you described, like they have a pie chart for how they're planning to allocate tokens, but they control all of it. Like this stuff's not on-chain yet. It's basically in like a PowerPoint presentation. So at day one, the founding team will generally control 100% of tokens. They'll sell a portion to early investors. And then, if they want to sell more before launch, they just take some out of that, 100% minus whatever they sold out of that bucket. Now, generally, they've kind of communicated what they want to do. So generally, let's say 65% are going to be allocated to the community and 15% to advisors, et cetera, et cetera. But those are really just like numbers in a spreadsheet before launch and they can always change them.

Mark Lurie:

Okay. So let's say company has sold 10% of their tokens, let's say, to investors. They've given themselves 20% of the tokens, maybe 30% of the tokens. Then the rest are in some Omni wallet or like a community fund. They're operating for a while, but things take a little longer than expected. So they need to raise and they're selling another 20% of the tokens. So those would then come out of this community fund?

Regan Bozman:

It really varies. But I would say generally, probably that would be what would happen.

Mark Lurie:

Okay. I mean, one thing that this token thing does is it puts a cap on how many rounds you can raise, which could back a company into a corner.

Regan Bozman:

100%. We rarely see teams raising more than two rounds before launch. And then teams can always raise money after launch. And I think you've seen a number of these kind of big OTC deals, whether it's like Lido or Index Coop, or SushiSwap. But yeah, that's generally like the DAO Treasury then is selling tokens rather than maybe just the core team kind of laterally deciding they want to do that.

Mark Lurie:

I see. Equity's an odd thing. You can always issue more. And I guess that's a feature and a bug. It means people can get diluted. It also means there's always room to take on new stakeholders if it's important to do so for the life of the company.

Regan Bozman:

Tokens function, they serve many purposes. They're much more multifaceted than equity. They're potentially like user acquisition subsidies. They represent governance. They maybe pay for network fees, and they kind of represent equity of the core team. So they do a bunch of stuff and not always [inaudible 00:36:56]

Mark Lurie:

I mean, that's a great way of putting it because at any time you have something that serves multiple purposes, it's never going to be perfect for one purpose. It's like, that's a really tough thing. These tokens are like ownership of a decentralized protocol, at least they should be. And yet they're serving like 10 different purposes, and makes really hard for them to be excellent at serving one. And I guess that's why you get into these complexities around structure. What other thoughts do you have and advice do you have for founders as they're going through the fundraising process?

Regan Bozman:

I think there's some basic things that I'm surprised how little I see done. For example, you should always ask for references on your investors before you take money from them. And that could be asking them to introduce companies they've invested in. You could go on Dove Metrics and see who else they've backed. And generally, people in crypto are very open to talk, especially about something like that. So I would always do that. I rarely see people doing it.

Regan Bozman:

I think the second big is just understanding how investors are structured and how that impacts how they would work with you. There's a lot of different types of investors giving money to like private crypto projects. Some are hedge funds, some are venture funds, some are just managing off their balance sheet, and they all have very different strategies. So I think a lot of people complain about VCs dumping on retail, and certainly that happens.

Regan Bozman:

But I think a lot of the time, it's funds that are maybe set up as hedge funds, for example, where they report results quarterly, their investors can pull their investments quarterly, and they need to show returns quarterly, that operate on a much quicker timeline where if they have a 10X after an ICO, they're going to sell tokens. So I think understanding how is a fund structured? How long are their investors locked up for? You could just ask them how long is the average time they've held a position. And everyone has to report this stuff. So they definitely know it. And I think just understanding how a fund operates there will generally just give you like a pretty good sense for how they're going to work with you. So I think those are kind of the two biggest things founders should do when talking to investors,

Mark Lurie:

Understand the funds, incentives, and strengths because that will drive a lot of their behavior.

Regan Bozman:

Exactly.

Mark Lurie:

Got it. And so we're coming to our end of our time here. I'd like to ask a question we touched on in the beginning of our conversation, which is, as non VC investors or traders or crypto users, how much should they feel FOMO at investing, and how much should they be willing to follow the lead of venture investors who invest at really high valuations? Should they be skeptical of that or should they see that as a good signal for themselves?

Regan Bozman:

Look, I think it depends on a few things. The biggest thing is probably what your strategy is. Are you trying to make a quick 2 or 3X, or do you want to hold something that's like fundamentals-driven for like four years? So I think on the former, yeah, to some extent venture, fund investors often have access to presale prices, and these things will pop at an idea or something. And in that case, like that alpha is constrained and hard to get. And I think it's valid to fear FOMO.

Regan Bozman:

I think on the other side, look, crypto is way more accessible and democratic than most asset classes have been before. And Axie, Solana, Aave, there's many, many examples of like really, really good venture-style returns 100 to 1,000X, where anyone on earth could have bought these tokens early on. So I think there, we bought plenty of tokens on the open market, just like anyone else. And we're happy to do that. We see dislocations where we think there is there's value to be captured, and we act on that. So I think if you're that type of investor, there's a lot of access in this asset class that you can act on.

Mark Lurie:

Interesting. Well, Regan, thank you for helping us peel back the layer of the onion here. It's a lot more complex under the surface than it seems from the headlines. And there's a lot of lessons to be learned as an investor, as a founder, and as an everyday crypto person looking in from the outside. So really appreciate your joining and being here.

Regan Bozman:

Thank you for having me on

Mark Lurie:

How can people follow you if they want to learn more?

Regan Bozman:

Yeah, I'm just Regan Bozman, R-E-G-A-N B-O-Z-M-A-N, on Twitter. It's probably the easiest.

Mark Lurie:

Great. I am a follower of you there, and I'd suggest anyone who listens follow as well. Thanks so much.

Regan Bozman:

Thanks, Mark.

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