Dialogue 1 confirmation Partner: Invests less than once a month on average, many VCs are disguised traders

Author: crypto @ stanford, Richard Chen

Original Title: "Richard: 1confirmation"

Compiled by: Linqi, Chain Catcher

Richard Chen is a partner at the well-known crypto venture capital firm 1confirmation and a Stanford University crypto OG (Class of 2018). Since its establishment in 2018, the firm has made notable investments in projects such as OpenSea, Coinbase, Polkadot, dYdX, and Cosmos.

Recently, the Stanford crypto community conducted an exclusive interview with Richard Chen, discussing his investment strategies, evaluations of various VCs, and more. Chain Catcher has compiled the main points of the article as follows:

• If you conduct an initial coin offering, there will be a group of traders pretending to be VCs. Organizations like Alameda, Three Arrows, CMS, and DeFiance will sell your tokens once they lock in profits and ignore your emails. Or they might short your tokens on derivatives exchanges for delta-neutral cash arbitrage trading.

• Money is your ability to bend reality to your will. However, the vast majority of people I have seen who got rich quickly from cryptocurrency have turned into hedonists and complacent individuals, spending money for their own enjoyment rather than using their lifetime wealth to create a lasting impact on society.

• Developers are busy building, and they don’t have time to tweet. I think the simplest approach is to unfollow those who are trying too hard to become thought leaders.

Entering Crypto

C@S: When did you first become interested in crypto, and why?

Richard: That was in 2015 when I went to Stanford. It was the first year that Professor Dan Boneh taught CS 251 (Bitcoin and Cryptocurrencies). At that time, Ethereum was still relatively young. In fact, compared to Bitcoin, Ethereum was my entry point into the crypto space because I found creating applications more interesting than the Austrian school. I was studying CS theory courses and attended all the classes by Dan Boneh and Tim Roughgarden. I had a deep dive into cryptography, security, and game theory. Blockchain and cryptocurrencies happened to be the most natural applications of all this in the real world. So I became increasingly curious about crypto technology. I even wrote a paper on Ethereum in my freshman PWR class (Stanford's freshman writing course).

C@S: Wow, so you really got into the field early.

Richard: Yes, although that was a few years after the Ethereum ICO, so I felt like I had missed a big wave in crypto. Then, in 2017, cryptocurrency suddenly boomed again. I co-founded the Stanford Blockchain Collective with Vince McPhillip, Alex Pruden, Anna Carroll, Ben El-Baz, Tevon Strand-Brown, and others. I was actively involved in crypto-related activities at school. After I left university, they renamed it the Stanford Blockchain Club.

At that time (and I think it still is), 80% of CS majors were interested in AI. There were very few people interested in crypto, maybe only a dozen. The Stanford Blockchain Collective was a tightly-knit community, and we hosted many cool events with lots of interesting speakers involved. Our relationships were very close back then.

C@S: What is your overall view of the crypto/NFT space today?

Richard: I believe crypto is a grassroots movement that has grown out of internet culture. It represents a generational wealth transfer from the Baby Boomers to the Millennials. It is also a paradigm shift in institutional distrust. This could be the central bank of Bitcoin extremists or the large tech companies of web3 believers. NFTs provide artists with alternatives outside the gatekeepers of the entertainment industry.

C@S: What does web3 mean to you?

Richard: In 2017, I wrote a paper on web3, with the main point being to shift power from central gatekeepers to the people. It’s not Twitter fact-checkers who decide content moderation policies, but the people. I think this is even more important today. There has been a lot of recent controversy over certain Twitter accounts being banned, such as Nancy Pelosi's portfolio tracker or Dr. Robert Malone. The new CEO of Twitter even stated that Twitter is not bound by the First Amendment. Web3 will be our chance to rise up as oppressed tech serfs.

About 1confirmation

C@S: What do you think sets 1confirmation apart from other funds?

Richard: One significant difference is that we actually invest very infrequently (less than once a month on average), so our portfolio is small and concentrated. Because of this investment model, we can spend more time working closely with entrepreneurs by providing top-notch service. That’s how we win deals. For new founders who want us to invest, we ask them to seek opinions from our existing founders and ask them who has been the most helpful on their balance sheets; they almost always say us. Focusing (rather than picking the right companies) is also the biggest driver of fund returns, and I’ve written some articles on my views on portfolio construction before.

As an example, I will build for portfolio construction. I created a SuperRare Twitter bot, which now has 25,000 followers; it’s a severely undervalued way to market and create a passionate community of artists and collectors. There are also many Dune dashboards, the most famous being the OpenSea dashboard, which has been cited by the media. For DeFi projects, we are early liquidity providers, and I will build simple arbitrage bots before professional MEV traders come in. Thinking about product strategy is also a big issue; I believe you can only give good advice when you have a deep historical background in the field and can analyze past patterns of success and failure.

We also provide a lot of help with token distribution, token economics, and legal and regulatory matters. Especially for US teams, regulation is the biggest issue tokens face because they are in a legal gray area. The opinions of lawyers who talk to users can be vastly different, and lawyers who don’t understand crypto can cause significant harm to companies. We have the best lawyers in the crypto space.

C@S: 1confirmation has invested in some great projects like Ethereum, Cosmos, Polkadot, Coinbase, and OpenSea. What is your strategy for evaluating the potential of investment projects?

Richard: Mainly 1) market, 2) product, 3) team, and 4) community, in no particular order. In the short term, community and memes are the biggest drivers of cryptocurrency prices, so some investors say fundamentals don’t matter. But memes are fleeting, so in the long run, what you really want is a genuinely passionate user community, not some anonymous people talking about prices.

Ultimately, what excites us is the new product use cases that can push the crypto space forward (0 to 1 rather than 1 to N products). This allows us to invest very early before obvious trends emerge in categories like DeFi (dYdX and MakerDAO in 2017) and NFTs (OpenSea in 2018). We don’t want to be categorized into a specific vertical, so considering what products users like helps us stay ahead.

C@S: I know you led the seed round for OpenSea, which is fantastic. What did you see in them at the beginning? Because it was clear that the NFT market wasn’t that big at the time, right?

Richard: When the ERC-721 NFT standard was just invented, we believed that digital collectibles were an important asset class that would support new use cases. CryptoKitties was the largest NFT project at that time. It attracted many early enthusiasts and speculators, which usually indicates that the long-term trend for NFTs is correct, but then there was a period of disillusionment. CryptoKitties charged a 5% commission on its marketplace, while OpenSea, as a secondary market, charged 2.5%.

The two major competitors at that time were OpenSea and Rare Bits. The Rare Bits team came from Farmville, Zynga. They had a higher profile, so they raised more money from VCs, but they didn’t understand NFTs as well as the people at OpenSea. The founders of OpenSea were very driven. I remember they were busy working, living in Discords, reaching out to every NFT project in hopes of getting them listed on OpenSea.

I knew Alex Atallah from Stanford ACM, who is one of the co-founders of OpenSea. When we invested in it in April 2018, OpenSea's trading volume was already 4 times that of Rare Bits. Rare Bits eventually shut down in early 2020. Meanwhile, the founders of OpenSea kept their burn rate at an extremely low level and patiently waited for the NFT explosion in 2021.

C@S: Are there any recent investment projects that you are very optimistic about?

Richard: We invested in Catalog in June 2021. It is a music NFT marketplace. Unlike art, collectibles, or gaming, the music NFT market has not taken off yet, but its growth rate is indeed astonishing; although the absolute numbers on the y-axis are not very large, it reminds me of what I saw with SuperRare and cryptoart in early 2020 when it hadn’t exploded yet, but the growth was already there. I believe music NFTs will have a similar explosive moment in 2022.

C@S: What is your favorite investment project, either personally or from 1confirmation?

Richard: I work closely with Nexus Mutual, which developed nexustracker.io. They are the market leaders in DeFi insurance and have a significant advantage. The founder, Hugh Karp, was the CFO of a Munich insurance company, and he quickly began to delve into cryptocurrency, which is rare for someone from the traditional world. He combines traditional insurance experience with an understanding of crypto-native concepts, helping Nexus avoid the pitfalls that other competitors fell into, which were already solved decades ago in the insurance industry (for example, why we don’t have a good reason to use prediction markets or put options for insurance).

C@S: What investments do you wish you had made back then?

Richard: The portfolio I missed out on is pretty bad. I usually browse through the entire list of information, but recently what attracted me was Dun Analytics. I should be their largest user on the leaderboard (besides that non-counting CEO).

I was attracted by the B2B SaaS business model and potential market size; at that time, I should have thought, "This is an obvious product that people love to use." I am a super user myself, and I should have invested in things I like to use. I also knew their founder relatively well.

On VC in Web3

C@S: As a VC, do you think new fundraising methods in web3, like ICOs and DAOs, have significantly changed the VC landscape?

Richard: Not much has changed. Projects were popular with ICOs (initial coin offerings) in 2017, then IEOs (initial exchange offerings) became popular in 2019. Now it’s called IDOs (initial DEX offerings), which is almost the same thing but renamed in a different way. For traders, these projects are often short-term buy and sell, while long-term VCs who only care about the product and not the price. It’s completely different from the world I’m familiar with. DAOs are like SPVs and angel syndicates in the traditional world.

C@S: Are you saying that ICOs and IDOs are generally more suited for quick projects rather than long-term focus?

Richard: Yes, I can only name a few ICO projects that have been successful and still exist since 2017. For many token presale traders, they sell immediately after the tokens unlock and get listed on exchanges.

C@S: Do you think that’s still the case now? Or if someone really wants to engage in a crypto project, should they try the traditional VC route?

Richard: It’s just adverse selection. If you conduct an initial coin offering, there will be a group of traders pretending to be VCs. Organizations like Alameda, Three Arrows, CMS, and DeFiance will sell your tokens once they lock in profits and ignore your emails. Or they might short your tokens on derivatives exchanges for delta-neutral cash arbitrage trading. What you need are investors with diamond hands who will stand by you for the next few years.

C@S: Have you ever worried that a lot of crypto-related information on Twitter is dominated by VCs, and the perspectives of developers might get buried?

Richard: Yes, that’s certainly the case. Developers are busy building, and they don’t have time to tweet. I think the simplest approach is to unfollow those who are trying too hard to become thought leaders. It’s essential to proactively reach out to developers building interesting things. I often do this; if someone builds a cool NFT tracker, I’ll DM or email the developers and have quick conversations with them. You can learn a lot of cutting-edge knowledge from talking to developers rather than chasing whatever the next hot trend is that thought leaders are saying on Twitter. Moreover, behind these thought leaders, there are often many unethical psychological games (raising the price of your project to sell to your followers so they can become your liquidity exit).

C@S: Do you think most Twitter VCs really know what they are talking about? I feel like people like Andreessen, including Chris Dixon and Ali Yahya, do. But there are also many new "thought leader" VCs, and I wonder if you’ve had the chance to interact with them and gauge their capabilities.

Richard: After you talk to them in person, you realize they speak very plainly because their thought leadership is just amplifying and repeating what others have already said. It’s hard to find people who independently come up with original ideas; Chris and Ali from a16z are the first ones I can think of.

I also respect those VCs who believed early and stuck with it. For example, early gaming VCs who invested in Axie Infinity and Sandbox back in 2018/2019 and patiently waited for explosive growth in the field. Now, "thought leader" VCs are FOMOing into some game projects that are preparing for valuations of $100 million.

C@S: I guess that’s some advice you’d give to readers: try to find Twitter influencers or VCs who have been involved in the crypto space for a long time and keep following them.

Richard: Yes.

Assumptions

C@S: What advice do you have for newly graduated entrepreneurs?

Richard: They should ask themselves, "If the price of cryptocurrency drops by 90%, would you still believe in the crypto industry?" I think founders from Stanford and Silicon Valley, in particular, tend to be profit-driven. The reason is that they are talented and have many options; if you can build crypto technology, you can build traditional technology. If you are talented but lack conviction, then there’s no intrinsic motivation to force you to endure a year after year in a crypto bear market.

In our portfolio, the worst-performing investments are those from Silicon Valley profit-driven founders who pivoted in 2019. Their illusions about cryptocurrency were shattered, and they pivoted too early, but a year later, the crypto ecosystem exploded. I believe you must be a believer, not a profit-driven individual. Don’t just think about getting rich quickly; have the patience and focus to endure several bear/bull cycles.

C@S: Who do you think is the smartest person currently working in the crypto space?

Richard: Alex Angel from Primitive Finance is one of them because, despite majoring in business in college and dropping out to start Primitive, he was able to become a Solidity expert so quickly. He is among the top 1% of all Solidity developers I know. He is also one of the smartest people I know in joint curves, AMM research, and financial engineering.

C@S: You are a billionaire and no longer have to work for money. What will you do next?

Richard: Money should be your ability to bend reality to your will. However, the vast majority of people I have seen who got rich quickly from cryptocurrency have turned into hedonists and complacent individuals, spending money for their own enjoyment rather than using their lifetime wealth to create a lasting impact on society. There is an abundance of capital, but a scarcity of power.

Being able to influence politics is one way to showcase your power in the real world; otherwise, no one will care about your magical crypto internet funds. That’s why you see so many billionaires getting involved in politics and trying to influence it. Unfortunately, most of them are just trying to enrich themselves and perpetuate inequality, which is why populism has risen over the past decade. I want to break the garbage policies that the elite and institutions (like mainstream media and big pharma) have put in place to preserve their power at the expense of society.

I also support the arts. I have loved playing the oboe since I was young, and I can understand the challenges musicians face. I buy NFTs, even if my purchases may never yield financial returns, but this is largely my way of giving back to artists. I really love this quote: "Art has no direct relation to defending our country, but it makes it worth defending."

C@S: What will the world look like when the crypto market becomes 100 times what it is now?

Richard: If Bitcoin reaches $200,000, then half of the billionaires in the world will be cryptocurrency billionaires. This represents a generational wealth transfer from the old money Baby Boomers to the new money Millennials. These people grew up in internet culture, playing video games like RuneScape and living in subreddits and Discords.

The last time such a generational wealth transfer occurred was during the Industrial Revolution when there were landowning aristocrats, and then real estate suddenly became less valuable. Carnegie and Rockefeller of that era were the big winners of this generational paradigm shift because they were able to build businesses and create value rather than rent-seeking. They also left a lasting legacy through philanthropy for future generations.